by Janice Dorn, M.D., Ph.D.

Collective fear stimulates herd instinct, and tends to produce ferocity toward those who are not regarded as members of the herd…Bertrand Russell

Our ancestors lived in a constant state of fear– their lives in constant jeopardy from the elements, wild animals or climate changes that threatened to kill them. In the modern age, we know that some dangers

are still very real. If you are walking across the street and a large bus careening out of control comes bolting toward you at high speed — you are in real fear. In this case, the bus is the predator, and you are the prey. Death is literally staring you in the face, and your body goes into fight or flight mode as it tries to avoid it. This is real, tangible fear, and many of you have faced situations where bodily harm or death was literally staring you in the face.

In the markets, the fear predators are what force us to take action. Fear is the hunter, and we are the prey. We want to make money, and the predator that pushes us to do that is greed. Markets move up because people are buying and down because people are selling. We do not know the motives of these millions of people, but we infer that they are acting in their best interests to make money or minimize losses. Thus, buying or selling begets more buying or selling as the herd reacts to the predators of fear and greed.

To experience fear is human. With the exception of individuals who have certain brain lesions or are highly medicated with potent psychotropic medications, everyone alive feels fear. It is the emotion that binds us together, and it is the emotion that the media, public relations and advertising use to drive powerful messages directly into our limbic brains.

Paranoia strikes deep
Into your life it will creep
It starts when you’re always afraid
You step out of line, the man come and take you away…
“For What It’s Worth” by Buffalo Springfield

The major fears of traders are based on one simple premise: We do not like to be wrong! We don’t want to make a mistake–and having made one, we don’t want to admit it. At some point, the pain of realizing that we have made a mistake is too great to bear, and we get rid of our position at any cost. This is why short squeeze rallies (shorts buying at any cost just to get out so that they don’t have to take the pain that literally feels like their insides are being squeezed) are so powerful. This is why long squeeze declines (longs selling out at any cost just to get out so that they no longer have to tolerate the pain of descent into complete despair) are equally breathtaking.

The four major fears of traders and investors: fear of losing, fear of missing out, fear of leaving money on the table and fear of being wrong–are really some combination of fear and greed. The bottom line here is that fear is the predator. It chases after us, it hunts us down, it makes us captive to it and it causes us to act in ways that are not necessarily in the best interest of our equity curve. The fear of dying from a bus coming at you full force is very real. The fear of dying from selling a losing position or from leaving money on the table is quite different. The former is a rational fear of a real danger that is stalking us. The latter is not entirely rational, yet we allow it to stalk us.

The best thing we can do with less-than-rational fears is to turn them around completely. In other words, rather than letting fear be the predator and stalk you, adopt another attitude of action. Do not be paralyzed and frozen by fear. Become the predator and stalk it. Face it full on. Look at it and ask yourself if it’s really all that frightening. As long as you continue to allow yourself to be stalked by fear, your world will shrink, and you will become smaller and smaller as you retreat into a space of trying to protect yourself. Fear has you exactly where it wants you.

If, instead, you begin to move in the direction of your fears–slowly and steadily–you will find that they have less and less power over you. Your world begins to expand. You understand that fear is really False Evidence Appearing Real (F.E.A.R.). You begin to see that you have the power within you to face these fears and to control them. They are real only if you allow them to be real. By using the tools of position-sizing and money management, you control your risk as you move closer and closer to that fear. Once you are able to keep moving toward it, fear begins to diminish and you see it for what it really is, rather than what you imagined it to be.

You gain strength, courage, and confidence by every experience in which you really stop to look fear in the face. You must do the thing which you think you cannot do…Eleanor Roosevelt

Janice Dorn, M.D., Ph.D.

About high yield Bonds

Warning by David Kotok:


I do not feel that way today for the reasons outlined above.  There are significant risks facing investors today, as David Kotok has so eloquently warned in his writings on the European debt crisis.  For once, however, those risks do not come from weak credit quality or overvaluation in the U.S. high yield market.  Ms. Pomboy was incorrect in her assessment, and the last thing the high yield bond market needs is its own Meredith Whitney moment.

