Friday, April 29, 2011

Iceland v. Ireland

Great stuff up at Interfluidity on a topic well outside my comfort zone--the problem of default on the edge of the Euro Zone.  Ideal final exam question: Ireland v. Iceland.  Discuss.  

Off Again

Off Again, this time to hang out with some grandchildren in Washington DC.  

W/o Comment

I think the birther issue is good for the country. A modern republic needs some simple and unimportant issues to keep its citizens invested in the process. The important issues of our time are far too complicated for the average person  ... .
First, guess who said it. Then go read the whole thing.  

Thursday, April 28, 2011

Today's Must-Read: Mead on Falling Between Two Stools

Today's must-read is Walter Russell Mead on what's wrong with Obama: not his impulse to compromise but his affinity for compromises that don't work, that tic off the base while enraging the opposition.  A more clever and imaginative--that is, probably, more experienced--compromiser would find ways of making each side feel surprised at how well they have done.  Go read the whole thing.

Mead mentions one point I've highlighted before: the discontinuity between Obama in reality and  Obama in expectation.  But Mead picks up on another point I hadn't noticed: the kid is looking punchy.  Somebody needs to take him back to his corner, pour a bottle of water over his head, and tell him that it ain't over, that he can really do it.  Wrapping both points together, Mead says:

The President looks like a man who is ridden by events; at just the moment when the nation craves a strong leader, the President looks weak, dodgy, uncertain.  The contrast with the inflated hopes that an untested and inexperienced Senator Obama did so much to build up is crippling.  Obama has fallen so far precisely because he and his supporters so hugely oversold him.
I think I've said before that the job of a President  is to make his predecessor look good. I won't say that Obama has made W look good yet.  But when it comes to deal-making politics, squaring the circle, we all know who was good at that--Bill Clinton.  Mead says: , "the moment the President seems to be envying Clinton’s talents and attempting to emulate rather than scorn them.  From anti-Clinton to aspiring Clinton is a long fall and it can’t be much fun."   

Oh, But Define "Useless"

The Wichita Bureau showcases a Daily Beast piece on the "20 most useless college degrees"--and oddly, "German" and "Classics" are not on the list (perhaps too trivial to notice?). Some are easy to guess--journalism and advertising, low pay, lousy prospects, declining availability of openings. What puzzles me is the number of artsy fields in which--though they are on the list--openings are said to be on the increase. Hello, is the world really going to need more theater majors? And what is it with "Mechanical Engineering Technology"--small number of grads, fairly good salary prospects?   Why is the number of openings in decline while all those artsy fields are going up?

[But wait, I just noticed what looks suspiciously like a glitch in the data. For "number of students awarded degrees 2008-2009:" the lists reports the same number in half dozen or so different fields--89,140." Looks to me like maybe somebody took the gross number for a whole bunch of different subfields and reported it in each one of the subfields separately.]  

Wednesday, April 27, 2011

Jost on ObamaRomneyRyanCare

Professor Timothy S. Jost from Washington and Lee Law School has put together a commendably boring comparison of ObamaCare, née RomneyCare and what is, on Jost's account, its new avatar as RyanCare.  As Jost offers, with wonkish restraint:
Exploring the shared elements of the two plans [allows one] to clarify the extent to which consensus has emerged in U.S. health policy may enable us to begin addressing the serious conflicts that remain.
Well it might.  As Jost makes clear, in terms of structure and strategy, the similarities vastly outweigh the differences (Kevin Outterson points out that Ryan even has an individual mandate--query, is the whole package unconstitutional coming out of the gate?).  But I wouldn't hold my breath about "addressing" here:  There are at least two good reasons why this will never happen.  One, the Republican's indisputable first principle that it is more important to destroy Obama than it is to pass any program, no matter how plausible and widely desired. And two, to distract attention away from the point that Ryan's plan is so much more chintzy less generous than Obama's.

I admit that I don't have a firm, unalterable position on the chintzy/generous scale. It still seems to me that we're having far too little discussion about the reasons for the high costs of health care. How would the world change if we could use our Medicare dollars in Bangkok or Bangalore, for example? Is the FDA really moving as fast as it should on the approval of economizing devices? Just in general, I wish I had a better informed view about how the competing plans deal with the matter of competition among health care providers. I'm inclined to suspecct that RyanCare does next to nothing, but it's not obvious to me that ObamaRomney does much better.  

Why Children Shouldn't Write History

Further evidence that history is best left to those who lived through it.    In Fixing Failed States, Ashraf Ghani is waxing nostalgic about that past he never knew when the wise men were rebuilding Europe after World War II.  He mentions Acheson, Marshall, Kennan.  And he says their leadership "was matched by that of British politicians Aneurin Bevan" (etc.).

I'm pretty sure--I hope--that Ghani is confusing Bevan, the social-justice firebrand and architect of the National Health Service with Ernest Bevin, the tough, wily, combative old trade unionist who served as British Foreign Secretary in the early days of the Cold War.

An excusable error among children (Ghani is little more than 60, after all), especially since Ghani's criticism of foreign aid is imbued with one feature that much such criticism lacks and that is a sense of history.  Ghani clearly believes that way too much modern foreign money goes gurgling hideously down the drain--not least, he argues, because it is aimed  at "states" which really do not exist.  But, argues Ghani, the Marshall Plan at the end of World War II was a huge success, precisely because it was directed at states worthy of the name.  Later in the Cold War we shifted to supporting friendly dictators. This may not have been a worthy purpose and in the end it may have proved self-defeating.  But you'd have to concede (perhaps cynically) that this strategy, too, served at least its short-term purposes perfectly well.  

Tuesday, April 26, 2011

Populi Schmopuli

Two more stories to remind you of how, um, surprising, can be the opinions of the voters on high-visibility public issues.

One, Don Taylor showcases results in a survey of voter attitudes to various budget/tax packages.  Way I read it, the Tea Party comes up with the smallest budget cuts and the smallest overall deficit reduction.  Independents are tops in both with Dems a close second and Republicans generally, third.  Democrats head the league tables for "raise taxes," but only slightly ahead of Independents.  Taylor discusses it from the perspective of health policy which is only natural because that is his gig.  I would say it is one more piece of evidence as to how difficult it is to get a decent conversation going on these issues.

Two, take a look at the current Economist and its survey of what California voters know about their budget.  And before you get smug, be warned that this is one poll where the "best informed" voters do worst.   The data on California's famous/notorious "Proposition 13" from 1978 are particularly telling.  Older, better educated voters who might even be expected to remember Prop 13--they got pipped by younger less educated, and even by "registered elsewhere" or "non-citizens"--could it be the old settlers, and not the immigrants, who need to take a citizenship test?  

Birthers Everywhere

Say did you hear the one about the guy who crossed a crocodile with an abalone?  Tell you in a min.

Meanwhile, for no good or even barely adequate reason, I've been meditating on birth narratives as in, like, you know, maybe that the President was born in Kenya.  As so often I suppose I'm behind the curve here, but it occurs to me to marvel at how common--and persistent--are the stories of our remarkable beginnings.  Athena emerging the brow of Zeus, for example.  Or Aphrodite rising from the waves (on Cyprus, the tour guides will point out the exact spot; Aphrodite seems to have moved on).  Moses in the Bullrushes.  Jesus in a manger, but under a star. 

Sometimes, these stories meet with rude skepticism.  Shakespeare's Owen Glendower says of his birth "The heavens were all on fire; the earth did tremble."   Hotspur will have none of it:

O, then the earth shook to see the heavens on fire,
And not in fear of your nativity.
Diseas'd nature oftentimes breaks forth
In strange eruptions; oft the teeming earth
Is with a kind of colic pinched and vexed
By the imprisoning of unruly wind
Within her womb, which, for enlargement striving,
Shakes the old beldam earth and topples down
Steeples and moss-grown towers. At your birth
Our grandam earth, having this distemperature,
In passion shook.
 ...but one doubts that the speaker much moved by Hotspur's contempt.   In this field as others, deconstruction by evidence is rarely a successful strategy.   But there is another possibility here, hitherto unexplored: if you can't beat 'em, join 'em.  I therefore propose that Obama was indeed born in Kenya--in a manger under a star.  And the earth did shake when he was born.
Oh, as to the guy who crossed the crocodile with the abalone: he wanted an abbadile but all he got was a crockabaloney. 

