
The Banker Who Said No - dangoldin
http://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html
======
kqr2
He's also behind the Beal Conjecture which offers a $100,000 prize for either
the proof or counterexample:

<http://www.math.unt.edu/~mauldin/beal.html>

 _BEAL'S CONJECTURE: If A^x +B^y = C^z , where A, B, C, x, y and z are
positive integers and x, y and z are all greater than 2, then A, B and C must
have a common prime factor._

------
ggchappell
FTA:

> "This is the opportunity of my lifetime," says Beal. "We are going to be a
> $30 billion bank without any help from the government." (A slight
> overstatement: He is quick to say he relies on federal deposit insurance.)

And he pays for it, too (premiums, y'know). That's not "help" as we usually
mean the word; that's a purchased service. Now, as for the bailouts -- which
Beal is not getting -- that is "help".

~~~
jhancock
It is a good read and he obviously is a "good" banker for not overextending
his bank. But to say he doesn't rely on government help makes it sound like he
runs a normal corporation. Banks are not normal corporations. Mine can't loan
out money at 26 times my deposits. Can yours? Of course not, your not a bank.
This is the rub with banks. They want to behave like private entities, but
they leverage government backed currency which normal corps cannot do.

I think we need a new class of corporation for banks and possibly insurance
companies. A class that recognized they are hybrid entities, and not the same
as a typical private company. It turns out we sort of do have this class
(there are lots of hoops to jump through to become a bank). But this class is
built on top of the normal rights and privileges of the standard corporate
entity.

~~~
mynameishere
Lot of upmods for an extremely confused post.

 _Mine can't loan out money at 26 times my deposits. Can yours? Of course not,
your not a bank._

...oh kay.

 _A class that recognized they are hybrid entities, and not the same as a
typical private company_

Umm. You seem to be getting at GSEs, a standard corporate form.

<http://en.wikipedia.org/wiki/Government-owned_corporation>

Generally, this doesn't seem to work out too well with financial companies,
see Fannie Mae/Freddie Mac (which weren't GSEs, but close enough...) The truth
is, the vast bulk of banks were perfectly healthy and responsible. Almost all
the trouble came from a few gigantic ones, and the reasons for their behavior
were many.

~~~
byrneseyeview
Is it really responsible for a bank to back 30-year loans with demand
deposits, at 25-to-1 leverage? I really can't imagine that happening without
government intervention, and if it only happens when the government makes it
happen, there's a good reason to expect that it's irrational.

Banks are hybrid companies in the sense that FDIC insurance means they are
basically conduits for lending to the government. If I deposit $100 with my
local bank, I don't care whether the banker keeps it in cash, invests it in
penny stocks, or spends it on whores -- no matter what, the government backs
my deposit.

This is for other promises from companies. E.g. if I pay someone $100 now for
$100 worth of lawn care over the next five years, I make damn sure I can trust
that person. If I pay the bank $100 for a CD maturing in five years, I don't.

This gives all banks an incentive to take undue risk, balanced by government
regulation, which gives them a secondary incentive to find clever ways to take
big risks (which they do by hiring clever people who would otherwise do more
socially useful stuff).

~~~
anamax
>E.g. if I pay someone $100 now for $100 worth of lawn care over the next five
years, I make damn sure I can trust that person. If I pay the bank $100 for a
CD maturing in five years, I don't.

> This gives all banks an incentive to take undue risk

Actually, you've just demonstrated that FDIC insurance gives you an incentive
to take undue risk. You'll deposit your money at any bank without regard for
whether said bank is trustworthy.

BTW - It's curious that you seem to believe that better rules will help since
you also seem to believe that "clever people" can always get around the rules.

As to whether a govt-run bank would do any better, feel free to point to the
fraction of govt enterprises which are run as well as you'd require of govt
run banks. Which states' DMV is "good enough"? How about the post office?

~~~
ilkhd2
Bank of North Dakota. A government run one..

~~~
anamax
> Bank of North Dakota. A government run one..

Majority-Scandanavian states seem capable of lots of things that other states
can't manage. Since the majority of US states are not majority-Scandanavian,
we can't use the majority-Scandanavian ones as a model.

~~~
ilkhd2
Well, ND is a German majority state. I understand that it is tempting to say
that it has something to deal with scandinavian personality, but look up a bit
up north you'll see Canada, with very non-scandinavian in it's population
makeup, however I'd think it is a lot like Northern Europe in its political
and economical structure

------
jmtame
To prepare bids he locked himself in his office to write a computer program
with 50 variables (now 250), ranging from home price changes by neighborhood
to interest rates to origination dates.

Yep, he's a hacker.