Junk Bonds Are Fairly Valued
July 26, 2012



Michael Lewitt is a portfolio manager and heads the opportunistic credit section of Cumberland.  His bio can be found at www.cumber.com.  His email is michael.lewitt@cumber.com.


The great economic historian Charles Kindleberger described a bubble as follows:


“What happens, basically, is that some event changes the economic outlook.  New opportunities for profits are seized, and overdone, in ways so closely resembling irrationality as to constitute a mania.  Once the excessive character of the upswing is realized, the financial system experiences a sort of ‘distress,’ in the course of which the rush to reverse the expansion process may become so precipitous as to resemble panic.   In the manic phase, people of wealth or credit switch out of money or borrow to buy real or financial assets. In panic, the reverse movement takes place, from real or financial assets to money, or repayment of debt, with a crash in the prices of commodities, houses, buildings, land, stocks, bonds – in short, in whatever has been the subject of the mania.”  (Manias, Panics and Crashes, 1989)


In recent years, we have seen this process occur with respect to internet stocks (late 1990s), the nation’s housing stock (mid-2000s), and twice with respect to corporate credit and the high yield bond market (2001-2 and 2008).


Last weekend, we were warned that the high yield bond market is experiencing a bubble.  Unfortunately, the warning was completely misplaced despite coming from a highly respected source, MacroMavens’ Stephanie Pomboy.   Ms. Pomboy argued in Barron’s that high yield bonds meet “all the standard criteria of a bubble.”   I don’t know which criteria she is referring to, but I would respectfully suggest that Ms. Pomboy reread her Kindleberger.   The reality is that today’s high yield bond market exhibits none of the characteristics of a bubble.


Investors’ desperate search for yield in today’s zero interest rate environment could lead them to look for yield in all the wrong places.  The Federal Reserve’s zero interest rate policy has now persisted for four years and there is no end in sight.  Today, however, the high yield bond market is not one of the wrong places to look for yield, as it has been so many times in the past.  There are several reasons why that is the case.


The most important reason is that corporate default risk today is extremely low today.  It is also likely to stay that way.  Thus far in 2012, the corporate default rate is below 3%, far less than the historical average of 4.6%.  High yield issuers have strong cash balances, healthy working capital positions, and manageable debt amortization schedules.   Prior to earlier high yield bond market collapses in 2001 and 2009, there were many warning signs that corporate defaults were going to skyrocket.  The market did not disappoint.  In 2001, defaults reached 10.5% and in 2009 they hit 13%, the highest corporate default rates the U.S. had seen since the Great Depression of the 1930s.  Conditions today are a far cry from then.


The second reason why the high yield bond market is not in a bubble is that valuations are not unreasonable.  Ms. Pomboy argues that “spreads are hovering at 2005 lows” (Barron’s, July 23, 2012, p. 33), but that is simply not true.  In fact, spreads are much wider today than they were in 2005.






Avg. Yield-To-Worst




High Yield Index Spread




BB Spread




B Spread




CCC Spread




Based on Barclays/Lehman High Yield Index option adjusted spreads.


Ms. Pomboy is certainly correct to point out that the absolute yields on high yield bonds are uncomfortably stingy today.  As hybrid securities that combine the characteristics of equity and debt, high yield bonds should offer investors an appropriately high return for taking equity risk.  That risk, however, is much higher in a CCC-rated bond than a BB-rated bond. But  CCC-rated bonds offer average yields of 11% today, which compares very favorably with what is on offer from many stocks today.  That is certainly not the sign of a bubble.  This is particularly true with respect to the CCC-rated bonds of large leveraged buyouts that date from the mid-2000s.  Moreover, despite their low ratings, many of these bonds are attractive investments today for too many reasons to outline here.


The third reason that high yield bonds are not experiencing a bubble is that there are few signs that the new issue market has reached the silly season.  In fact, the quality of new bond issuance is far superior today to what it was in the periods that preceded previous market crashes.  The internet bubble of the late 1990s-early 2000s was fueled by telecommunications and internet companies selling debt, while the private equity bubble of the mid-2000s was fed by the large buyout firms.  In both periods, these borrowers flooded the markets with tens of billions of dollars of highly speculative deals of dubious credit quality: bonds rated CCC+ or lower; holding company bonds; pay-in-kind or toggle notes (bonds that have the option of paying interest in cash or kind); dividend recapitalization financings; and covenant light bank loans.  Most new issuance today is related to the refinancing of existing debt. Very few new LBOs are being done, and telecommunications, technology and internet companies are financing themselves in the equity markets, where they belong.