But is it Macroprudential?

File this in your dictionary of new fince term, somewhere near "algorithmic shredding"--microsmurfing:

The term "smurfing" refers to the small army of people hired by money launderers to make small denomination bank deposits. Smurfing, and its more recent variation, micro-smurfing, has been one of the most common ways that money launderers, most often working on behalf of drug organizations, have laundered proceeds of criminal activity.
Micro-structuring (or micro-smurfing) tries to defeat transaction-monitoring systems by making the deposits so small they "fly under the radar" of the detection rules embedded in the software systems. While micro-structuring is difficult to detect and prevent, banks can and should be able to meet this challenge.
Source: inhouse manual of a major consultancy.  

Monday, April 25, 2011

Medical Factoids (But You Knew)

The share of solo practices among members of the American Academy of Family Physicians fell to 18 percent by 2008 from 44 percent in 1986. And census figures show that in 2007, just 28 percent of doctors described themselves as self-employed, compared with 58 percent in 1970. Many of the provisions of the new health care law are likely to accelerate these trends.
From Gardiner Harris' gripping New York Times account of life on the front lines of medicine, paywalled  but reprinted in full here.  

Pirates, Libertarians and Infrastructure

So, you're thinking that piracy is the product of failed states?  Not quite, argues The Economist, in a piece subtitled "Why Pirates Like a Little Law and Order."  In a word "infrastructure:"

because piracy is a “market-dependent” crime. Pirates may benefit from protection from other criminals. Selling the loot requires transport and the ability to store goods. All this requires some rule of law—but not enough to cramp bandits’ style.
 So piracy does not flourish in/around Haiti, Liberia, Sierra Leone . They need a "sweet spot," (E's phrase)  like Cambodia or Cameroon where they can draw on the social capital they need.  Even in pirate-ridden Somalia, it appears, the real piracy comes from the more stable north rather than the utterly wasted south.

Where pirates go, libertarians may follow.  Or vice versa.  It has seemed to me that one thing missing in the libertarian argument is any sensitivity to the level of civility and order you need to make piracy libertarianism work: what by way of safe and dependable harbors, reliable night watchmen, fully stocked ATM machines you need in order to support your enterprise and exactly how you get them. It was one of the principal vices of Reaganism that it undertook to demonize not "incompetent civil servants" but "civil servants," as if you could do without the lot. Of course there is no evidence that there has ever been: even if you'd settle for the Cameroon, you don't want Haiti. On this and so much else, where Captain Kidd leads, Ayn Rand may follow.  

Sunday, April 24, 2011

Opera Note: Capriccio:

Watching Renée Fleming and friends as they diverted themselves in the overheated drawing room (complete with harpsichord and harp) that forms the set of Richard Strauss' Capriccio, all I could think was: somebody needs to haul these people out to the countryside and make them dig irrigation ditches.  There are many things you can say about this remarkable opera but one is that it is a monument--no, a love letter--to the haute bourgoisie that define so much of the dart world around the end of the 19th Century.  Thin Proust's Paris, Mann's Hanseatic League, Faulkner's Yoknapatawpha (the Compsons, remember?), even, by a slight stretch, the Ranevskys in Chekhov's Cherry Orchard.  They're civilized (more or less), they're cultivated (somewhat), they are cosseted (more than they know) and they are bored, bored, bored, much more than they want to admit even to themselves.   In the case of Strauss' "countess": and friends, they turn it all into a kind of parlor game or, as Strauss calls it,  "A Conversation Piece for Music."

But I risk letting myself be misunderstood.  There are actually many things to enjoy about Strauss' farewell offering on the opera stage--not least the fact that by planting his tale at the very epicenter of frivolity, Strauss has 
poofed (one suspects intentionally) an overripe raspberry into the mustache of his supposed mentor and protector, Adolph himself, the voice and face of the Thousand-year Reich (think an uptown version of this).

Beyond context--Capriccio can be read as an old man's work, fit company (if not quite a match) for Verdi's Falstaff, Shakespeare's Tempest or maybe Sophocles' Oedipus at Colonus--the wry wisdom, the same not of not quite mellow reconciliation.  Also and perhaps more important, it has something close to Verdi's musical fertility: it spills out ideas as if the composer had decided that, this behing his last outing, he might as well empty the bin (and indeed the plot, if there is one, turns on a slightly clownish old producer, here played by Peter Rose whose CV itself includes at least one first-rate Falstaff).

Still you'd have to concede that goes slack after a while.  And for all its charms, you come to realize pretty quickly that it's here because Fleming, still at the peak of prestige and able to demand about any role she wants.  Fortunately this one suits her: at 52 she, like her "Countess," (and the composer) is willing and able to preside over a contention about the nature of art, and to provide her own summing-up.  That finale has her on stage mostly alone for the last 20 minutes and here is one place where I think that HD proves markedly inferior to live performance.  Even Fleming's face can grow tiresome after a while and you find yourself closing your eyes just to get away from her. Fortunately, there is music enough to keep you engaged, challenged and entertained right through to the last bar.  

Political Footnote:  I have to admit to a bit of ambivalence about Strauss' allowing himself to be protected by the Nazis, in a world where Joseph Roth drank himself to death and Stephan Zweig committed suicide.  I don't suppose I'm informed enough to judge, although I have heard that he had a Jewish daughter in law to protect, and grandchildren.

Linguistic Footnote:   It just now sank into me that a Capriccio is not the same as a Carpaccio.  A Capriccio is, I take it, a small caprice.  A Carpaccio is, of course, a large carp.  

Change We Can Believe In

My Cousin Dave asks:  What do you think of this?
Thilo Sarrazin, the German Social Democrat who attracted attention last year with his controversial book claiming that immigrants to Germany were dumbing down the country, will not be booted out of the party

Ha, you know want to know what I think?  I think the German Social Democrats just noticed that the "True Finn Party"  captured 19 percent of the seats in the Finnish Parliament. 

Caedmon's Hymn

Now we must praise to the skies the Keeper of the heavenly kindom,
The might of the Measurer, all he has in mind,
The work of the Father of Glory, of all manner of marvel,

Our eternal Master, the main mover.
It was he who first summoned up, on our behalf,
Heaven as a roof, the holy Maker.

Then this middle-earth, the Watcher over humankind,
Our eternal Master, would later assign
The precinct of men, the Lord Almmighty.
---From Bede's History (7C AD)
Translated by Paul Muldoon
Reprinted in Benson, Chernaik and Herbert, Best Poems on the Underground (2110)

A gift from Michael, heathen to a heathen, on what may or may not be Easter Sunday.  Thanks, Michael. 

Saturday, April 23, 2011

A Second Shakespeare Birthday Story

I heard this one on the BBC a while back so it must be, you know, true.  It's about the Earl of Euphoria who was getting a straight-razor shave from his favorite barber when his friend the Duke of Magenta eyed him through the plate glass window.  The Duke popped in for a friendly hello and in the process, nudged the Earl just a smidge, but enough so the barber dropped his razor leaving the Earl, you know, like semi-detached.

The  Earl sued the barber.  The case came before the Judge McAdoo, much admired for his sagacity and general knowledge.  He held that only the nudger, not the barber, might be liable on these facts.  In support of his finding he produced a veritable treatise, which passed from hand to hsand among members of the bar and took on the name "McAdoo about Nudging."

The treatise was so popular that Shakespeare even named a play after it. Can you guess which play?  

Just in from the Man Watch

The Wichita bureau transmits (but did not generate) another heapin' plastic tub full of turbulent rancor about the deficiencies of men.  He notes an odd irony: it seems to be women, not men, who express themselves most loudly on the point that women should just knuckle under and deal with men in all their sniveling inadequacy, rather than trying to fashion something better.  To which I might add: seems to me that it is women, not men who express themselves most loudly on the point that men ought to get it together and start to behave.  How often have you heard a man tell another man to "man up"?   Cf link, link, linklink.

This Just In: British Woman Finds Employment

Joel commends us to Simon Kuper 's account in the Financial Times of how Kate Middleton, marrying Prince Andrew (!) William, will embark on her new life without a job--and how, in this respect, her name is legion.  In only mild exaggeration of Kuper's point,  none of us has a job any more.  The  old live off their pensions or their accumulated real estate value; the young live on the old or each other. "In this crisis," says Kuper,  "people have switched en masse from living off wages to living off capital."

