Showing posts from September, 2009

What a Statistician's Investigative Instincts Can Tell Us About Modelling Risk

Man, James Kwak wasn't kidding about a neat little time waster ... he laid a link honeypot over at Baseline Scenario that led to here, and I chased it, and I must have blown ... oh, God all the minutes. And I really had stuff to do today. Drat.

At the heart of "Are Oklahoma Students Really This Dumb? Or Is Strategic Vision Really This Stupid?" lies the question: Did a pollster finesse a little data to please its conservative client?

Here's what's going on (and please do chase the link, but be forewarned -- it's a time eater): Nate Silver, author of (the number of electors in that quaint anachronism we call an electoral college), smelled a rat when an outfit called Strategic Vision released the results of another one of those "you won't believe how stupid Americans are" polls. It showed Oklahoma high school students were pretty close to drop-dead dumb (only 23% reportedly could identify George Washington as the first president).…

A Glimpse of the Monetary Policy (in Action)

So, what rules did Bernanke break when he tossed out the rule book?

Here is a story about the reduction in the Treasury’s Supplemental Financing Program that no one probably read because the few who understood it did not have to read it and the rest would not get it. According to Bloomberg:
The U.S. Treasury Department plans to cut back its borrowing on behalf of the Federal Reserve as it seeks to keep government debt under a legal limit ... The Treasury will reduce the outstanding borrowing in its Supplementary Financing program to $15 billion “in the coming weeks,” the department said in a statement in Washington. The Treasury has been keeping the account, set up last year to give the central bank more flexibility as it undertook unprecedented lending, at about $200 billion.Note the critical phrase “on behalf” in the opening sentence – the Treasury is planning to cut back its borrowing on behalf of the Federal Reserve. That is an accurate characterization of the program, although the…

Still Not Convinced the Fed Shouldn't be the Systemic Risk Regulator?

I argued against the Fed taking such a role in this blog entry earlier this month. Among my five points was this:
The Fed doesn't have the regulatory chops.

And what do you know? The Washington Post now does a detailed autopsy on how the Fed failed to rein in the mortgage lenders who abused subprime borrowers: As Subprime Lending Crisis Unfolded, Watchdog Fed Didn't Bother Barking. Consumer finance companies sprang up in an unregulated space, and as they boomed, established banking companies jumped in to create their own mortgage-lending units and grab a chunk of the profits. Throughout this period, the Fed decided not to get involved.

The takeaway points: (1) The Fed didn't just regulate lightly. It turned its back on this sector altogether, while these predatory lenders grew like weeds. (2) The Fed was being warnedabout these lenders as early as 1998, about a decade before everything fell apart. (3) When the Fed declined to supervise them, that left a vacuum, because the Fe…

Toward a New Philosophy of Regulation

In the early stages of the financial crisis, I recall having a conversation with a Citigroup banker. I was waxing indignant about the failure of regulation leading up to the collapse. Her shrugging response: It's a losing game for regulators anyway; Wall Street will always stay a step ahead of them.

It's not that I completely disagree. Regulation is difficult. Take for instance the I.Q.-and-experience mismatch across the public-private divide. Those smarter graduates with MBAs and law degrees get hired by Wall Street for big bucks; their more-mediocre classmates wander off to work for the U.S. government for half the pay. Then, once the latter spend a while at the SEC or CTFC they naturally seek to cash in on their resume at some point -- after all, their experience, plus their insight into how a regulatory agency works, are valuable to Wall Street. They jump the fence and serve those they once regulated. So, in the end, the government doesn't even get the benefit of experi…

Oh, So Now You Don't Want the Annual Pecan Sale Flier?

The arrogance of Wall Street throughout this financial meltdown and aftermath never ceases to amaze me. I know it shouldn't, but -- these are the kind of guys who, on the hangman's scaffold, would take a moment to harangue the executioner about the rope burns they're getting because the noose is too tight.