Those familiar with my track record and writings know that I have never been an apologist for high yield bonds.  In fact, I have spent much of my career warning investors about their risks.  My approach to investing in this asset class is different than that of most managers based on my dour view of these securities and the private equity firms that are among their largest issuers.  In both 2001 and 2007, I warned investors to exit the high yield credit market in my newsletter, The Credit Strategist (www.thecreditstrategist.com).   I do not feel that way today for the reasons outlined above.  There are significant risks facing investors today, as David Kotok has so eloquently warned in his writings on the European debt crisis.  For once, however, those risks do not come from weak credit quality or overvaluation in the U.S. high yield market.  Ms. Pomboy was incorrect in her assessment, and the last thing the high yield bond market needs is its own Meredith Whitney moment.


Michael Lewitt, Vice President and Portfolio Manager


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Think with your Mind

Abandon Hope

by Janice Dorn, M.D., Ph.D.

Hope in reality is the worst of all evils because it prolongs the torments of man…Friedrich Nietzsche

Take an old pair of jeans and cut a hole in one of the pockets. Now, start pouring sand into that pocket. What happens? Sand runs down your leg and to the ground. What do you do? Keep pouring until the

sand is up to your ankles? Your knees? Your waist?

At what point do you realize and act on the fact that no matter how much or how fast you pour sand into the empty pocket, you have a hole in your pocket? When do you come to the conclusion that you either have to stop pouring sand or just throw your pants on the ground and run away as fast as you can?

Sadly, many of you will keep pouring until you are up to your neck in sand. Suddenly, it begins to feel like quicksand and you are trapped–can’t or won’t get out. At this point, you feel like you are being pulled down into the quicksand, unable to breathe, choking and suffocating in the murky slime.

This is how it feels to lose. The hole in your pocket is the losing position. The sand is your mental, emotional, physical, financial and spiritual capital pouring out until you are drained, have nothing left to give and are literally sinking in a quagmire of your own creation. The pain of loss is excruciating, like a knife stabbing through you. Everything feels quite different when you are in a losing position. The experience of time changes and seems to slow down to a snail’s pace. Physical health deteriorates due to the outpouring of stress hormones that weaken your immune system. In the same manner that going long in the markets is not the inverse of going short, losing is much more than just the absence of winning.

The feeling of losing is persistent, relentless and devastating. It eats away at you like a cancer that metastasizes to every part of the body, killing one cell after the other. If it is not contained, losing truly feels like death. How does deterioration of psychological and physical capital with focus on a losing position manifest itself? Irritability, sleeplessness, continual searching for something or someone to affirm your position (confirmation bias), anxiety and dysphoria, tick-itis (the toxic habit of watching every tick of the position day after day), rumination, self-deception, impairment of social and family activities and a litany of other unpleasant emotional and physical states. Perhaps the worst aspect of this is the spiritual decay that manifests as self deception and lying to family and friends. One is rarely capable of owning true feelings of guilt, shame and inadequacy and shifts into a mind morph where a failed trade becomes a hold and hope investment.

Of the gamut of emotions that flood traders and investors on a daily basis, the most risky is hope. It borders on delusional to believe that the markets are kind, loving and give you money if you just keep your pants on and hang in there. If this is what you are thinking, it might be a good time to reassess why you are in the financial markets– among the most cruel, bloody and dangerous games that humans play.

The most rigorously honest thing that I can say in response to this type of thinking is: abandon hope. As extreme as this may sound, it is the only way to be consistently successful. Attachment to a losing position is a recipe for more misery and illness than any one of you deserves. Eschew complacency and mediocrity, both in trading and life. Cut losers quickly and do not sit around waiting for the markets to rescue you. 80% of all traders are out of the game within six months because they don’t have the discipline to manage risk by cutting losing positions.

Who can say what is waiting for you at the bottom of the slippery slope of hope? Stop pouring sand into the hole in your pants before it is too late. Suffering is optional and you are in control. Take your power and use it to make yourself strong in the service of living and breathing with freedom to play another day.