Agreed that Kate is stepping up from the family's party-favors business, but if if she thinks she is moving into a life of uninterrupted ortolans and whipped cream, she'd better think again.  I'll bet she has already been instructed as to her duties and responsibilities--cutting ribbons, hugging school children, keeping her bra on while on her boyfriend's yacht.  If her mind wanders, she'll be brutally reminded by her phalanx of handlers.  In this light, it may be that Kate Middleton, after a long informal internship, is the one young person in Britain who is actually getting a job.    

Afterthought: My friend Dan suggests that if it doesn't work out, she might also find employment as a model for jellybeans.

The Man from the Consulate Fails to Get the Point

"From a certain sense, the play is ridiculous," he said.  "Hamlet is one of our worst historical figures, all Denmark is ashamed of him. A drunkard, a pagan, a liar, a seducer, a common murder, and disgusting in his personal habits.  This is all in Saxo Grammaticus.  The true hero of the time was the good King Claudius, a graceful and instructed man of state, I assure you, whose death led to a nasty invasion of Jutland by our Norwegian neighbors. Fortunately they did not stay long.  No, we are not proud of that revolting clown Hamlet, whose notions of humour consisted in imitating the sound of a rooster.  It is not as if his crimes and buffooneries had even the excuse of youth, for he was fifty years old when he embarked on his abominable career of dissimulation, treachery and murder.  Your English Shakespeare was sadly mistaken.
"A square-faced man in a a blue suit...who turned out to be from the Danish consulate," as  reported in John Glassco's Memoir of Montparnasse 63 (NYRB 2007).

Happy birthday, WS, who turns 447 today.

Friday, April 22, 2011

"Offshore" Again

I've now been able to finish Nicholas Shaxson's Treasure Island (cf. link) and I'm glad I did it although I can't say it quite lived up to its promise. Well: it has its virtues, as I foresaw when I first read about it.  It starts of strong: he's great at big picture. And there it is peppered with good stories all the way through.  But he is up against the problem of any journalist (or academic) who wants to write about a matter of great secrecy: in the end, he doesn't know all that much.   The giveaway is when he starts telling you about what he wasn't able to find out, or about his conversations with others who may or may not know more than he--then you know he is shuffling papers.

But the big picture remains well presented.  Shaxson presents a compelling network of offshore havens, arising mainly from the ashes of the old British Empire, where people who have something to hide, hide it.  The proprietors traffic in rectitude and surface propriety and they control, by any credible measure, a good portion of the world's wealth.  He's also got some fine smaller stories: I loved his account of the evolution of the Caymans, and he told me things I didn't know about the emergence of Delaware as an onshore/offshore haven for the credit card racket (ever notice that the rise of the credit card more or less tracks the decline of the union card--Shaxson doesn't miss the irony).

Yet it is a bit more complicated than that.  Shaxson understands these havens as being the sanctuary of sponges and freeloaders evading their just responsibilities in society.  He touches upon, but does not stress, the point that a good many of those who enjoy the protection of the havens are there to get protection against irresponsible and rapacious kleptocracies.  No doubt there are American zillionaires who enjoy all the solace of a functioning society while burying all their taxable income under a fog of anonymity.  But if I were, say, the three Gupta brothers in South Africa, I'd make damn sure to have a bolthole far away from the rising tide of exclusionary racism.

More: after a while, one finds oneself aching for a further inquiry into the substrate of these devices--the social conventions that support a system of independent nations going back to Grotius.  I'm not saying a system of nation-states is wrong, precisely; I'm saying these tax havens are a natural extension of the system and it his hard even to conceptualize a world that might work any other way.   At the moment, I find myself eager to move on to something that will take me a bit deeper into that substrate so I can consider better how a Grotian state-system leads to such a pernicious result.  Yes, I've read John Scott's Seeing like a StateI think maybe it's time to take a crack at Ashrf Ghani's  Fixing Failed States, with the hope of getting a better sense of just what the idea of "a sovereign state" might mean.  

Fred Thompson wants us
To stop repeating the story
About him in the Gucci loafers
At the Iowa State Fair

Copy that, big guy.   But here's what he seems not to have learned.  Stories like that don't have to be true.  They live if they capture our sense of the candidate, our uneasiness with his character.  So Bill Clinton's airport haircut and of course the inevitable matter of the guy who invented the Internet.

Or, I suppose, the allegation that the incumbent was born on Alpha Centauri Kenya. Sure, this last is freely transmitted by and to people who have no idea where Kenya is, saying nothing of the Centaurus constellation. But it feels right: the Obama canard works because people simply don't get him. And don't get hung up on crude racism: our world is falling apart, our kids are strung out on meth, and we are ruled by a guy who looks (and, let's face it, sometimes acts) like he from another planet. Don't bother us with evidence, we know what feels true.

Carpers will say that it's all just a cauldron stirred by malevolent schemers at Fox News, etc. True, but beside the point. Fox (etc.) does it because it works. As Mr. Dooley said, politics ain't beanbag, and I must say I do look forward to the one about Thompson with the cape and the Hummer and the nubile campaign volunteer.   And I promise never to repeat the story about how he trooped around Iowa in Gucci  loafers.  Anyway, not often.

Language Note: Optionality

Reading Ignoto on the corp fin currriculum, Bill asks: is "optionality" now a word?

Answer: I guess so.  Google offers a string of definition entries.  And language Troglodyte though I am, I would argue that we need to admit this new word because it identifies a new (or not hitherto identified) concept.

Specifically: let's stipulate that we're living in a conceptual revolution as to our understanding of options.  Black-Scholes taught us how to understand options.  Once you understand options, you start finding them everywhere.  And if you can't find them, you make them.

Hey, I didn't say this was a good thing.  Understanding the power to make options means we now live in a world where you can slice and dice the probability spectrum into a near-infinite number of pieces.  Which may not be a good thing. But Ebola is not a good thing, and yet we let it have a name.  

One I Actually Never Heard Before

Roy offers:
There was a young curate of Kew
Who kept a tom cat in a pew;
He taught it to speak
Alphabetical Greek
But it never got farther than μ.
I first read it as "never got farther than p" which also works, I think. And I do recall:
There was a young curate of Kew
Whose limericks stopped at line two.
And, of course:
There was a young man from Verdun.  
And needless to say, it's fine to learn a limerick that starts with "a young curate of Kew," and does not end by grossing you out.

Thursday, April 21, 2011

Ignoto on the Corp Fin Curriculum

Ignoto read my lament about the corp fin curriculum  and responds with some provocative advice:
--Optionality is everything - frankly, I'd start with that. A lender writes a put on the value of an asset or enterprise and is paid a premium for doing so; an insurer writes a put on the value of whatever is being insured and is paid a premium for doing so; an equity holder writes a call on the value of an asset or enterprise and pays a premium for doing so. Everything derives from those concepts - securitization, swappery, you name it. (Exam question: deconstruct the 3-7% attachment-point tranche of Goldman Sachs Pile of Dung CDO 2006-1 into a set of options. Determine which German banks had the ability to properly assess this tranche. Show your work.)
--Related to the previous point, Black-Scholes is of high utility from a teaching aspect, especially right at the start of the course. And not for the formula - who cares what the formula is - or for its shortcomings - as plentiful as they are - but for parsing the five elements of the formula (risk-free rate, asset price, strike price, time to maturity, and volatility) and how each affects the value of the option. As you go through other elements of corp-fin, you can keep coming back to this: how does a savvy private equity investor retain the option value of its equity in a company it owns that is struggling? Why would a tech company be more inclined to issue convertible bonds than a utility?
--A key element of understanding corporate finance and the securities markets is understanding market participants' different time horizons, risk constraints, accounting conventions, and incentive structures. The failures you mention in the blog entry can all be picked apart by assessing those factors - and students may be able to discern why hedge funds are able to make money in unique ways by arbitraging away the mispricings that exist due to these disparate needs and constraints.

Once you get those concepts in students' minds - optionality, incentives, and market structure - the rest tends to flow pretty naturally. And the sooner people look at these, the better equipped they are to avoid narrowing their focus too tightly and missing the financial forest for the trees.
I'll take it to heart as well as to mind and indeed, option pricing has been working its way up through the pack for several years now though I prefer to do it with binomials because I think the core intuition is the same and it scares thetroops less.  Hope he's kidding about the Pile of Dung CDO. 