First they grumblingly took billions in bailout dollars from Paulson, then refused to say what they were doing with any of it. Then, after Geithner came up with a plan to buy up their toxic assets using generous federal backing, a plan that would have led to some overpaying in their favor, they decided they didn't want any part of that. And now they're looking forward to big bonuses again this year, as the rest of us watch unemployment creep into double digits.

Sometimes it just makes you want to laugh until you cry. You know, the tears of the world-wise clown. What put me in this mood was a story up at the Huffington Post revealing the tussle now taking shape betw…

George Bush Funnies, Sept. 18 Edition

A former George Bush speechwriter, Matt Latimer, is attracting some attention on the pages of GQ with an unusually revealing look at his former boss. While writing about how clueless Bush was about Hank Paulson's helter-skelter efforts to save the financial industry from melting down last fall, he happens to reveal:
At one point, during another of our marathon speechwriting sessions, Steve Hadley and Fred Fielding, the White House counsel, let us know that the president needed an FDR line—like “We have nothing to fear but fear itself.” The president had his own suggestion for such a line, however: “Anxiety can feed anxiety.” So we produced a speech with no real information and our FDR knockoff line.Okay, so no one ever claimed George Bush was a great orator. "Anxiety can feed anxiety" ... not the kind of writing that stirs the soul.

Look at FDR's great line. The words have a rhythm, a cadence, as they roll off the tongue. They are simple words (six of the eight are mon…

The Annals of "Whatever Happened to PPIP?"

Remember, PPIP was the Geithner plan rolled out amid much fanfare back in March. The government was to pony up funds and partner with private investors to buy up crappy assets clogging bank balance sheets, through a series of auctions. This act of Roto-Rootering our financial system was depicted as necessary to restoring the banking industry to the pink of health.

Early on, I predicted the plan would die because the banks wouldn't play ball. They wouldn't dare, knowing that they'd have to revalue huge chunks of their assets once the investors' low bids revealed how little their loans and securities were really worth. My conviction hardened as the year went on.

So naturally, I was more than a little intrigued by this story:
FDIC Names First Winner in Toxic Asset Program

So did I get this wrong? Is the program finally stumbling out of the starting gate? Well, it turns out my reputation remains intact. Check this out about the first winning bidder (bold mine):
Fort Worth, Texa…

The Annie Le Murder: Three Questions

Okay, I know I'm drifting afield again, but I have a weak spot for true crime stories and Jane Velez-Mitchell's yammering on HLN. Annie Le is of course the 24-year-old Yale graduate student whose body was found crammed inside the wall of a laboratory on campus, five days after she went missing. Medical technician Raymond Clark has been declared a "person of interest" (these are almost always suspects, though the police have quite pointedly avoided using that word in Clark's case).

I'm following all the dribs and drabs of coverage of this sad story, but there's not much news. There are three questions I can't figure out why no one is talking about (and if they are, please note where and I'll happily shut up).

1. The police found bloody clothes, apparently belonging to the murderer, behind some ceiling tiles. The police also have video from some 70 cameras outside the building showing everyone who entered and left. Then why don't they just match t…

Looking Back in Incomprehension

It is the anniversary of Lehman’s demise and everyone is looking back for “lessons learned”. The passage of time has not helped. The usual nonsense about greed, bad management, etc. is being regurgitated, with a new spin making the rounds: that Lehman’s demise prevented even bigger collapses. Goldman’s Blankfein was first to float this nonsense.“A bailout of Lehman Brothers might have provoked a public backlash, causing the government “to let the next institution fail” instead, Blankfein said ... “It might have been a much bigger one with much more dire consequences.”Joe Nocera of the New York Times picked up the same theme in a front page article claiming that if Lehman had been saved, a much bigger firm such as Merrill might have collapsed.