The trouble with most people is that they think with their hopes or fears or wishes rather than with their minds… Will Durant (American Historian and Philosopher…1885-1981)

Janice Dorn, M.D., Ph.D.


Text Copyright: Janice Dorn, M.D., Ph.D. 2012 All Rights Reserved

Public governance in LIBOR

Updates from my friend David Kotok

LIBOR and Public Governance

July 23, 2012


This commentary was written by Bill Witherell, Cumberland’s Chief Global Economist.  He joined Cumberland after years of experience at the OECD in Paris.  His bio is found on Cumberland’s home page, www.cumber.com.  He can be reached at Bill.Witherell@cumber.com.



Recently I wrote about the sorry state of corporate governance in some leading financial institutions that is being revealed by the still-developing LIBOR scandal. We now have, in addition, the US Senate report charging that the lax guidelines of HSBC affiliates worldwide failed to guard against money laundering, doing business with firms linked to terrorism, and bypassing sanctions against Iran. Thus we have more damage being done to confidence in the major global banks. In this note we turn to some public governance issues raised by the LIBOR scandal. Did central banks and the relevant regulatory bodies, along with the international bodies responsible for overseeing the global financial system, respond to the problems in the ways we should expect?


One broad measure of what we should expect at the public governance level can be found in the OECD Principles of Corporate Governancethat I cited in my previous note. Recall that these Principles have been endorsed by the governments of the 34 member countries of the OECD, including the US and the UK, as well as the World Bank and the IMF.  Principle I.D states, “Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfill their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained.” We will focus on the second sentence of this Principle.


It has become evident that a number of national regulatory agencies and central banks were aware of the problems with LIBOR and the possibility of abuses well before the present year.  My colleague Bob Eisenbeis has written about staff members of the New York Federal Reserve Bank having discussions on the matter with staff of Barclays in December of 2007. The then President of the NY Fed, Timothy Geithner, “spoke briefly” (his words) on the subject with Mervyn King, Governor of the Bank of England, in Basel, Switzerland, where both attended the monthly gatherings of central bankers at the Bank for International  Settlements (BIS), considered to be “the central bank for the central banks.”  On June 1, 2008 Geithner sent an email to King offering six “Recommendations for Enhancing the Credibility of Libor” that had been developed by the staff of the New York Fed.  King replied that the recommendations “seem sensible to us” and that he was passing them to the British Bankers Association (BBA), which is responsible for the daily LIBOR fixing.  On May 1, 2008 the New York Fed also briefed the Federal Reserve Board and relevant regulatory bodies, in particular, the Commodities Futures Trading Commission, which had already opened an investigation the previous month, and the Securities and Exchange Commission.   As far as these steps go, they are commendable. But did they go far enough?


On July 20 the Bank of England released on its website a large amount of correspondence between the Fed, the BOE, the BBA and the UK’s Financial Services Authority (FSA) that sheds information about the BBA’s review of LIBOR in 2008. Clearly in the period following the receipt of Geithner’s recommendations, the BOE and the Fed continued to interact with the BBA, seeking to shape the final results of the Libor review while not wishing to be seen as endorsing those results. The BBA did not seem to think anything was really wrong with LIBOR but they recognized they had a serious perception problem that they needed to be seen as addressing. The BOE appeared to be more concerned that LIBOR had deficiencies that needed to be addressed in order to make sure that LIBOR would not be replaced by a New-York based alternative. There are no indications in this correspondence that anyone felt they were dealing with a problem of systemic importance. Nor is there any suggestion that either the Fed or the BOE were unsatisfied with the modest results of the review, which only partially took on board the Fed’s recommendations.


Last week, Mervin King, under fire for not acting sooner, charged that Geithner gave no indication of malpractice in their 2008 exchange. In their July 20 posting on their website, the BOE  adds “At no point did the FRBNY draw the attention of the Bank to evidence of wrongdoing in the setting of BBA Libor.  Indeed, with the exception of the memorandum sent by Mr. Geithner to the Bank in early June 2008, none of the other documents published on June 13 2012 by the FRBNY had been shared with the Bank.  These showed, inter alia, that back in April of 2008 a Barclay’s staff member advised a New York Fed staff member that the bank in the UK was low-balling rates to avoid appearing weak.  Fed Chairman Bernanke testified last week that in 2008 they had no information that bank traders had tried to manipulate rates “for profit.” However, both the Fed and the BOE certainly should have been aware by then of the potential for such manipulation.