Latitude of Dignity

Dignity, Latitude of.  Substantive.  The number of square inches by which your shirttail extends beyond your, um, fundament.
 I dreamed that one up--quite literally--about 4 this morning.   I had thought that it was coined by Edgar Allan Poe, but if so, he concealed it from Google.  Poe was looking pretty weird, BTW; at 151 years dead, I suppose this is hardly surprising.

Curious afterthought: my spellchecker doesn't like "fundament," either.

Absurd afterthought:  My friend Dan said I was perhaps thinking of Poe's vastly inferior contemporary, Edgar Allan Poo, with whom he is often confused.  I won't, um, dignify that with reply.  

Wednesday, April 20, 2011

Working at the Coffee Shop

Yessir, always mighty proud to say it, I'm a devoted coffee shop worker and I'm happy to learn that I'm in company with the likes of  Conor Friedersdorf as well as Malcolm Gladwell and Ernest Hemingway. (well--two out of three).  I can sign on to most of what Conor says about why we do it though I would put it a little differently: I just get anxious and lonely when I'm home working with nobody else around--I fear that elephants might walk down Main Street and I would miss them (why I do not worry about the elephants that might walk down my own street is left as an exercise to the student).

But I'm still mulling his final reason which, he concedes " hasn't been raised by anyone to whom [he has] spoken"--call it the guilt/shame factor: the idea that you wouldn't want to be seen just gazing vacantly into space.  Now I concede I could be a stranger to myself here but I just don't recognize myself in this one.  For one thing, I never just stare vacantly into space: I find something to fiddle with--my Kindle, my brand new Iphone, my paperback novel (those were the days), the inflight catalog in the seat pocket in front of me during those down-time ten minutes around takeoff and landing.   At least at the level of consciousness about the whole thing.   I mean--particularly in the morning, I just love the feel of the whole world buzzing by.  Recall the last sentence of Little Dorritt, which might be the best line Dickens ever wrote:
They went quietly down into the roaring streets, inseparable and blessed; and as they passed along in sunshine and shade, the noisy and the eager, and the arrogant and the froward and the vain, fretted and chafed, and made their usual uproar.
 Let's hear it for the noisy and the eager, the arrogant and the froward and the vain, fretted and chafed, and all those of us who get sustenance from them.   


Ed Kilgore nails it:
The Republican establishment has perceived that [the candidacy of Donald] Trump will drag the entire Republican field into a world where they cannot be taken seriously by general election voters—and launched an all-out effort to tar him. But the truth is that their effort may be a lost cause, for reasons that are intrinsic to the success of Trump’s consumer-focused approach: This year, GOP voters’ hunger for radicalism is so great that it can be filled by essentially anybody. Kill off Trump’s candidacy and the demand will remain, leaving an opening for yet another demagogic charlatan to take his place. ... [L]ast Friday, Public Policy Polling released a survey that showed Trump not only running ahead of the entire 2012 field, but registering numbers higher than such prior leaders as Mitt Romney and Mike Huckabee. That caused the Republican Powers That Be to stop dismissing him and launch the kind of sustained attack that is said to have succeeded in fatally damaging Sarah Palin’s credibility as a potential presidential candidate. During the last few days Karl Rove, George Will, and the Club for Growth have all trashed Trump very aggressively
But a closer look at the PPP findings should reveal the weakness of this elite strategy. What they show is not a desire to support the faux tycoon per se, but a raging right-wing, anti-establishment fever that has only gotten stronger in recent months. Ending or mortally wounding a Trump candidacy would only address its symptoms, rather than curing a condition in which voters will follow whichever candidate is willing to outdo his or her opponents at wingnuttery. 
 Link.  In fact, this streak of explosive anger has been there all along, goes straight back to (at least) the Wobblies.   It's been obscured in recent years, partly by Ronald Reagan who seemed to promise so much (but in fact, gave not very much).  Ross Perot had a bit of the flavor, but populism in Perot was always  varnished over by a strain of inspired wonkery.  Before that we did have George Wallace, but with Wallace, the stench of racism was so apparent that we tend to overlook the strain of beyond-racism lower-middle-class rage.  Before Wallace, for the real thing you pretty much have to go back to Huey Long.

Maybe we need to take instruction from our friends, the cheese-eating surrender monkeys.  For a long time they've had Jean Marie Le Pen and before him, Pierre Poujade.  Indeed, it's probably not far off the mark to say that Le Pen's main contribution to French public life is that he made Nicolas Sarkozy look normal.  

Ivan is Outraged

Ivan, Underbelly's crack Alabama correspondent, is outraged.  Apparently 13 students from his beloved Decatur have been suspended for (as a headline gleefully expresses it) "drinking wine in Italy."

"What are you supposed to drink in Italy?" Ivan growls. A good question, particularly considering that the story also repeats a report that some students were also suspended for drinking "only a non-alcoholic drink"--which, strictly speaking, could be "water." "Corn sugar crapola?" Ivan suggests, which is I think his pet name for Dr. Pepper.

But I'm just as intrigued by another aspect of the story. Apparently the malefactors were "suspended" to the "Center for Alternatives to Suspension, an alternative school." I.e., your suspension from school is that you have to go to school?

The story also reported that "parents have been understanding," though understanding of what it does not specify. For a good selection of Italian wines, go here.   For more on corn syrup crapola, go here.  

Tuesday, April 19, 2011

Greenspun Gets It

No secret, I'm a big fan of The Economist, but I do think Phil Greenspun has their number:
One of life’s comforts is reading the Economist. The magazine is generally optimistic about the world’s prospects for growth and improvement. An article typically takes the following form:
  1. problem is identified
  2. straightforward solution is offered
  3. discussion of why some countries don’t have the political will to implement the solution
  4. example of one country that behaves rationally
This is comforting because it is then clear that there is a lot of low-hanging fruit. If our politicians could wean themselves from the diet of special interest money, our problems could be quickly and painlessly solved.

Neve Happen

"Nobody will ever run a four-minute mile," says a character in John L. Parker Jr's Again to Carthage.  "Physically can't be done.  You can't drive a golf ball 300 yards. Never happen.  No one can throw a hundred-mile-an-hour fast ball and no one can hit it out of the stadium. All of it is beyond human capacity."

And no one can run a two-hour marathon.  Oh wait.  Not long, but wait.   

Monday, April 18, 2011

Again: What is Corporate Finance About?

As I've said before, I teach a course called "Corporate Finance."  And following up on what I said before, I still can't figure out what this course is about.

Recap: I used to think this was about people who who want to raise money for projects--the guy at the widget works who wants to expand his factory and goes to the market to hire some capital--debt or equity--to let him do it.

Restating: not any more.  I think the inflection point was around 1980 (give or take) when deals stopped chasing money and money started chasing deals. And not just high rollers who wanted to get rich: no, formerly staid and sober managers--like your pension fund which keeps promising you it can get eight percent--found themselves chasing after projects in deals.  And the odd part was that all of a sudden, there was money enough sloshing around to make it happen.

In a simpler time, I used to think it was just a matter of too many profits and not enough good ideas.  Or at least, bankable ideas.  I can see now that this was naive.  There are at least two phenomena which conspired vastly to increase the volume of deals.

One, the deterioration of reserve requirements.  Suppose there are 10 banks; a lends to b, b to c, etc.  Start with $1.  If a bank can lend only 80 percent of its holdings, the total lending in the system is $4.5.  If 90, $6.5 and if 95, $8.  If the bank is totally unregulated I suppose you get all the way to $10.

The other is the decline/disappearance of "insurable interest."  If I want to buy protection against the destruction of the house at Fourth and Magnolia, I have to show that I own it, or the insurer won't write the policy.  If I want to buy protection against the risk that LittleCo will default on its bond obligation, I may be the creditor who owns that obligation, but vastly more likely I'm just a bettor taking a flutter.  Once you've uncoupled the bet from insurable interest, you've opened the doors to a virtual infiinity of deals.