The claim can be neither proved nor refuted. It is an idle conjecture. Nocera’s Merrill example shows how little he knows about the markets. Merrill was bigger in terms of assets. But Lehman was a far more “connected” – systemically important, …

Judge Rakoff Stands up for the Little Guy

Just when you think cynicism rules the land and nothing will ever get any better because everyone's in someone else's pocket, through campaign contributions to the left and right and everyone in between, or regulators going soft on misdeeds because of plans to eventually fence-hop to the private sector to land cushy jobs, or Goldman Sachs populating the upper ranks of the U.S. Treasury with its own operatives ... well, along comes this heartening news:
A federal judge on Monday rejected a $33 million settlement between the Securities and Exchange Commission and Bank of America Corp., saying the SEC's accusations of inadequate disclosure by the bank over bonuses paid at Merrill Lynch must now go to trial.The judge was no doubt incensed: the $33 million would have been paid by the shareholders of the bank -- essentially the same ones who did nothing wrong and got screwed in the first place! The U.S. district judge, Jed Rakoff, has immediately been lionized as a new and rare k…

Functionaries (passed off) as Revolutionaries

I was at the start of my vacation when Bernanke was reappointed. In terms of newsworthiness, then, the story is a tad dated. But this is not a news site, and there are important points about the reappointment that I would like to write about.

Ben Shalom Bernanke secured a second term as the chairman of the Board of the Federal Reserve because he played ball in his first term. He played ball obediently and unquestioningly.

In the ceremony announcing the reappointment, President Obama said that Bernanke’s “bold action and out-of-the-box thinking” helped save the economy from free fall. That was the agreed-upon line on Bernanke that the media had been promoting for over a year: a bold and unconventional thinker and doer – a veritable revolutionary, in other words, of the kind that these crisis times demanded. Google “Bernanke + rule book” and see how many sources, from the New York Times to the National Public Radio, approvingly talk of Bernanke “throwing out” or “tossing out” the rule boo…

5 Reasons NOT to Make the Fed the Systemic Risk Regulator

I realize this debate peaked about three or four months ago, but wanted to get my two cents in. Originally I waffled on whether the Fed should take on this role. Absent compelling evidence, I waffle no more. I'm not in favor of having the Fed -- the powerful central bank the U.S. created almost 100 years ago -- regulate systemic risk in our financial system. This is why:

1. The Fed's independence -- standing on high ground, removed from the ebb and flow of political currents -- is more liability than asset. My thinking here is straightforward: no body composed of any number of wise men will successfully manage all threats of systemic risk. However, when the designated risk regulator does egregiously and clearly screw up, I think there should be clear, well-defined lines of accountability.

2. The Fed is too opaque. Watching the disclosure battle between the Fed and Bloomberg News makes me more than a little nervous. The Fed doesn't want to reveal the companies taking part in …

Thinking about the Weather: Probability of Precipitation

It's raining. That's a matter of pressing concern at the moment (9:40 a.m.) because, before night falls, I'd like to get in my 26-mile bicycle ride. So I suddenly find myself with an intense interest in that odd probability figure so often bandied about by your friendly neighborhood meteorologist, "chance of rain." (Note: if you're looking for financial commentary today, sorry -- it's Saturday, and my Derivatives Muse has left the building.)

But what does a 30% chance of rain actually mean? Or, in my case, a 50% chance -- that's the grim outlook today for where I live. Does it mean it will rain 50% of the day? Or that, at any moment I step outside, I have a 50% chance of getting wet? I've studied some meteorology, so I was pretty sure that I knew roughly what it meant. But I still had some questions.

Online I soon found this from "The Straight Dope" from Cecil. His answer was sort of like "Percentages for Dummies" -- a bit superf…

The Badly Bungling SEC: An Eye-Opening Tale

Today I want to return to the blistering report that the SEC's Office of Inspector General issued earlier this week. In 22 highly detailed pages, the SEC's internal watchdog retraced a succession of mind-boggling blunders that allowed Bernard Madoff, king of the Ponzi schemers, to escape detection for more than a decade and a half. In fact, the SEC wasn't even investigating Madoff at the time of his arrest; his own sons turned him in. He turned out to be the mastermind of a $65 billion fraud that suckered investors from pension funds and charitable foundations to wealthy individuals.