In addition to warnings in academic papers and the NY Fed’s own research, it is notable that the March 2008 issue of the BIS Quarterly Review included an article, “Interbank rate fixings during the recent turmoil,” by two BIS economists, Jacob Gyntelberg and Phillip Wooldridge.  They say the following:


“The widespread use of fixings as reference rates also gives contributing banks an incentive to misquote.… For example, market participants with large positions in derivative contracts reference a rate fixing might seek to move the fixing higher or lower by contributing biased quotes. Alternatively, they might indirectly influence the accuracy of the fixing by choosing not to join the contributor panel.”


The scope for such strategic behavior to influence the fixing can to some extent be limited by trimming, in which biased or extreme quotes are disregarded. However, even trimmed means can be manipulated if contributor banks collude or if a sufficient number change their behavior.”


Last week Bernanke testified that, “The LIBOR system is structurally flawed … It is a major problem for our financial system and for confidence in the financial system … we need to address it.” He emphasized that this will require an international effort.  We would agree. It seems doubtful, however, that either US or UK authorities recognized until very recently that the problem was major, of systemic importance, even though regulatory investigations have been underway since 2008 in the US; and now reportedly at least 10 enforcement agencies globally, including those in Canada, Japan, Europe, and Korea have investigations underway. There appear to have been no efforts to raise the issue in key international financial forums, in particular, the BIS, the Financial Stability Board, the IMF, or the OECD, all of which could have been used to increase awareness of the problem and exert pressure for reform.  Until the recent revelations, there has been no effort of which we are aware to inform investors or the general public that a benchmark rate central to the plumbing of the financial system was structurally flawed.


Indeed, the opposite signal was given as the Fed continued to use the LIBOR as a benchmark. In September 2008 the NY Fed extended to AIG an $85 billion line of credit with an interest rate based on the LIBOR. In November 2008, when the Fed established the Term Asset-Backed Securities Loan Facility, it again used the LIBOR to set the interest rate. Now, five years after the first warnings were given, all the relevant public-sector institutions are picking up the ball. Regulatory and enforcement bodies are carrying out investigations, some of which are well-advanced. Mervyn King has arranged for a meeting September 9 in Basel, bringing together central bankers to discuss LIBOR deficiencies and consider “radical reforms.”  Also, Mark Carney, governor of the Bank of Canada and chairman of the Financial Stability Board, said the FSB will look for long-run solutions to the LIBOR problem.  The FSB brings together bank regulators, finance ministers, and other financial supervisors under a mandate to coordinate at the international level the work of national financial authorities to develop and promote the implementation of effective regulatory, supervisory, and other financial-sector policies that have implications for financial stability.


It is a pity that it took five years and the Barclays case to bring this degree of attention to the issue. Referring back to the governance Principle cited in the second paragraph, we certainly cannot give a high grade for transparency. As for timeliness, the NY Fed got off to a good start, but the follow-up by the Fed after 2008 was lacking. As for the Bank of England and the UK’s Financial Services Authority, the defense that the US did not provide a sufficient warning about deficiencies in the LIBOR seems weak to us.  It is unfortunate that the Bank of England apparently was not informed by the NY Fed of information it had obtained about practices at Barclay’s in London. However, as the LIBOR system is based in the UK, the BOE and the FSA must have been aware of the structural flaws, but apparently did not recognize their systemic importance.


Bill Witherell, Chief Global Economist


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Decision Matrix

Succinctly put by my good and dear friend :

Beware The Biases

by Janice Dorn, M.D., Ph.D.

It is one thing to show a man that he is in an error, and another to put him in possession of truth…John Locke

Cognitive biases describe the way you think–the operative words here being cognitive (thinking) and biases (prejudices). You tend to hold on to your biases, even when they don’t serve you well.This causes you to make trading mistake after trading mistake. Also, since your brain is hard-wired for biases, it is difficult to change them without experiencing some type of internal discomfort.  Resistance to change and acting out of biases have two effects on your trading and investing: You do the same thing over and over again, and you expect different results every time you do it. This is–as you are aware—Albert Einstein’s definition of insanity.

