Wednesday, 31 August 2011

Bad Credit Loans and How to Improve Them

At the moment, money is a problem for everyone, no matter how much they have, and at the rate that the credit crunch is taking affect, it isn’t going to get any easier. Currently, a perfect credit score seems an impossible target to reach, and with no help coming from the economy, banks and lenders stay away from less than perfect credits scores like they are the plague.

You are probably now thinking, “Where does this leave the millions of people who need a loan or a mortgage who do not have this incredible credit score?” The way these people can get the cash they need is what is known as a bad credit loan. However, if you need even more money, then the following helping hands can improve your success rate of being accepted for a bad credit loan.

Watch your Purchases

This may seem like an obvious thing to do, but it is definitely worth while in the long run. There are always expenses that we forget about, but they all add up over a month. There are many tracking systems online, but making your own on excel or eve just writing them down is just as easy. This way, you can take your statements along with you to the lender to prove you have enough money.

Keep old credit cards active

For a long time, the general rule from experts has been to close down existing accounts in order to improve your credit score. However, there has now been a change of views, and the consensus is to keep them open as if they have no debt, they positively contribute to your credit rating. If you are thinking of applying for a larger sum of money via your bad credit loan, under no circumstance close any cards. This will not work, and if some cases, could potentially make your score even worse.

Hard working bad credit loans

It is always a battle in these cases, but bad credit loans will give you the advantage that you need in your credit score fight. When applying for your loans, go through many different lenders that send your reports to the bureaus as this will show that many companies see you as a good asset.
Follow all of these hints and tips, and your bad credit should be wiped away in the quickest possible time.

OLIVIA PRICE: "Creating an outstandingly beautiful and unique image in the modeling world"

OLIVIA PRICE:  American Beauty!




Question 1:  Where did you grow up?
Olivia Price:  I grew up about 30 minutes outside of Los Angeles.

Question 2:  When did you know you wanted to be a model?
Olivia Price:  I was a loner in high school, but around age 16 a friend took an interest in photography and borrowed me for a subject from time to time.  Getting back the photos was always exhilarating, and I have sought the spotlight since childhood.  I began incorporating my desire for fame and creative edge into photographs earlier this year, and I love it.


Question 3:  How do you stay fit? What are your beauty secrets?
Olivia:  I got lucky when it comes to genetics! I'm naturally thin and have a high metabolism from being a competitive gymnast for so many years, but I've been doing a lot of yoga and dance recently.  The beauty rule I live by is never sleeping with makeup on, it ages your skin drastically.  And always wear sunscreen!


Question 4:  What do you like to do in your free time?
Olivia:  My schedule is hectic, so I cherish every opportunity to be a vegetable.  In between shoots I like preparing my own wardrobe from unique finds at the thrift store down the road from my house.  I like altering certain pieces on my sewing machine to make concept costumes. I also paint and dabbled in photography.

Question 5:  What kind of music are you into?
Olivia:  Dubstep and tehcno are what I'm into right now- Deadmau5, Afrojack and DJ's like that.  I'm big into remixes!


Question 6:  For my readers aspiring to be models, how did you get started and how did you gain the confidence to pursue a modeling career? I mean, it is very competitive and a tough industry to be in….
Olivia:  My first real experience with modeling started with an invite to pose with some ’souped up’ cars.  I was looking at gigs on Craigslist and I got a response to come shoot!  It ended up being more risqué work than I was comfortable with at the time.  I would advise all aspiring models not to violate their own levels of comfort for anyone.  It will leave you with regret.

Question 7:  Who is your favorite model?
Olivia:  This is such a tough question! I think Adriana Lima is the hottest woman on the planet, but as far as creating outstandingly beautiful and unique images, I'd have to go with Tyra Banks.  She's an expert at inventing concepts and delivering theme.


Question 8:  For my male readers, what do men do wrong when trying to date the fairer sex?
Olivia:  I've found that a lot of men get too comfortable too quickly.  That playful level of tension and feeling the need to almost act in a new romance makes it fun.  I like a man with sharp wit who can keep me intellectually on my toes.  Chivalry is very key!


Question 9:  Where do you see yourself in 5 years?
Olivia:  In five years I hope to be acting in films.  My end-all goal though is to put fame and fortune to use in various philanthropic projects, primarily in disaster relief.

Olivia Price is natural, successful, refined, and accessible.  She is down-to-earth but seriously professional! Olivia is truly a talented model creating an image of "outstanding beauty and uniqueness" in the modeling world.




