Email from experts

Posted on December 29, 2009 by Felix

I got an email from one Ed Grebeck this morning, complaining about a post of mine on the subject of CDOs. It started like this:

Felix,

I teach “Credit Default Swaps 101” at NYU, a strategist in the global debt markets and an early critic of structured finance and its spillover. Google me.

I published “Why Should Institutions Invest in CDOs, at All ?” In Euromoney in APRIL 2006. See 5 minute video link, done in March 2008.

So I’m surprised that academics at Princeton just now, October 2009, after some $3T + structured finance losses, belatedly argue “[it is not possible to price CDOs…].

As it stands, their work is INCOMPLETE. If it were a thesis, I’d say they failed.

A lot of the email made little sense to me, but there was enough there to pique my interest that I thought I’d look into Mr Grebeck.

As someone who wrote for Euromoney for many years, I have access to their archives: I looked all through the April 2006 issue and couldn’t find Grebeck’s article at all. Indeed, I searched the Euromoney website for him, and couldn’t find it anywhere: he turned up only once, quoted in a column by Edward Chancellor.

As I replied to his email asking him about this, I thought I’d look up his NYU credentials while I was at it. Turns out he’s one of two instructors on one course at NYU’s School of Continuing and Professional Studies — the continuing-education arm of NYU, not the university itself.

Meanwhile, I noticed that the “Euromoney article” was part of his email sig, along with that video:

Ed Grebeck is a global debt market strategist and author of “Why…Invest in CDOs, at All?” [Euromoney, April 2006], a prescient warning of Structured Finance illiquidity, conflicts of interest, flawed pricing models and today’s trillion dollar losses. http://fiscalclinic.com/2009/12/20/ed-grebeck-shared-with-you-his-video-interview-with-riskcenter.aspx?results=1#SurveyResultsChart

Grebeck replied to my email, attaching the article — which, I wasn’t surprised to find, was never published in Euromoney magazine. Instead, it was a chapter of something called the Structured Credit Products Handbook 2006/07, and it was published complete with Grebeck’s photograph, title, email address, and phone number.

I know enough about Euromoney to know how this kind of thing works: they use the power of the Euromoney brand name to sell chapters in these books to anybody willing to write one. Then they try to sell the finished product to the authors, who can try to use their status as a published author to burnish their credentials. None of this has any connection with Euromoney magazine, beyond the parent company.

But what about that article? Was it really prescient? Did it foresee “today’s trillion dollar losses”? Was it even called “Why…Invest in CDOs, at All?”

The actual title is “Why should institutions invest in CDOs, at all?”, and at heart it’s all about relative value: if you’re thinking about buying CDOs, says Grebeck, then maybe you’d get better value out of certain other investments instead, which carry less risk or higher returns.

Certainly Grebeck saw that the ratings on CDOs might be suspect, and that the investment banks structuring them were conflicted. But he nowhere talks about trillion-dollar losses, or any possible losses at all. And the main thesis of his article is that if you’re thinking of buying a CDO, you’d probably be better off — wait for it — buying equity in Ambac instead. Or maybe some other monoline:

Ambac is a relevant CDO comparable because its business model demonstrably works and it, like the other financial guarantors, is really a ‘giant CDO’. Ambac (symbol: ABK) is the best performing monoline financial guaranty insurer, generating a long-term return on equity for investors in excess of 15% per annum — up to May of 2005. Other established guarantors, in business since at least the 1980s, are MBIA (symbol: MBI), FSA and FGIC.

Financial Guarantor portfolios already have the diversification that today’s CDOs try to achieve… Their low risk portfolios permit high leverage, some 75 times, at least, their net worth…

Financial guarantors confront the same agency costs that CDO investors face… However, they have at least 300 dedicated staff, each learned in ‘credit culture’, to underwrite, document and monitor the risk over its term and so protect themselves as active market participants.

I really don’t think that an April 2006 article extolling the virtues of Ambac and MBIA counts as “prescient”. ABK was trading at about $70 back then; today, it’s less than a buck a share. MBIA has similarly fallen from $80 to $4. And the losses that did them in are exactly the losses that Grebeck claims to have so presciently foreseen. Yes, investors in CDOs lost a lot of money. But you would hardly have been better off investing in ABK instead.

After reading the article, it was pretty obvious that I wasn’t going to place much faith in what Grebeck has to say: he seems to be deliberately misleading when it comes to (a) his own credentials, (b) the place that his article was published, and (c) its contents. But then I realized that if he was emailing me, he was surely emailing lots of other journalists as well — people who might not be able to check up on the Euromoney article so easily, and/or people who under pressure of deadlines might be more willing to take him at face value. Should I not somehow give them a heads-up?

At the same time, Grebeck had caused me no harm, beyond the time I spent looking into his credentials: it would be cruel of me to splash his name all over Reuters as some kind of exemplar of spurious expertise. Indeed, Grebeck may indeed know a great deal about CDOs and CDSs and whatnot; I certainly hope that he does, for the sake of his clients. (His day job is running a Stamford consultancy providing “client-directed, confidential, research that extracts value from tomorrow’s opportunities as credit markets change, today”.) He’s just one of many financial professionals trying to make a living in these markets, looking for a bit of good press.

So on the grounds that no one much reads felixsalmon.com any more, I’m putting this note up here. I feel I owe it to myself, just to justify the amount of time I spent on Grebeck today.