In order to push through the biases that are holding you back from becoming a profitable trader and investor, you must be aware of them and make appropriate changes. How do you make changes? You retrain your trading brain. This is done through consistent coaching and practice. It takes time, but it is completely doable—and it works!

The human brain uses biases to protect against assaults on your self-esteem. The self-attribution bias describes the tendency for good outcomes to be attributed to skill and bad outcomes to be attributed to just plain hideous bad luck.

A decision matrix for self-attribution bias looks something like this:

Good Outcome

Bad Outcome

Right Reason


Bad luck

Wrong Reason

Good luck


This type of thinking is one of the biggest obstacles you must push through in order to become successful. Why? Because the only way to gain consistent profitability as a trader is to recognize and take full responsibility for your own mistakes. This is yet another reason to keep a detailed trading journal and to analyze each trade in context of self-attribution. In this way, you will come to a better understanding of where you were skillful and where you were lucky.You will also find that mistakes are essential to learning—both in the markets and in life. The takeaway is to accept a mistake as a mistake, not blame anyone else, and learn from it so as not to make it again.

Here are some questions for you to ponder as they pertain to self-attribution bias and how it is interfering with your trading success:

1. When are you lucky and when are you skillful?

2. Are you right for the “right” reason, or are you right for some other reason?

3. Does it matter, as long as you are right?

4. How do you measure and “fess up” to mistakes—i.e., recognize mistakes as mistakes by taking personal responsibility and accumulating regret?

5. Is it important to do this, and why or why not?

6. What are some other biases that affect your trading results?

You should examine yourself daily. If you find faults, you should correct them. When you find none, you should try even harder…Israel Zangwill

Thanks and Good Trading!

Janice Dorn,M.D., Ph.D.

Scorpion v Frog


 Janice Dorn, M.D., Ph.D.


 A scorpion and a frog meet on the bank of a stream and the

scorpion asks the frog to carry him across on its back. The

frog asks, “How do I know you won’t sting me?” The scorpion

says, “Because if I do, I will die too.”

The frog is satisfied, and they set out, but in midstream,

the scorpion stings the frog. The frog feels the onset of

paralysis and starts to sink, knowing they both will drown,

but has just enough time to gasp “Why?”

Replies the scorpion: “It’s my nature…”  Aesop’s Fables

No matter who you are, how intelligent or how much education you have, if you keep doing the same thing over and over again, expecting different results, you are suffering from the most insidious form of insanity. This is self-delusion of the highest degree. Years ago, when I first started to trade, I was so optimistic that I could make money consistently. I was smart, educated, a successful physician, and always had been able to study hard and master anything I put my mind to. I could do it and nothing was going to stop me. I would work longer and more intensely than anyone else, and show wonderful profits month after month.

Little did I know what I was facing, and that I was about to come head on with the most challenging task of my lifetime. Simple—maybe–but not easy.  Not easy at all. After a few months, I found myself dancing as fast as I could; yet running on a treadmill going nowhere and suffering from vertigo, headache and a severe case of tick-itis. I studied and read everything I could lay my hands on, subscribed to service after service looking for the Holy Grail and struggling to make consistently successful trades. Why couldn’t I do it? What was wrong?

Is this so difficult? What about all the people who have returns of greater than 80% a years? They couldn’t be exaggerating, could they? After all, it’s in print and on a heavily subscribed website, so it must be true. Mustn’t it? So I studied more, subscribed to more services, learned new indicators, bought books, joined some chat rooms and saturated myself with information. This produced more vertigo, headache and sleep deprivation. I was on total information overload. I started sleeping sitting up so that I would not sleep too deeply and could awaken more easily at 4:30AM (having gone to sleep at around 1:30 AM) in order to study and watch the markets before they opened at 6:30 AM.

I was in total immersion, so why couldn’t I make consistently successful trades? I became paranoid, thinking it was a kind of conspiracy since every time I took a position it went against me. I knew the stop and was stopped out in my minds, but we didn’t take the stops because I had faith that the position would come back. It was some kind of a misunderstanding or misinterpretation by the market that was responsible for the price spiraling downward.