This framework suggests two more boring practical questions

One, how far should I go in teaching them about apparatus?  I have to clarify "what's a stock, what's a bond?"--these kids are plenty bright but their financial experience is not great and we start at the beginning. Also "what's a bank?" (as if I knew).  Do I also have to teach them what's a put, what's a call (yes?)?  And what's a credit default swap--and do I have to show them how far it's "really" insurance, how much a kind of a bond?

Speaking of banks,I assume I have to make sure everyone understands the difference between a commercial bank, an investment bank, a proprietary trader, a hedge fund, a private equity fund.  Is it my job to tell them how Iceland went broke?  And how China's banking institutions just aren't strong enough to sustain it as a global swashbuckler?

Corollary of all this: I suppose I need to explain how the vast majority of financial transactions have nothing whatever--zero, nada, bubkas, zilch--to do with the raising and allocation of capital.  They're just "finance."

By the way if we get  in this deep, shouldn't I also be telling them something about Offshore?--the City of London, Jersey/Guernsey/Man, Caymans? 
So, do I need to explain that all the really big deals don't "take place" in New York, or even Delaware (saying nothing of Palookaville).  And does that mean I have to teach the nature of sovereignty too?

I think I'll go take a nap.  

Good Ol' Joe

I always thought of myself as one of the few who actually liked Joe Biden.  Less so today, I guess.

Douthat's "Family of Four"

Ross Douthat asserts that the average American family of four has an income of $94,000. The blogosphere climbs all over him--the accepted figure is actually $75,700.

Douthat backs down, sort of
He says he was looking at the CBO tables which include income from employer provided health care and employer's share of payroll taxes.His tone is apologetic, but I am actually willing to cut him a bit of slack on this one. It has long struck me that one problem in discussing these issues with my colleagues (senior staff at a public university) is that they genuinely do not know how well off they are. Pensions and (mostly) health care are pretty much opaque to them; they can't get their mind round the idea that they are part of the payroll cost. A more realistic understanding of these issues would always include these numbers; for one thing, it would help us to compare workers who do get good pension and health care protection with those who do not.

For me, the most interesting thing about this gaffe is that Douthat didn't see it coming. This is a guy who is supposed to instruct us on public policy and he didn't realize that he was off by a factor of near a third from the standard number? Hello?   

Anecdote:  Years ago I went off on a visit to the University of Texas.  For some long-forgotten reason, we agreed that Texas would not hire me directly but would take an assignment of my contract from the University of California.  When the dean got a look at his contract cost, he nearly had a heart attack; the total number (i.e., including all benefits) was about 30 percent above my nominal salary.  He was a gent, he kept his deal--but it was a vivid reminder to me of what somebody was actually willing to pay me.  And a pretty good reminder that employment at the University of Texas would have been not that-all alluring.

Sunday, April 17, 2011

Romeo Verité

My favorite Shakespeare teacher (55 years ago) really gave a workover to Romeo and Juliet.  She showed how it is a flawed play but interesting, in that you can see  Shakespeare innovating, improvising, learning its trade.

How flawed?  Well, she is the one who first showed me that Romeo isn't really much of a tragic hero--he's just a kid. It was she from whom I head the quip that it is not really a tragedy--rather, a comedy that ends badly (my friend Dave adds: throw in a couple of ensembles and you could have a Rossini opera).

How interesting?  The same teacher points out how Shakespeare makes a whole bunch of calculated choices here--and how they are theatrical choices, designed to make the play work better on stage.

Example: It's 1595 and Shakespeare is just coming out of his ornate over-the-top sonnet phase.   The poetry in RJ is indeed over the top--but the dramatic point is that over-the-top poetry creates a problem: these are kids who do not know the difference between words and life, so besotted with words that they forget how words can kill.

Example: Fully rounded characters.  Not just the leads--Romeo himself is perhaps not fully rounded.  But the Nurse, Mercutio, Benvolio, old Capulet--and hey, I'm not half done yet. The Nurse in particular: she must be the first of those vessels of comic vitality that Shakespeare does so inimitably and so well (and yet in a mind-numbing irony, she can be read as the cheerful, unintentional villain of the piece).

Better example: In Shakespeare sources, the events extend over months--Shakespeare gets it all down to less than a week.  And in the sources, the leads are--I forget precisely, but they are older.  Shakespeare makes them early teens.

All of which is a long buildup to a short point: last night for the first time ever, I saw an RJ in which the leads really were early teens.  And you know what?  It works, in pretty much the way Shakespeare would want it to work.

Not perfectly, of course--hey, these are kids, for many I bet the first time they did anything on stage.  They talk too fast.  Sometimes they don't seem to know what their character is up to; sometimes you suspect that they do but you do not know what their character is up to.  Sometimes they seem to forget that there is anyone else on stage.

But they got so much right: they got the raw energy, the torrential hormones, the uncrimped delight in life, the impulsiveness that is ultimately fatal.  In short, they are so much fun to watch.  And whether they realized it or not, they got Shakespeare, and he got them.  I figured I was going to like it but in retrospect, I wouldn't have missed it for anything.  

Saturday, April 16, 2011

Stewed Marmot, etc.

Civet de Marmottes
Having killed some marmots sunning themselves belly up on the sun with their noses in the air one sunrise in September, skim them and carefully put aside the mass of fat which is excellent for rubbing into the bellies of pregnant women, into the knees, ankles, and painful joints of sprains, and into the leather of shoes.

Cut up the marmot and treat it like stewed hare which has a perfume that is unique and wild.
Having killed some squirrels in autumn, skin them the same day and empty them.  Roll them up in a piece of lard and let them brown with some good quality butter in a copper saucepan. When they are a good golden color, salt them, cover, and let them cook on a very gentle fire. One must use no spice of any kind which might entail the risk of taking away from the animal its exquisite nutty flavor.
 Poulets a Devenire Tendre
In order to make chickens immediately edible, take them out of the hen-run, pursue them into open country, and when you have made them run, kill them with a gun loaded with very small shot.

The meat of the chicken, gripped with fright, will become tender.  This method used in the country of  the Fangs (Gabon) seems infallible even for the oldest and toughest bird.
 All from Toulouse-Lautrec and Maurice Joyant, The Art of Cuisine (Trans. Margery Weiner, 1966), found by the other David this afternoon at Back Alley Books in a basement in on the square in Chardon, Ohio

Friday, April 15, 2011

Who Said It?

Maybe I'm the last to know:
"McCain, really, that was almost an impossible situation. Bush has been so bad, maybe the worst president in the history of this country. He has been so incompetent, so bad, so evil that I don't think any Republican could have won."

"You know, you can be enemies with people, whether it's Iran, Iraq, or anyplace else and you can still have dialogue. These people wouldn't even talk with him. It's terrible."

"I think [Obama] has a chance to go down as a great president. Now, if he's not a great president, this country is in serious trouble."

"I think [Obama's] going to lead through consensus. It's not going to be just a bull run like Bush did. He just did whatever the hell he wanted. He'd go into a country, attack Iraq, which had nothing to do with the World Trade Center and just do it because he wanted to do it."

"They always said 100 years before a black man or woman could be elected president. And the 100 years turned out to be, like, one year. He's done an amazing job."
Who said it? Go here.  H/T David who avows he is not really 86; just pushing 85 from the wrong direction.  

Off Again

Off to admire a grandchild playing Benvolio in Romeo and Juliet. Never did much like the last act of that play anyway.

Thursday, April 14, 2011

Are You in the Mob?

Listening to a bit of HBO fluff about the career of Jerry Weintraub, the producer/agent, I heard him tell about his father, the gem merchant, and father's response when father figured out that son was rich.

"Are you in the mob?" papa asked.  Nah, papa, said Jerry, I'm not in the mob.

"Where's your inventory?"

Say again?  Does papa think that if you are rich without inventory, you must be in the mob?  Doesn't he understand that inventory is a burden, a fardel on your neck?  Sure, if you've got inventory you can sell it, but if you can't sell it--you've still got inventory and you probably still owe the bank.  Or the mob.

In away it is the opposite of the bank equity rule: the value of a bank is the market's estimate of what the bank can command as capital--and once the market decides you can't command any capital, you're toast.

Not really a propos but somehow it brings to mind the story I heard years ago about Ed Bronfman of the Seagrams family who bought United Artists.  Apparently Bronfman's father--a conservative old codger--was irritable and out of sorts.

