This afternoon started out as pretty much a perfect Sunday afternoon. I’d made eggs Benedict for Cerise, Veronica and myself, and we were lounging in the living room, sipping blood orange mimosas and cappuccinos. Twinkle purred softly in my lap as I perused the latest edition of Harper’s, while Cerise explored the Sunday New York Times and Veronica went over the Sunday Washington Post, pink felt highlighter in hand, searching for stories about suitable Washingtonian men she should meet and get to know. It was cozy, it was serene, and, in my humble opinion, it was very, very good.
But there is an irrefutable corollary to Murphy’s Law. It states that the probability of sustaining a pleasant situation is inversely proportional to the cube of how much you are enjoying it. That bit of wisdom was readily demonstrated this afternoon, as my little piece of paradise managed to sustain its existence less than half an hour, only to be shattered by an incessant ringing of my front door bell.
“Hickox?” I was astounded. The man lives Columbia, Maryland, for Christ’s sake. To drive all the way from there to Great Falls, Virginia on a Sunday afternoon – without even calling ahead first to see if I’m home – requires either an incredible amount of stupidity or a problem of utmost and secret urgency. It turned out to be both.
“Don’t tell anyone,” he admonished, cocking his head back over his shoulder at Cerise and Veronica as he hustled me into my study, “not a soul. This has got to be just between you and me, understand?”
“What does?” I demanded as Hickox hurriedly shut the door behind us.
“What I came here to see you about,” he hissed, throwing me a look that said I, of all people, should know exactly what he was talking about. And after a moment’s reflection, I did. Hickox works for the Treasury Department – enough said.
“You’re on the bail out team?”
“Rescue!” Hickox insisted. “Call it the ‘Rescue Team,’ all right?”
“Okay,” I shrugged, “ you’re on the Rescue Team. What’s your assignment?”
“Well,” he began, as sweat started to break out on his brow, “you know how Treasury has this seven hundred billion dollars appropriated in the new law that President Bush signed yesterday and we’re supposed to use it to buy up all the illiquid securities that Wall Street doesn’t want anymore?”
“Of course,” I assured him. “Mortgage-backed securities, credit default swaps, collateralized debt obligations, all that absurd stuff Paulson and his buddies foisted on the markets. They ought to be ashamed of themselves, blackmailing the American people into buying all that useless crap, now that everyone’s finally realized it’s totally worthless.”
“Don’t say that!” Hickox was white as a sheet. “All that useless crap has to be worth something! It just simply has to!”
I shot him a skeptical glance as I made myself comfortable in my favorite plush leather reading chair. “Why?”
“Because the American economy… ah, because the international banking system… because the Chinese…. uh, because the British… um, because the dollar… er, because the President… ah, because Congress… oh, [expletive]!” Hickox collapsed into the chair next to me, shuddering in exasperation. “Because if they really are worthless, then we’re all completely [expletive]!”
“A very compelling argument,” I observed. “From the neoclassical school of economic theory, I presume?”
“Don’t start gloating, Collins,” Hickox warned, “this is no time for people like you to go on and on with a chorus of ‘I told you so.’ The country needs to put all that behind us – just forget about it.”
“Sure, we definitely need to forget it,” I razzed, “so Henry Paulson can make another half-billion dollars cheating us ten years from now after we have.”
“You can’t really believe,” Hickox protested self-righteously, “that Wall Street will ever be the same after this, can you?”
“What could be all that different?” I leaned back, contemplatively, my hands behind my head, and mused. “After this, we will still have the Hank Paulsons of the world; we’ll still have their lawful prey, the American people, and we’ll still have pieces of paper for conniving scumbags like Paulson to call ‘assets’ and trade back and forth until the next house of cards collapses and Wall Street comes back to Congress with another blackmail demand.”
“Tom,” Hickox scolded, “this is no time for your famous cynicism. Tomorrow is Monday, and I’m expected to have the answer by seven a.m.!”
“The answer to which question, pray tell?”
“The question of how to evaluate those securities,” Hickox sputtered, “why else would I come all the way out here from Columbia to see you on a Sunday?”
“So that’s what your assignment is – figure out how much the federal government should pay the banks for their various illiquid securities?”
Hickox hung his head, dejectedly. “Yes.”
“What the hell,” I inquired, “did you do to deserve an assignment like that?”
“Nothing… specific,” he muttered, “I just… well, they always seem to give me the [expletive] jobs that nobody else would be caught dead doing.”
“Okay, it’s all clear to me now,” I relented. “You’re using the Financial Accounting Standards Board FAS 157 for Fair Value Measurement, I assume?”
“Uh, yes,” Hickox offered, “and, um, no…”
“What?”