Buy more. That’s it. Average down and keep averaging down and eventually, I will get it right. Eventually, the price will come back up and I will be justified. Why isn’t the price coming back? I know it has to. After all, I studied it, charted it, listened to the gurus, read everything on every bulletin board, and it absolutely HAS to come back. Oh, that news that just came out…. Ugh! Must be false or overstated because there is no reason that the stock should be selling off like that.

I know it is coming back, so I will buy more. Wow!! Look at the size of the position now. Hmmmm. I better kick it up a notch and start participating in every message board and study every report and watch every tick every day for signs that life is returning and I can get back from underwater. Most of you know how this feels. I do. I have been there, lived it, and suffered losses from it. Life was miserable this way. I became depressed and irritable. I walled myself off from the rest of the world just trying to figure out what to do. I had dug a really deep hole and the only way out was to sell and take the losses. OR- wait and be in agony day after day, watching my account and my self-esteem (what was left of it) erode like shifting sands.

I tried too hard, studied too much, and pushed myself to the point of both physical and mental exhaustion. Why? Why did I not honor the stop, continue to hold on and even average down? I had to figuratively kill the frog and kill myself in the process. In order to be reborn, I had to destroy the internal self-defeating programming and start all over again. I had to step back, look at what I had done with a sharp and penetrating glare in the bright light of day. I decided to take the loss, to stop trading for a while, to take a vacation and center myself. My health returned. The dizziness and headache went away. I didn’t care so much about watching the flickering ticks (so, at least, I was in remission from a severe case of tick-itis).

It was not the market, the charts, the software, the gurus or anyone/anything else. It was me! I was my worst enemy. Nothing was going to change until I got right with myself.

The most exquisite paradox is that as soon as you give it all up, you can have it all.

As long as you want power, you can’t have it. The minute you don’t want power, you’ll have more than you ever dreamed possible… Ram Dass


Janice Dorn, M.D., Ph.D.




Text Copyright:  Janice Dorn, M.D., Ph.D., 2012 All rights reserved

Illustration Copyright:  http://tinyurl.com/cvwgl5c

Libor – Costs & Victims

This is serious….

The Libor Scandal: Costs and Victims
July 17, 2012

Readers are seeing a series of Cumberland commentaries about the Libor Scandal.  We do not intend to bore you.  We do intend to explore it in detail, from various perspectives, seeking out the nuances, and asking as many questions as we answer.


Why are we doing this?  We believe the Libor scandal is systemic and worldwide.  It is not idiosyncratic to Barclays.  The UK has seven other firms under investigation right now.  Barclays was the first to reveal a settlement.  The nature of the settlement itself indicates that the scandal is huge.


The implications of the Libor Scandal are significant in many ways.  They will certainly alter the global direction and scope of regulation and supervision.  The outcome will not be known for years.  There are good reasons why Fed Chairman Bernanke used words like “weakens confidence” and “fundamentally flawed” in his testimony today.  We was asked repeatedly about the Libor Scandal.  Note how he could not give “full assurances” to Senators that Libor pricing today was trustworthy.


There are multiple questions and issues involving different national jurisdictions.  My colleagues and I have already written about some differences between the US and the UK.  However, the Libor-setting entities include banking institutions worldwide.  Libor-type, rate-setting mechanisms are in place for the world’s major currencies.  The investigation is underway in several countries, not just the US and the UK.


The amounts tied to Libor are monumental.  That suggests the claims asserted by plaintiffs in class-action suits are likely to be enormous.  We expect the alleged damages to be in the trillions.


What happens when those claims are resolved over time?  Who pays whom?  How much?  Some estimates suggest the claims will be a severe blow to the banking system, require recapitalization of certain large banks, and lead to a new version of TARP.  We think that is extreme but, of course, no one knows at this juncture.  The worst-case estimate has Congress capping the liabilities of US-based banking institutions.  Others suggest similar actions will take place in Europe and elsewhere.  Who knows?