~~~
BobbyH
This sounds like a multi-variable linear regression he did in Microsoft Excel?

~~~
joeyo
Other than excel having some floating-point arithmetic problems, what
difference does it make what tool he uses?

Most things are linear to a first approximation anyway.

~~~
tlb
Only because most first approximations are linear.

~~~
joeyo
I can't prove it, but I will assert without much fear of a counterexample,
that, for most if not all systems, linear models describe most of the variance
with the fewest number of free parameters. This may be as much as 90% in some
cases, but almost certainly more than 50%.

In other words you get the most bang for your buck. This is not to say that a
linear approximation might not be very inaccurate on important parts of the
problem domain, but the variance that a higher order model would describe
would be less, perhaps much less, than the portion the linear part describes.

~~~
kragen
First you say, "linear models describe most of the variance with the fewest
number of free parameters," and then later you say, "In other words ... the
variance that a higher order model would describe would be less, perhaps much
less, than the portion the linear part describes."

In my limited statistical experience, the problem with higher-order models is
not that you get less bang, but that you need more buck: that is, there are
too many free parameters. But in your second quote, you seem to be talking
about higher-order models that have as few parameters as a linear model, i.e.
one parameter, plus one per independent variable. What kind of higher-order
models are you thinking of?

~~~
joeyo
Sorry, I mistyped.

I meant that the _additional_ amount of variance described by a more complex
model _beyond_ that described by a linear model is much less than that
described by the linear model in the first place. Obviously the total amount
will be more, or else your model is both complex and _wrong_. :-)

Consider:

    
    
      Model A - 1 degree of freedom - 60% of variance
      Model B - 2 degrees of freedom - 75% of variance
    

That extra DOF has gotten you 15% better description of the variance, but at
the cost of complexity. Perhaps that is worth it, perhaps not. As has been
noted above, that complexity has a real cost that can manifest itself as
overfitting, instability, and lack of generalization. The curse of
dimensionality is very real.

All that I meant was the linear model will probably capture the most variance
per unit complexity. Which gets back to my original point that most (all?)
problems are linear to a first approximation. It's not just that people are
lazy.

------
gills
I think it's pretty telling that this guy was investigated for _not_ consuming
the fraudulent crap coming out of Wall Street.

Wouldn't that be like a 1999 startup being investigated because they didn't
have exponential growth projections in the IPO prospectus?

~~~
ori_b
Well, if someone does something completely out of the ordinary for [what the
investigator thinks are] no apparent reason, then that should raise red flags
to investigate.

I'm not surprised he was investigated; Massively different investments,
raising money without buying anything apparent, and not trying to cash in
whenever possible do point to an anomaly -- possibly even a fraud --
happening.

So long as he's not wrongfully convicted, I don't have a problem with
investigations.

~~~
endtime
_Well, if someone does something completely out of the ordinary for [what the
investigator thinks are] no apparent reason, then that should raise red flags
to investigate._

Yeah, that's the point...that it was extraordinary to behave sanely (as
opposed to "consuming the fraudulent crap coming out of Wall Street").

------
numair
> Beal shrank his bank's assets because he thought the loans were going to
> blow up. He cut his staff in half and killed time playing backgammon or
> racing cars.

I have always respected a man who drives his cars hard and plays a mean game
of backgammon -- and actually makes money while doing it. Upvoted.

------
toffer
This is a great article.

If anyone is interested in learning more about Andy Beal's million-dollar
poker games with the best players in the world in 2001, you should check out
this book: "The Professor, the Banker, and the Suicide King: Inside the
Richest Poker Game of All Time", by Michael Craig. It's got a pretty complete
profile of Beal, and tells all about the games.

------
smanek
Does anyone know if it's possible for an individual to buy a CDO?

Supposedly everyone wants to get rid of these things and is desperate for
cash, which makes it seem like a decent opportunity for buyers. If I had
$10,000 I could afford to lose (and was willing to take a long shot with) is
there some market where I can buy those sort of assets?

~~~
Tangurena
To start with, you have to be what is commonly called an "accredited
investor." This is a requirement because almost none of the "investments" sold
as CDOs are registered with the SEC. The accredited investor loop-hole is the
one you'll need to invest in hedge funds and the like: it means something like
_you're a big boy now, and you don't need the feds protecting you from
crooks_. Alternatively, your organization will need to be qualified as an
institutional investor.

