Beware of Greeks Bearing Bonds: A Lesson for Today?

In a 2014 interview, the legendary financial writer Michael Lewis commented that when he wrote Liar’s Poker – the legendary book about the madness of junk bonds and financial markets:

…I thought, ‘these people are paying me hundreds of thousands of dollars to give financial advice, that’s fucking insane,’ … I just felt like people were going to look back and say, ‘Can you believe they did this?’ but it turned out to be the start of a new world where this became normal.”

And isn’t that the truth? That feeling has become a never-ending sense that financially induced madness would come to a screeching halt. Instead, the raucous and crazed days of 2000 gave way to the global financial crisis that brought the world to its knees. And now we are…beyond 2000 in terms of valuation, beyond 2007 in terms of leverage, and way past the budget deficits of 2008. More on that in a moment.

In 2010, Lewis penned a remarkable article for Vanity Fair. Beware of Greeks Bearing Bonds. In that piece, he described his trip to Greece to find what catalyzed the nation’s anger during the Great Financial Crisis (GFC). Under the belief that Lewis will never see this and the content remarkable in-light of the madness underway in financial markets today, the quoting will be liberal and the point hopefully clear.

Michael Lewis’ Greece Experience & Our Takeaways:

To summarize: the piece explains how the economic disaster in Greece was, at least in part, brought about due to a group of Greek monks at the great monastery of Vatopaidi. The Vatopaidi monks managed to use special access to government officials and quirks in valuation methodologies to create transactions that moved billions from the Greek government to their own coffers.

Lewis describes a culture where hiding lots of money from their own tax collectors was considered commonplace. Even the nefarious conduct of some US Investment Bankers in manipulating the country’s finances to remain compliant with European Union requirements did not seem to upset the Greek people.

Yet, when the information about the Vatopaidi Monastery’s fiscal impropriety came out, the Greeks took to the streets in a rage. Michael Lewis’ article is an ex post examination of how excessive leverage and unforeseeable events can blow up an entire country.

The tsunami of cheap credit that rolled across the planet between 2002 and 2007 …. Wasn’t just money, it was temptation. … Entire countries were told, ‘The lights are out, you can do whatever you want to do and no one will ever know.’”

You see, at the apogee of excess, Greece ended up having debts that amounted to $1.2 trillion “…or more than a quarter-million dollars for every working Greek.” That number came from $400bn in direct obligations and another $800bn in commitments for pensions. The thinking that pervades Lewis’ article (and the thinking of many at the time) was “those crazy Greeks – how irresponsible.”

For context, the United States government currently owes, in direct liabilities, $28.7 trillion[1] and has 113 million workers[2]. So let the record show: 2021 is the year the US tied with the profligate Greeks at what was considered “peak crazy” in the GFC.

Let the record also show that by some calculations the US has somewhere between $120 trillion to $200 trillion in unfunded liabilities. Definitely not footnoting that. Hit the G00G up and help fund the $13.9 billion they hand out in shady GAAP compliant stock compensation. Apologies. Digression into a pet-peeve.

As the author traversed the country he described his encounters with various individuals that provided evidence of the ludicrous accounting underpinning the wreckage. Finance in Greece had been turned into a travesty. Assets transferred back and forth using gimmicks to suppress valuations and avoid regulations and taxation.

One of the many funny pieces of Beware Greeks Bearing Bonds involves Lewis’ description of his dialogue with Peter Doukas from the Ministry of Finance. Doukas describes being attacked for issuing $18bn of 40- and 50- year bonds prior to the crisis when rates were low. In return for doing this the Greek newspapers were filled with articles saying “DOUKAS MORTGAGES OUR CHILDREN’S FUTURE.”

Yet after the crisis hit, the bonds fell 50% giving Greece a $9bn windfall. I’m certainly not implying the US is going to default. But maybe we could learn something from the Greeks?

As we have made painfully clear in our post, US debt today, US bonds offer virtually no nominal yield, negative real yields, and is coincidental with record equity valuations. Yet according to the US Treasury, our average maturity is FIVE YEARS.

Historical Weighted Average Maturity of Marketable Debt Outstanding

Our second chart shows the long-run decline of the dollar suggests the US has been “defaulting” in a fairly reliable, if subtle, fashion. Maybe a 50-year bond is just what we need?

At one point in the article, Michael Lewis writes “In Athens, I several times had a feeling new to me as a journalist: a complete lack of interest in what was obviously shocking material.”

Rereading this stuff today the resonance is incredible.

In our well-mannered and factually accurate piece on the obscene lending underpinning the easy-credit, record leverage and shady accounting underway in private equity, you can be forgiven for missing the broader point. These “masters of the universe” have been backing companies like Airbnb, Uber, and WeWorks and then passing slivers of them back and forth to each other.

Each time they move a little piece around they mark the valuation up. It happens again and again. Here’s a chart of WeWork’s valuation. Think about this.

This thing blew-up right at the moment they tried to take it public. How many “WeWorks” are actually out there trading today? How many are buried in the books of various private funds?

WeWork Valuation

In our prior rant, Bond Buyer’s Dilemma, we cited research from AQR explaining that the returns to private markets were manufactured. There simply is no way these assets have return features the way they are reported. AQR’s work does a spectacular job of bringing deep dive rigor to this painfully common-sense problem.

Towards the end of the article, Michael Lewis writes “Here [the Greeks] are, and here we are: a nation of people looking for anyone to blame but themselves. … It’s one of those moments when it feels as if anything might happen. Really, it’s just a question of which way people jump.”

Today, the crisis is not upon us. YET.

Between the crypto prophets, the SPAC mania, the arithmetically impossible promises of exponential returns being preached from “a pulpit of uncommon power” it certainly feels imminent.

In our view: it’s just a matter of which way, AND WHEN, people jump…

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.


[2] Just Facts, National Debt

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October 22, 2021 |

Categories: Raucous Rants

October 22, 2021

Categories: Raucous Rants

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