The best-case scenario is that there is no liability.  We see many arguments being proffered to blunt the plaintiffs’ attacks.  Some argue that the Libor-setting estimates were just that: estimates.  There were warnings to that effect.  They say that these were not fraudulent transactions.  The trimmed-mean method means the high and low are not included in the final pricing, so a bad estimate is in the group that is thrown out.  In due time, we will find out how valid these arguments are.  At Cumberland, we doubt these defenses will prevail.


In the end, legal systems around the world will be making decisions on liabilities.  They are different systems and their legal constructions are quite distinct as to the nuances.


Let me offer a thought-provoking calculation.  Many estimates center on $350 trillion in derivatives, securities, and debt pricing tied to Libor.  Assume that number is correct.  Suppose a claim is asserted by a class action that ultimately results in a judgment of 1 basis point in damages.  That’s right, for this example we will assume only a single basis point.  One basis point on $350 trillion dollars is a very large sum.  It is $35 billion.  That is the damage for only one year.  The Libor Scandal covered many years.


The highest estimates of total global exposure to US-dollar Libor are close to $850 trillion.  Some claims are asserting that the Libor-rigging distortion was as high as 80 basis points.  Remember, this was a multi-year scandal and these are the numbers for one year.  Bottom line, the liability is potentially quite large.  Also, remember: these are estimates for US-dollar Libor.  What about the other currencies?


At Cumberland, we believe that this Libor scandal involves two elements.  One of them is the retrospective of how the system operated in 2007-2009.  We already see evidence of disclosure of things we did not know existed.  My colleagues have been working on them, so I will not repeat them here.  See www.cumber.com for the Libor-related commentaries.


Other issues with the Libor Scandal involve other asset classes.  For example, we know billions in US housing-finance mortgages are tied to Libor.  That number has been estimated as approximately $275 billion and covers an estimated 900,000 mortgages.  Cumberland staff is among the potential plaintiffs.  Do those borrowers have a claim?  Were they overcharged?  Were they undercharged?  If they were overcharged, did the recipient of the payments have a windfall?  Should it be returned?  Is there a claw back provision that would be implemented by a judge in the settlement of the claim?


What about the foreign exchange market?  Libor is instructive, indicative, and relied upon in order to set foreign exchange rates and the placement of funds.  Global corporate treasurers look at two things (or at least they did): the Libor maturity schedule from one day to one year, and the foreign exchange market forward rates for the same period of time.  The corporate treasurer has to decide in which currency he will deploy cash.  Does he deploy monies in Currency A or Currency B; which way does he maximize his yield?  He then goes to his commercial bank and puts on the position that is perceived to be the most beneficial to his company. In many cases, that bank is also on the Libor-setting committee for one of the currencies.  Some of those banks are primary dealers with the Federal Reserve.  The positions taken are transactions based on good faith.  For years, they were “trusted.”


What if one of those rates is rigged?  The whole game changes.  Billions may have been deployed based upon assumptions that are now questioned.


Our Cumberland team will explore these issues over the coming weeks and months.  We need to know what was real and what was rigged – that is obvious.  We also need to know what indicators, what tests, what market-derived pricing was faulty.  For example, if you depended on the TED spread to make your stock market investment decisions in 2007-2009, you may have made decisions on faulty information.  Now you know that information is suspect.  You are aware that activities in the UK were/are flawed.  You also know that the system of governance has not been changed.  Can you depend on these market-based indicators today?  If not, you should be questioning other indicators as well.


Where does this end?  None of us knows.  This is an unfolding revelation.  We are going to learn piece-by-piece as the onion layers are peeled back.


We will close this commentary with a personal note.  We feel badly for some of our friends at Barclays and at other firms.  Those individuals had nothing to do with the Libor Scandal.  They are economists and analysts and they do excellent research.  They publish some of the finest work in the world.  They are now likely to feel some angst because their institutions have been tainted with reputational risk.  From our conversations, we know that they carry psychological pain.


To them we add this note.  You did not do anything wrong.  You did your best in the research sphere.  You assessed economics and finance.  You reviewed published market data.  You did so in good faith.  Now, you have to carry a burden that you did not create.  That is unfortunate.  You, too, are a victim of the Libor Scandal.


To be continued…


David R. Kotok, Chairman and Chief Investment Officer