“Well,” Hickox sheepishly proceeded, “that would have Treasury buying at the exit price…”
“Yeah, sure,” I concurred. “What FASB calls ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.’ What’s wrong with that?”
“Paulson’s guys,” he slowly recited while wringing his hands, “are arguing that if an asset is FAS 157 Level 3, the last trading price might not necessarily be the… ah… correct… one.”
“You mean,” I interjected, “that they want the SEC to suspend mark-to-market valuation so they can sell their pieces of fancy toilet paper to the American people at the prices Paulson and his lickspittles crave?”
“They don’t… put it that way… exactly,” he nervously informed me. “They say it’s more like they’re asking Treasury to use judgement instead of a set of strict rules…”
“Strict rules?” I interrupted. “You mean, strict generally accepted accounting rules like everybody else has to follow?”
“Secretary Paulson and his friends,” Hickox carefully explained, “aren’t like… everybody else. They say that strict application of FAS 157 to the… assets in question… would continually force prices toward the bid values and away from the values asked…”
“Maybe that’s because the ‘assets in question’ aren’t worth what Paulson and his cronies want for them,” I suggested.
“But Tom,” Hickox insisted, “the more profit the banks make selling these securities to the Government…”
“The more money they’ll have,” I broke in, “to use getting the credit markets and the economy moving again. I know. I’ve heard that line of reasoning already. Some folks buy it. Some folks bought their houses from crooks who wrote them bogus sub-prime mortgages, too.”
“FASB and the SEC,” Hickox pointed out, “have both issued guidance that while the transactions of inactive markets should be considered in management’s estimate of fair value, such results aren’t necessarily determinative.”
“And,” I recalled, “they also said that ‘when an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.’ Look here my friend – you can put lipstick on Sarah Palin, but that doesn’t make her Geraldine Ferraro. That’s nothing but Paulson’s smoke and mirror explanation for highway robbery! He’s looking to turn back decades of progress in financial reporting and revert to the Dark Ages, like in the 1920’s!”
“Not my problem!” Hickox challenged, extending his left and right hands like a pair of pans on a Roman scale. “My problem is that here’s the bid at 15 and here’s the ask at 95!”
“So,” I proposed, “you calculate a present value based on projected receipts under the assumption of an ergodic stochastic process of future events.”
“Huh?” Hickox scrunched his face into an expression of total perplexity. “Look, Tom,” he complained, “I’m a Civil Service accountant, okay?”
“Right,” I affirmed. “So, what have you accomplished so far?”
“I started out at my desk,” he related, “you know, just doing a preliminary analysis, using Excel…”
“How did it go?”
“About five minutes into it, Clippy popped up and said ‘It looks like you’re trying to structure a national financial bail-out package, would you like some help?’”
“Did you take Clippy up on his offer?”
“Yeah,” Hickox confessed, blushing slightly, “I was desperate. But I gave up on him pretty soon afterward.”
“How come?”
“Ah,” Hickox spat out in disgust, “the first thing Clippy did was add a line item titled ‘Tax Break Incentive for Microsoft Corporation.’”
“It figures,” I opined. “Then what?”
“I thought,” he continued, “I might as well say to hell with trying to rough out the valuations with spreadsheets, and go right to Treasury’s custom-designed valuation application suite.”
“Custom designed, eh?” I leaned forward a bit, betraying my interest in such matters. “Which federal IT contractors worked on that?”
“Oh, well,” Hickox brusquely shot back, his hands displaying a gesture of general confusion and futility, “it would probably be easier to say which ones didn’t. Every two years, we’d have a re-compete, throw out the incumbent and hire a replacement.”
“Really?” I couldn’t resist the urge to ask. “What seems to be the problem?”
“Oh, you know,” Hickox sighed as he shook his head with an air of worldly resignation, “the usual. We told them we’d know what we wanted when we saw it. But they insisted on assigning analysts to ask all these questions we couldn’t answer, and all those analysts were these middle-aged Americans with advanced degrees and twenty years of IT experience and stuff, and the contractor kept sending more of them to work on the project, writing programs and tinkering with the network; and, you know, having people like that around always makes the Civil Service staff feel, I don’t know…”
“Inferior?”
“Maybe; probably, it’s more like…”
“Inadequate?”
“Sort of; I’d say that’s close, but, closer to…”
“Worthless?”
“Not exactly, more like scared…”
“Intimidated?”
“Yeah – that’s it – they made us feel intimidated; I guess that’s the best word for it. So we were constantly having to conduct the usual whispering campaigns and character assassinations we use in the Civil Service to get rid of people we don’t like and make the contractor replace them with some cute third-world kids who just got out of college in Iran or Indonesia or whatever, that didn’t, you know, make us look so bad all the time, you know, by comparison. Being around people like those middle-aged American IT experts with those fancy masters degrees and doctorates can really affect a civil servant’s self-esteem, you know? And if our self-esteem isn’t up to snuff, well, then, our Agency’s mission is jeopardized, isn’t it?”