<http://en.wikipedia.org/wiki/Accredited_investor>

<http://en.wikipedia.org/wiki/Institutional_investor>

Ask your broker if they've got any they want to unload.

~~~
smanek
I'm a bit short of the wealth requirements to be called an accredited investor
... (1M net worth + 200K/year income).

That just seems blatantly unfair to me. It's the government setting up a
different set of rules for the rich.

~~~
gscott
> That just seems blatantly unfair to me. It's the government setting up a
> different set of rules for the rich.

There was one VC here that mentioned how someone emailed him about also
investing in 3 of the companies that he had invested in, and how he couldn't
let the person do it because the person didn't fit the requirements to be an
"accredited investor" then he mentioned what three companies they were. They
were all money pits with no path to profitability. I believe the "accredited
investor" bit helps people from having there life's savings thrown away on a
unregulated bad investment. The ultra rich either inherited money or built a
real business from the ground up and sold it. I would suggest one of those
paths instead :)

~~~
gojomo
But doesn't the current crash highlight the superfluousness of the 'accredited
investor' limits? Even investments poor people are allowed to make -- like
common stock of giant financial institutions, even those with government
sponsorship (Fannie/Freddie) -- can essentially go to zero.

The general markets are down 45% from their peaks. Why should submillionaires
be denied the chance to put 55% of their portfolio in T-Bills, and 45% in
highly-risky unregistered private securities? That wouldn't have done any
worse than the public stock market... and might do a lot better, if you
understand the private companies involved.

And if submillionaires are such easy marks, why not any limits on how much
they can gamble in casinos or even state lotteries?

The 'accredited investor' limits are silly; a phony security blanket at best,
an unfair impediment to broad-based entrepreneurship and investing at worst.

------
bilbo0s
"To prepare bids he locked himself in his office to write a computer program
with 50 variables (now 250), ranging from home price changes by neighborhood
to interest rates to origination dates." - Forbes.com 2009

"Beware of geeks bearing formulas" - Warren Buffet 2008

~~~
catz
Didn't Berkshire Hathaway loose a lot of money because of the current mess?

~~~
karl11
They went down as the market went down and did have some losses, but they also
had an enormous pile of cash and not very much debt. Buffett has been waiting
for the market to go down like it has so he could make his move with that
cash. As a result, I think he's going to make out extraordinarily well in the
coming years.

Sorry for the Buffett fanboyism, but he's the man.

~~~
catz
As I understand it he made some serious missteps in the recession. WP:

> Berkshire Hathaway acquired 10% perpetual preferred stock of Goldman Sachs
> at $123[40] only for it to fall to below $60. Furthermore some of Buffett's
> Index put options (European exercise at expiry only) that he wrote (sold)
> are currently running around $6.73 billion mark-to-market losses.

Warren Buffett tarnished as Main Street oracle
<http://www.thestar.com/Business/article/604619>

Buffett suffers big losses at Berkshire Hathaway
[http://www.bloggingstocks.com/2009/02/28/buffet-suffers-
big-...](http://www.bloggingstocks.com/2009/02/28/buffet-suffers-big-losses-
at-berkshire-hathaway/)

(d Berkshire's net worth dropped a whopping $10.9 billion in the final three
months of 2008.

Berkshire's shares have fallen 44% since the end of February 2008. )

etc...

~~~
karl11
Actually, the preferred stock in Goldman is an option. He has the option to
buy the stock at $123 indefinitely, meaning if it ever goes above that amount
he can then choose to buy it and sell it for a profit.

And like I said, the stock went down with the market. Yes, at one point his
stock was down 44%, but so was everything else. And if you look at the
fundamentals, they have a small leverage ratio, close to zero actually if I
remember correctly, lots of cash, and are one of a handful of companies still
rated AAA.

The guy in the article keeps saying if only he had access to more cash he
would be making piles more money. Well Buffett has the cash, and he's going to
rake it in when the market rebounds.

------
TweedHeads
Beal Bank? I am more interested in the story of how he started the bank. How
can an individual with the government's blessing can start a bank like that.
Don't they need huge funds and deposits and a million financial and security
hurdles? Where did he get it all?

~~~
TweedHeads
Furhtermore, I wouldn't trust my money to a bank where the owner spends
millions playing poker and brags about it. WTF?

~~~
nsrivast
Poker inculcates many of the skills needed for finance, and if you're good it
can simply be a profitable investment.

~~~
Rod
Exactly! When interviewing for hedge funds for a quantitative analyst / trader
position one should expect to be asked about poker / blackjack / backgammon.

A classical interview question / challenge would be to invent a new card game
and ask the interviewees to devise an optimal strategy for that game.

------
wyclif
Buy low, sell high. This is not rocket science.

~~~
grinich
However, he does know that too.