Finally it dawned on junior.  "Oh, you think I'm buying a studio so I can get laid?"  Well, yes.  "Papa, we own a liquor company.  I don't need a studio in order to get laid."   No word on whether he was in the mob.   

We Lose Our Innocence, and a President

At  1015pm EST on April 14, 1865, John Wilkes Booth stepped into the Presidential box at Ford's Theatre in Washington and shot Abraham Lincoln.  Lincoln died the next day.  For a more precise answer to the question "when did Booth kill Lincoln," go here.

Wednesday, April 13, 2011

I'm Still Trying to Get my Mind Round

A carriage house with a 12-car garage.

Update: details and a picture here.

Must be all the Salt Fish

I'm having a glorious time with Asgeir Jonsson's Why Iceland? which  I picked up because I wanted to learn how a country smaller than Anaheim could immure itself in a world-class banking mess. I am learning a bit about Icelandic banking, but my inquiries have also disclosed:
  • The poster bad boy of the Icelandic meltdown (yuk yuk) is one Björgólfur Thor Björgólfsson, mercifully called "Thor." His mother is the niece of the once-Bishop of Iceland, and the former wife of the late George Lincoln Rockwell, America's most famous avowed Nazi.
  • The prime minister of Iceland is the first (and only?) leader of any nation in a same sex marriage.  
  • Okay, so you knew all that. But did you know about this (H/T to my cousin Dave, an 86-year-old boaster).
More about bank failure later.  

A Shout-out for the BBC: Desert Island Discs

You want time-waster?  I'll show you time-waster: the BBC has opened up what looks to be the entire archiveDesert Island Discs--that's the show where they interview folks about the music they'd want to be cast away with. Well: "entire archive" seems not to mean entire archive, in that some programs appear to be unavailable and I can't always tell why.  But I think what I'd like to take away to a desert island is not any particular episode but the archive itself. of

More Pension Penciling

To solve the pension problem, make workers work longer: I've heard it before and I've passed judgment on the point, however briefly. But here's a point which (though it cannot be original with me) I have not seen in the debate so far. That is: consider retirement protection as a function of lifespan.  The average American 65-year-old male can look forward to something north of 17 years of life.   In 1940, by Social Security's own account, it was more 12.7 years.  Translated into percentages, that means that a 1940 retiree was looking forward to a retirement equal to 16 percent of his working life.  The comparable figure today would be 20 percent.  So to have the same percentage of life in retirement, today's retiree should keep working until he is a bit over 68 1/2.

Restructuring Datapoint

Just for perspective:
...restructuring any one of these sovereigns will prove larger and far more complicated than the previous record-holders, Argentina ($82.2bn of debt defaulted, 2001) and Russia ($72.7bn, 1998), combined. Greece’s outstanding debt sits at circa $430bn, Ireland comes in at $145bn, Portugal at $289bn.

Tuesday, April 12, 2011

Crash of the Titanic

I finished Greg Farrell's Crash of the Titans with a sense of giddy elation bordering on hysteria. Consider: In all of a long and not terribly corrupt life, I have never yet had--and probably never will have--to submit myself to the malign mercies of employment at Bank of America (but just to be clear, this is the Beverly Hillbilly version we're talkin' about now, not its predecessor California version which might have been at least minimally more fun) .

But the BHBA--if Farrell has it pegged, has there ever been such a combination of highly efficient mediocracy and police state? By all the evidence, Ken Lewis positively disliked and distrusted brains, much preferring to surround himself with drinking buddies. To be fair he did like to buy other banks--but for day to day operations, his weapon of choice was a man who must have been the most efficient enforcer of ideological conformity outside the court of Ranuce-Ernest IV.

Delighted as I am not to have been entangled with this lot, I'll concede that there are a few points in their favor.  One, old-fashioned public utility banking was/is supposed to be dull.  Indeed part of our problem is that so many bankers--in the end, including Lewis--found that the serpent beguiled them with the lure of the big apple (and how's that workin' out for ya, Mr. almost-capsized-the-bank?).  Correspondingly, dull banking doesn't pay very well.  And one point where you almost forgive Lewis his passion for mediocrity is that he had just as much contempt for Wall Street pay packets as, well, as everyone who does not earn a Wall Street pay packet.

Finally, if Lewis' Charlotte sounds like hell with enhancements, I can't begin to think of what it must have been to work for the titans at Merrill--Merrill, whose decline and fall provides the unifying thread of the narrative.  We start with the notorious Stan O'Neal, and if ever anybody needed a better press agent it is O'Neal, who seem to have garnered (if not quite "earned")  a place as the most unloveable spoiled  brat in the whole petulant play yard.  And it may be--it does seem to have been--O'Neal's mismanagement that led to the semi-collapse of Merrill.  But one tends to forget that O'Neal left just about a year before the ultimate sale to B of A; it was John  Thain who stood at attention on the bridge while the salt waves lapped over his boot-tops.  And what exactly is one to make of Thain?  It's a bit harder to say.  He certainly never lifted a pinky to be liked; so also it never seems to have occurred to him that there was anything much worth saving at Merrill except his own mega-bonus, and perhaps the interests of the small cabal of insiders he brought over from Goldman Sachs, evidently to tell him what to do,  By contrast, with people whose help he might well have used at Merrill, he seems content to be dismissive or downright rude.

But he did have a certain lordly style; at least he seems to have shown good taste in office furnishings, though it might have been nothing more than a ploy to distract attention from his own vacuous Clark Kent smile.    I grant that of all the supremos in this gripping account of the Merrill debacle, he seems the least offensive.  But one thing you learn from this highly readable narrative is that it's not just lonely at the top: it's also mean-spirited and often downright unpleasant. Makes a fella happy he's quietly tucked away in Palookaville.  

What is Living and What is Dead in MPT

I was hunkered down over my computer too late the other night when I heard a scratching at the glass patio door.  It was my old friend Investo!  I hadn't seen him since the late 80s when he disappeared just after the RJR Nabisco LBO.  He wasn't looking good: his beard came down to his beltbuckle and he seemed to have some kind of bird's nest in his hair.  I brought him and gave him a blanket to warm himself, along with a cup of cocoa.  After a bit of chit-chat, I divined that he had wandered into a cave in the Adirondacks and fallen asleep one day in early 1991, and had only just now awakened.

The cocoa worked its beneficent mind-clearing magic and in no time he was his old self.  Naturally, once he found his footing, he wanted to talk about his investments.  In particular, he asked me to bring him up to date on what had become of Modern Portfolio Theory.  Was it still, for example, modern?

We fell easily into an extended conversation--so intense that I barely noticed that Investo was making notes in some sort of weathered steno pad.  Hours passed without my being conscious of the time, but as the sun began to break through on the horizon,  I could see Investo start to shake his head as if to help focus on the world,  "I have to go," he said, "but this is for you"--whereupon he ripped out what was to all appearances a carbon copy of the notes he had taken. Before I could offer him breakfast, he slipped out through the door and into the early dawn.

I laid the carbon aside and forgot about it as I turned my attention back to my own life. But later in the day I noticed it and gave it a quick skim.  Here is the first page:
MPT 20 years later:

 Markowitz diversification: Still largely true, made into a Godzilla by securitization but then completely undercut by tranching.  

 Sharpe Beta: Dead, and getting deader, except perhaps in old-fashioned textbooks and  in the training manuals of second-tier salesmen.

 Tobin separation: Actually, still alive and healthy insofar as it underlies index funds and such, but everyone has pretty much forgotten the name.

 Fama ECMH.: Oh dear.  Nobody believes Fama ECMH any more, not even Fama.  It tells you nothing about bubbles and crashes, and it doesn't alert you to the notion that we may all be irrational in systematic or predictable ways.  Yet  it's still true that the market is not for amateurs, and that if you go into a strange poker game, you look around for the sucker and if you don't see him, you get out because you're it.  

Black Scholes Option Pricing:  This may be a  two parter.  Black Scholes taught everybody that options traffic in risk, and that you can slice and dice risk into a million pieces (and no, don't pretend you knew that all along).  But Black Scholes was more or less vaguely based on the notion that outcome distributions are "normal" and we have learned to our dismay that  they are nothing of the sort.

 Modigliani Miller Leverage Irrelevance: Kinda sorta true, as we come to grasp that there is no clear line between debt and equity, between "owners" and "lenders;" all are just claimants against the asset pool.