I want to return to this story because it's really important to appreciate how much rot we have in our financial regulatory system. Arguably, the SEC is worse than corrupt: with corruption, at least you have someone to arrest and you can purge any lesser wrongdoers from your ranks. Here we have what CBS News called nothing less than "jaw-dropping incompetence," and it appears to h…

The Shape of the Recovery: Lopsided W

I'm making my prediction for what this recovery will look like. Here goes: lopsided "W."

In other words: the economy takes a dip (the first sliding line of the "W"), makes a brief upward surge (the crest in the middle, which is where we are now), then slides downward again, even deeper, before we begin climbing out of the hole.

Why "lopsided": I think the "green shoots" happy talk and the stock market's inexplicable lunge higher are going to wither and blow away ... leaving us in a state of renewed fright that will drive the economy lower than before. By this view, the next leg down will be the harsher one, thus creating a lopsided "W."

I hope I'm wrong. I really do. But the big problem, from where I sit, is that we haven't really stared down the beast that got us into this mess. We have changed little at the heart of our financial system, prosecuted few of the bad actors and avoided acknowledging how much rot still plague…

Will Wall Street Finally Meet Its Waterloo?

That thought at least ran through my head this morning when I read this in the Times: "Wall Street Pursues Profit in Bundles of Life Insurance." It's a ghoulish little activity -- I use "ghoulish" with full intent, as the word derives from the practice of plundering graves for profit. Which, I imagine, could very well be Wall Street's next stop: buying up cemeteries, then disinterring the bodies and yanking gold and diamond rings off bony fingers, tossing teeth that have inlaid gold or silver into a bucket to be melted down, rummaging the corpses with a cold eye for any items of value ... But I digress.

The NYT explains the business at hand quite succinctly:
The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thou…

Barry Ritholtz Gets It Right

I like the frank, no-holds-barred style of Barry Ritholtz. The author of Bailout Nation appears here in a very good Q&A that, while you're idly chewing on that morning donut, you'd do well to check out. The title is a bit dull (Barry doesn't lack for imagination -- not so, perhaps, the headline writer): "How the Bailouts Could Have Gone Better."

Here are the major takeaway points I found, and they're very good:

1. There was a non-bailout way to bail out AIG and Citi. Rescuing them wasn't a binary proposition: let them perish or save them by showering them with geysers of money, no questions asked. While some might call Ritholtz naive on his analysis here, I think the bottom-line point holds up: we could have struck a much harsher deal with firms such as Citigroup that were doddering at death's door.

2. A major problem in this financial crisis is that, as Americans, we like to avoid "ripping off the Band-Aid," as Ritholtz would say. In other…

First Reaction to Madoff Report: W-o-w

The inspector general has dropped a big fat report on us why the SEC blew the Bernie Madoff investigation over a period of ... 16 years. That's right. The securities industry watchdog could have caught Madoff's investment Ponzi scheme as early as 1992. The executive summary (here, on a WSJ blog) is 22 pages crammed with missed opportunities so stunning they'll leave you breathless.

The short version of why the SEC investigators screwed up: Inexperience. Incompetence.

I'm not entirely satisfied with either of those explanations, and I hope to have time to return to this subject tomorrow. But I wanted to weigh in on this quickly because I think there's a more common-sense, fundamental reason the SEC failed, again and again, to catch a multi-billion-dollar Ponzi scheme that wasn't executing any trades (which no one bothered to check!!!!)

Here it is: The SEC is the securities industry "cop on the beat" right? When you want to hire a good cop/detective, what …

Sheila, What Are You Smoking?

That was my reaction to Sheila Bair's op-ed piece in the New York Times today. Bair argues against creating a super-regulator to oversee all U.S. banks. Her reasoning unfortunately wouldn't pass muster in a high school Debating 101 course.

Let's deconstruct the thought processes of the Bair-ian mind.
The principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the nonbank shadow financial system, and by using unregulated over-the-counter derivative contracts to develop volatile and potentially dangerous products ... The creation of a single regulator for all federal- and state-chartered banks would not address these problems.
Okay, let's assume her "principal enablers" analysis is correct. Now tell me which model you'd have more faith in to regulate a banking system: a fractured hodgepodge of smallish regulatory bodies or one "super regulator" that probably has more…