“But of course,” I acceded. “The Executive Branch of the United States Government exists, first and foremost, to provide employment, income, benefits and self-validation for members of the United States Civil Service – everybody knows that.”
“Exactly, Tom. You hit the nail right on the head,” Hickox confidently acknowledged. “And then there were the usual things that happen after you have a Civil Service Working Group design a computer system – we’d spend all day, maybe two days, even, in meetings and come up with a ten, even a fifteen page document, give it to the programmers and tell them to start coding right away, because time is money, right? And their managers would come back with this stuff about ‘prototyping,’ ‘use cases,’ ‘configuration management’ and ‘assignment of requirements to defined, phased releases of the software product’ and all kinds of other mumbo-jumbo those IT types throw in your face to justify all that money they charge, you know? So then we’d have to fabricate some more libel and slander in order to get those managers fired and make the contractor hire some nice managers who would stay out of the way and let us tell their programmers and network technicians what to do, how to do it, and when to do it, you know? And not try to confuse us with a lot of high-falutin’ double-talk while we were at it, either.”
“I see. And then what happened?”
“Well, of course, you know how those programmers and network technicians are. You tell them in plain English ‘make it do this’ and they make it do that – but then you tell them to ‘make it do this other thing,’ too, and that screws up how it does the first thing you told them to make it do. And so they fix it, but the fix screws up something else, and it just goes on and on like that. So, the first year, the whole thing didn’t work worth squat. So after another year of it not doing squat, we did a re-compete, threw out the incumbent and got another contractor; and, of course, here the new guys come in with more egghead middle-aged American IT experts with their fancy-schmancy PhDs and more IT managers with their hoity-toity MBAs full of all that ‘structured development’ bull [expletive]; and, of course, we have to waste six, maybe eight months getting rid of them, and before you know it, another year’s gone by and the damned thing still doesn’t work.”
“And how much has that run,” I discretely queried, “so far?”
Hickox pondered for a moment, then spoke. “Treasury’s spent, oh, I guess around seventy five million on it.”
“What’s it called?”
“The Financial and Economic Derivative Securities Worldwide International Numerical Evaluator,” Hickox proudly intoned.
“FED SWINE?”
“Ah, no, Tom,” Hickox corrected, “that’s not right. It’s ‘FED’S WINE,’ um, like we’re the Feds, and the computer program, it’s like, ah, a fine wine, get it?”
“Sure,” I stoically agreed. “Did you make that up?”
“Not me,” Hickox confided. “We got one of those companies, you know, like the one that made up the name ‘Exxon?’ I hired Wood Worldwide, the company that invented the name ‘Viagra.’ They created ‘FEDSWINE’ exclusively for us. I even got a trip to New York out of it – to visit their headquarters for the final approval conference.” Hickox leaned in close for emphasis and whispered, “They’re in Soho. You wouldn’t believe their offices! They must have spent a fortune on interior design! And everyone,” he marveled, “has their own, genuine Aeron chair – color coordinated to the decor.”
“Gee,” I innocently asked, “how much did they charge you?”
“Less than a hundred thousand,” Hickox bragged. “We got a really good deal on that – I made sure of it.”
“Well, I should think so! Heaven forfend,” I gasped, “that the United States Civil Service should waste any of the American taxpayer’s money.”
“Amen to that,” Hickox responded proudly. “Just doing our duty, you know. But anyway, the Treasury Department has paid those [expletive] IT contractors over seventy-five million dollars for FEDSWINE, and I still can’t get it to evaluate these damn securities we’re supposed to start buying from Wall Street on Monday.”
“What happened when you specified the securities, loaded the parameters, selected the database views and clicked on the Calculate control?”
“I kept getting a bunch of crazy error messages,” Hickox whined.
“What did those error messages say?” I quietly asked.
“Oh, hell, I don’t remember exactly,” he griped, “something like ‘division by zero undefined.’ What the [expletive] does that mean, anyway?”
“There are,” I ruminated, “two possible meanings. The first is, your exquisitely expensive, custom-designed federal software is malfunctioning.”
“Oh, Jesus!” Hickox exclaimed. “And there’s absolutely no hope of getting it fixed before seven a.m. tomorrow! What’s the other possible explanation?”
“That your exquisitely expensive, custom-designed federal software is, in fact, functioning correctly.”
Hickox’ eyes went wide as saucers. “Which means?”
“We’re all completely [expletive].”
Hickox bit his nails, considering the alternatives.
“I think,” he whispered hoarsely, after a moment’s mastication, “I better blame it on the computer.”