 Modigliani Miller dividend irrelevance:  True if you believe that managers maximize shareholder value.  And that pigs will fly.
 Did I say all this?  Was it true, I wonder?  Will he come back and explain to me what I could possibly have been thinking?

Oh, and one more thing: down at the bottom of the page: note to self, must check on my investment in Lehman Brothers.  

Monday, April 11, 2011

Gastronomic Jurisprudence

"The law," Judge Jerome Frank said (or did not say) "is what the judge ate for breakfast."

Damn if he wasn't right.

The Bank's Assets

You're thinking of investing in a business.  If the business owns, say, a locomotive, you know what it's worth: you can get a good guess out of a trade pub.  If the business went broke, you know you'd have a fair chance of selling the locomotive to somebody else.  But what if the business owns (be still my soul) "IP"--intellectual property, patents, copyrights, trademarks, trade secrets.  How do you know what they're worth?  There's nothing comparable--that's the point, they're unique.  Indeed, the real point of the IP is to prevent anyone from copying your gem of an idea.  In short, squishy numbers.

Comes now Greg Farrell, explaining how you've got a similar problem evaluating a bank:

A falling share price at an investment bank isn't just a measure of personal wealth for employees and a metric to use when senior executives wanted to figure out when they could retire.  When a bank hits hard times, there are no factories to sell or hard inventory that can be used as collateral toward a loan.  The assets of an investment bank are its loans, its funding commitments, and the securities it holds.  The share price represents the excess reservoir of capital that a bank can draw on aw a cushion against losses.  At the worst possible time in [the history of Merrill Lynch, the brokerage/bank] when it was holding more than $30 billion of toxic assets on its balance sheet--enough to wipe the firm out--a plummeting stock price was shrinking the firm's capital base.  It was yet another hole in the ship's hull.
Afterthought:  Or is there less here than meets the eye?  Farrell says that a bank's assets include "its funding commitments."  Then he says the share price represents "the excess reservoir of capital that a bank can draw on..." Are these two the same?  If so, the only (not very interesting) point is that the "funding commitments" probably don't show up as a balance sheet asset, even though they might be available as a matter of law.  Much different if "the excess reservoir of capital" is something more than its "commitments"--e.g., perhaps its prestige or power in the market place, such as to impel people to lend it money even though they may not be bound to do so as a matter of law.  

The Real Bill Ayers Scandal

Among so many other Questions that Will Not Die (Where is the real birth certificate?  Where is Judge Crater?  Who is  buried in Grant's Tomb?)--I note that another: the notion that aging ex-terrorist Bill Ayers ghosted Barack Obama's autobiography.  But has anyone ever considered the possibility that it is just the other way round--that it is Obama who ghostwrites for Ayers?  Tactically, which is more damning--that the poster child of spoiled-rich rebellion is actually the fountainhead of perhaps the only readable presidential biography ever written; or that our Kenyan-born fantasy President is really a tiresome and contentious old  whiner?

Aside to Underbelly acolytes: no, no relation.  UB's doppelganger spells his name without an s.

Sunday, April 10, 2011

Terry Gilliam on the Sense of a Non-Ending

It's a crotchet of mine that most novels end badly: novels are finite and life goes on so at some point you have to wrap things up and the wrapup usually doesn't work.  A favorite exception: Stendahl's Charterhouse of Parma, where the author in a spasm of primordial postmodernism lets us know that he has at last lost patience with his characters and just sends 'em all packing.

Listening to Terry Gilliam on BBC's Desert Island Discs this morning, I got dignified support for my theory.  You remember Gilliam: the one non-Brit in the Monty Python team, he was the cartoonist, the talent behind all those weird, surreal framing exercises that distinguish the Pythons from so many other first-rate British sketch operations of the time.

Listen to Gilliam and you come to realize that it was the Pythons felt the same way about sketches: try to give them a punch line and more often than not, the punch line will fall flat. Better just have someone drop in and crush everybody with a giant foot.

Sounds right to me, but Mrs. Buce asks: don't people getting bored seeing everyone get crushed with a giant foot?  Fair point, which may explain why the classic Python show lasted for only 45 episodes--and the movies, it seemed to me, never did quite so well.  Ironically, when Life of Brian came out, I tended to dismiss it as too linear.  Yet of all the movies, it may be the one to have proven most durable.

Here's a giant foot:

Ignoto on "Creating Your Own Leverage"

My friend Ignoto, who understands this stuff better than I, considers the question of which institutions are "systematically important." He offers a spin perhaps familiar in the trade, unfamiliar to me, and in particular, he says that the class of "systematically important" players does not include the subclass "hedge funds:"
No institution incapable of creating its own leverage is "systemically important." Most of us - hedge funds included - have to be provided leverage. And the parties capable of leverage provision tend to be banks, insurance companies, and futures clearinghouses (by virtue of the implicit leverage in futures contracts). A hedge fund that takes a 100x levered bet on a company's credit through a credit default swap (sell the protection for 1% per year on the notional amount) cannot do so without someone taking the other side of the trade. Unless/until we see hedge funds running side bets directly with one another rather through clearinghouses or the Street, they're not systemically important. (The hedge funds are, however, vital to understanding the risks being undertaken by the "systemically important" few - there will be far fewer line items on even the biggest hedge fund's balance sheet than whatever Goldman can muster, making the process of understanding the goofiness being undertaken somewhat easier.)
I asked for clarification on just who "makes their own leverage."  Ignoto responds:
Banks can create leverage through the fractional reserve / central banking system. Insurers can create leverage by underwriting risk and receiving premiums a small percentage of the face amount of that risk. Futures clearinghouses can create leverage by facilitating the transfer of futures contracts, which have implied leverage (although the clearinghouse itself minimizes counterparty risk). Blackstone can't create its own leverage - it has to obtain it from a bank or someone else who can create it. If no bank is willing to lend Blackstone a dollar, it can't manufacture a borrowed dollar out of thin air. Blackstone seeks the leverage, but they need the commercial banks to make it and serve it up...
But then, some second thoughts:

The hole in my thesis appears when hedge funds, PIMCO, etc. are able to write credit default swaps or other unregulated insurance contracts - which is really all CDS is. But even in those instances, without the market-making services of an investment bank, it's really stinkin' hard to trade CDS. Nonetheless, this is the rationale for requiring CDS to be exchange-traded and -cleared - a central repository where all counterparties to a given risk profile are known helps minimize the likelihood of unpleasant surprises.

But even protections like CDS clearinghouses, while better than the status quo, are still insufficient. Cross-border regulation is needed. After all, the AIG unit that Joe Cassano turned into the beast that ate us all was based in the UK.
 I'm thinkin', I'm thinkin.'  At the moment, only one thoughtlet: I had supposed the real problem with AIG was not that Cassano had a London postmark, but that AIG bosses were too distracted trying to pick up after Hank Greenberg.  And while Cassano may have been London based, his (apparent?) principal beneficiary was Goldman Sachs.

Saturday, April 09, 2011

Oy Gevalt

Responding to the arrest, on insider trading charges, of one Mr.Kugler, Adam Levitin puts aside his mantel of sobriety and respectability and yields to Yiddischer schtick:

az der kluger faylt, faylt er veyt. 

For a possible translation, go here.  

Trump on Birther

Donald Trump's feelings are hurt:

The term used [about  trump] “birther”-is very derogatory and is meant in a derogatory way.

I'm not sure anything can be derogatory to Donald Trump, although I would concede that as to him, the term "birther" is probably misapplied.  I'd be inclined to reserve the term "birther" to someone who sincerely believes, in the absence of any substantial evidence, that Barack Obama was born in Kenya or on the moon.  Distinguish this particular disability from the attitude of any sociopathic narcissist willing to embrace any idea, no matter how fanciful, and no matter how thoroughly he holds such idea in contempt, with the purpose of incurring favor among the most gullible of our polity (whom he also holds in contempt).  Call him a "trumper."


Okay, review the bidding: at 1225 est today, Juan Diego Flórez became a father for the first time; at 330 or thereabouts, he was cavorting in a threesome with two world-class sopranos (neither the new mother)--and this before a galaxy-wide audience. It's all in the interest of art and in particular, of Rossini's Comte Ory which premiered at the Met earlier this year as an occasion to showcase its most popular comic tenor. He was on stage by a bit after one.  It was the first baby for Flórez, the second performance for us (we were at the Met premier a couple of weeks ago; today was the HD Theatre version back home in Palookaville).  Once again, the word for the HD is "different."  You see less of the comic choreography of the bedroom finale, more of the comic rubberfacing of Joyce DiDonato (Diana Damrau may be a better singer but DiDonato is a more engaging actress).  And on this second time around you get--I got--a sense of how really challenging this music is for all three of them--deceptive because it has almost no bravura arias, just constant conversation throughout.  I gather Bart Sher is taking some flac for the supposed excesses of the staging but I'm not buying that line at all.  Putting it all onto a period stage was entirely in keeping with the good-natured comedy of it all and it left you free to recognize what is, for all its surface fluff, actually a highly sophisticated piece of work with Italian comedy, French farce, and Gallic wit.

The baby: Leandro.  Papa did not show pictures.  The mama: Flórez' wife of four years, the German/Australian Julia Trappe (one Peruvian website called her: "Tropper"--phonetic?).  She stayed home.

Manual for Malefactors

I've read three reviews so far of Jonathan Steinberg's new biography of Bismarck
See link, link and link, and don't overlook link.  All were favorable, and all succeeded in explaining a matter that eluded me when I took 19C history from (the excellent) Jim Sutton at the University of Louisville.  Namely, not just that Bismarck was important but precisely why he was important.  A complex of answers, of course, but sum it up with way: (a) though he took risks, he picked his risk with great care; (b) he could turn on a dime from left to right, so as to cement one alliance while confounding another. Add also this: he bore the seeds of his undoing.  He created a Germany so strong that it scared the daylights out of everybody around him.  Naturally they sought to gang up in defense--and inevitably, he spent the rest of his career in a frenetic display of crockery-juggling so as to outmaneuver them.  One thing I do remember from Jim Sutton: Bismarck created a system so intricate that only a Bismarck could hold it together, and once the new boy shunted him off stage, matters went to hell in a hurry.

One can only admire such clarity of analysis.  Yet I can't escape the fantasy that all over the world there are power-hungry amoralists poring over their fresh-minted and still-damp copies of this masterwork, and making their plans.  Now we know how Dr. Frankenstein felt when he heard the rumbling in the basement...

Disclaimer:  To be clear, I am entirely willing to concede that Sutton taught all this, but that my callow youthful self was just too callow and youthful to absorb it.

How it works (worked) on the Trading Floor

In Inventing Money, Nicholas Dunbar takes us on a tour of how a hedge-fund trading operation works (or worked, at Long Term Capital Management, before it cratered in 1998).
In a car factory, we separate the white-collar designers and managers who conceive and plan new cars from the blue-collar workers who actually build them.  It is the same in finance.  Suppose Greg Hawkins is at the apex of a pyramid.  Who is beneath him?

Directly under Hawkins are those senior white-collar types who share his PhD-level education in finance, and perhaps have a trading background too, but are younger and less experienced.  At LTCM, they were called strategists, and during LTCM's life, several of them would be promoted to principals. We can think of them as apprentice money-machine designers.

Under them, we find a junior white-collar level of traders, risk managers .... and software designers. The traders are the men who execute the trades; constantly on the ;phone, they wear headsets and talk in the slang of the Street.  Greg Hawkins and his strategists tell them what to do each day .... Hawkins will not tell the traders everything about the money machine he has designed--particularly its size or timing. At this level, a lot of people change jobs regularly.  It wouldn't do to have them take secrets to a rival firm.  However, they do need a good understanding of the components of money machines.   Indeed, many of these traders have PhDs, although often the subject is not finance, but physics or mathematics. ...

Below the junior trader level is the key white-collar/blue-collar divide.  At the top of the blue-collar pecking order are the pit traders.  In our analogy, they are like skilled machinists on a car production line. ... The pit trader doesn't ask questions, and he probably doesn't even have a college degree, let alone a PhD.  Instead of a boiler suit, he wears a stripy blazer with his firm's logo on it. ...

Below the pit trader in the hierarchy--who has his own team working for him--is a much larger layer of people who know virtually nothing about money machines, although their role is no less important. They are the workers who do the most repetitive production line jobs.

Known variously as clearing, settlement or operations, the unglamorous status of this bottom layer is summed up in an expression often used, "the back office."
 Comment:  Inevitably, all this has changed in the 13 years since but I wonder exactly how?  Are the math PhDs all in the back room designing algorithms (shredding algorighms?) that will execute themselves?   And do they still wear blazers?

Friday, April 08, 2011

DeLong Stands in a Cloacus Maximus and Gazes at the Stars

DeLong confesses that he thought he was functioning in a sane and well-ordered world, and now learns to his dismay that he was not. Inter alia:
 First, I thought that the highly leveraged banks had control over their risks. With all of the industry's experience at quantitative analysis, with all our knowledge of economic history, with bosses who understood the importance of walking the trading floor--I thought that our commercial and investment banks were professionals at risk management.

But our highly-leveraged banks and shadow banks did not have control over their risks. Indeed if you read the documents from the SECs case against Citigroup for its 2007 earnings call, Citigroup did not know what their subprime exposure was and had a frackingly difficult time finding out. Managers seem to have genuinely thought that their underlings were following the originate-and-distribute business model they said they were. Back when Lehman Brothers was a partnership, every 30-something in Lehman Brothers was a risk manager because they all knew that their chance of becoming really rich depended on Lehman Brothers not blowing as they rose their way through the ranks. But if the high-fliers' bonuses are based on the mark-to-model performance of their positions over the past 12 months, you've lost that every-trader-a-risk manager culture. I thought the big banks knew this, and had compensated for it.

I was wrong.
Copy that, big guy, and we'll be a long time figuring out just how such a classically implausible hypothesis (banker self-destruct)  could turn out to be so crashingly true.   My own best guess is that the reasons are diverse and sticky.  Part of it is heads-I-win, tails you lose: individual traders could figure what the hey, if I take I big risk and win, I get a big payday if I lose--well, what the hey.  But this doesn't explain why the CEO--an equity owner, and king of the hill--would touch the match that would blow off his own crown jewels.

On closer scrutiny, some instances are easier to explain than others.  Citibank, for example--in retrospect it is pretty clear that Sandy Weill was pretty good at buying bank assets but he had no interest in actually running them--and neither he nor anybody else ever figured out exactly how to do so (nor has yet, so far as I can tell).  Merrill--this almost beggars belief, but by all available public evidence, Stan O'Neal really never did understand what kind of business he was in.  No, strike that: he understood the business of kiss-up kick-down  bureaucracy, and he had no trouble cutting off thousands of employees.  But he seems never to have grasped the concept of risk, and he seems never have  been willing to listen to anyone who wanted to tell him.  Jimmy Cayne the bridge player at Bear Stearns--hard to tell exactly what was going on in his mind but he seems to have figured that somebody else would solve is banking problem while he was trying to figure out whether to raise three no trump.  Dick Fuld at Lehman--perhaps he once understood trading but by the end, he and his echo chamber of lackeys seem to have talked themselves into the view that it just could not happen to them,  As to AIG--sure, everyone says it was just one little teeny unit (that almost blew up the solar system).  But then the next question has to be--where were the grownups?  My own guess is that they were just all too busy trying to bring order out of the disarray resulting from the disgrace of Hank Greenberg.

History is written by winners, of course, and so it is the folks at Goldman and JP Morgan Chase who tell us that Lloyd Blankfein and Jamie Dimon really did walk on water--and, more precisely, that their banks really did try to assess risk, really did know how to listen to bad news.    Could be, although even here there is room for nuance--Goldman, for example seems to enjoy an extraordinary knack for making up its own rules (or the close corollary, sending its minions off to Washington to make up the rules for it).  Side insight: wouldn't it be true that the chief beneficiary of the AIG salvage operation is not AIG but its great counterparty, Goldman Sachs?   Others like to point to Lazard as one firm that did not go corporate (until later) and that stayed out of the headlines.   Narrowly true, although in that Lazard wasn't really a "bank" like the others, the fact may not be entirely relevant.

So you can make up a plausible story here, at least in retrospect.  But the consoling folklore that capitalism can't self-destruct because interested parties will respond to the proper incentives--the world seems far muddier, far more complex than that.