~See more of Olivia and follow Olivia's career~







Celebrity English Language and Culture





Monday, 29 August 2011

Brad Pitt: Love

Brad Pitt on Love
                                                             Brad Pitt

Question: How do you know when you’re in love?

Brad Pitt: Do you know how you tell real love? It's when someone else's interest trumps your own. I like to put it that way: trumps your own.

(to put it that way=to say it that way)
(to trump your own=to beat/defeat/over-power your own)

Talking about Love

Talking about love with friends.  Love is a topic when you have talked to someone 4 –5 times; maybe more.   Love is a strong emotion and people often listen closely and check to see if you feel the same or different from them.  People see love as a core value. 

Brad Pitt uses a rhetorical question to answer the original question. Also, he re-frames the original question in another form but the topic idea remains the same.  The form he uses has an authority style feeling to it.

Do you know how to tell (=notice) you’re in real love? = I will teach you.

This authority style speech gives him an aura of father, teacher, guru, expert, etc.
However, it is common and doesn’t sound too strong for the listener in a rhetorical question form.  You may also want to use this style to give yourself a moment to think of an appropriate answer. 

He says his idea about love using a common wording that is often used to describe love:

It's when …

Next, he gives his message and reemphasizes it by simply repeating the same words again:

It's when someone else's interest 'trumps your own'. I like to put it that way: 'trumps your own'.

He is using a strong expression style and then changes to a softer feeling. The change of tone expresses his passion and belief about love for his mate.  His mate is number one and he will be number two for her because he truly loves her.  Brad Pitt comes across as a man with strong convictions about love.  Brad achieves HIGH CLASS COMMUNICATION/English with only a few sentences. 

Speaking Pattern

Do you know how to tell you’re in real love? It's when someone else's interest trumps your own. I like to put it that way: trumps your own.

Part One

First, let’s simplify Brad’s style:

Do you know how to tell you’re in real love?  It's when someone else's interest trumps your own.

Do you know how to tell you’re in real love?  It's when someone else's interest trumps your own.

1.Do you know how to tell you’re in real love?  It's when two becomes one.

2.Do you know how to tell you’re in real love?  It's when you can’t imagine life without the other person.

Part Two
Now, let’s lengthen the style:

Do you know how to tell you’re in real love? It's when someone else's interest trumps your own. I like to put it that way: trumps your own.


3.Do you know how to tell you’re in real love?  It's when two becomes one.
I like to put it that way: two becomes one.

4.Do you know how to tell you’re in real love?  It's when you can’t imagine life without the other person.  I like to put it that way: can’t imagine life without the other person.

Try it with me :-)
I would love to see one of your ideas in Brad's simplified form. Please post or send me 1 Example Sentence. :-)

It’s when ______________________.

Also Find Out what Angelina Jolie feels about Long-term Relationships!

Connect with Alex - Celebrity English!

Celebrity English Language and Culture


Friday, 26 August 2011

What Is Behind the Critical Shortage of Prescription Drugs?

Today, the critical shortage of prescription drugs reached the editorial page of the New York Times. Under the heading The Shortage of Vital Drugs, the paper said:
A widespread shortage of prescription drugs is hampering the treatment of patients who have cancer, severe infections and other serious illnesses.

The Food and Drug Administration says that some 180 medically important drugs have been in short supply, many of which are older, cheaper generic drugs administered by injection that have to be kept sterile from contamination.

A survey of 820 hospitals in June … found that almost all of them had experienced a shortage of at least one drug in the previous six months … As a result, more than 80 percent of the hospitals delayed needed treatments, almost 70 percent gave patients a less effective drug, and almost 80 percent rationed or restricted access to drugs.
The cause of this shortage? According to the editorial:
Nobody is sure just what is causing the shortages ... But several factors are likely to be involved: contamination problems at some manufacturing plants, forcing unexpected production shutdowns; difficulties in getting pharmaceutical ingredients from suppliers, especially those abroad; reluctance to invest in production-line improvement for low-profit generics when high-priced brand-name drugs bring in far higher profits. Sweeping consolidation in the generic drug industry means that fewer companies are left in that market to make up for a shortage.
The Times has become a trashy paper, more in the league of The New York Post than its previous self. Its stories are old, the opinions in its pages downright embarrassing. That is why I rarely quote it now.

Here, it blames “contamination” and the difficulties with the supply lines. The drug companies in question are some of the largest, most advanced industrial corporations in the world. They are the “Big Pharma”, some with over a century of experience in drug manufacturing; we are not talking about the chicken processing plants in Alabama and Georgia. The idea that they will allow contamination or suppliers to impact their output is laughable.

More than 3 months ago, the Financial Times had covered the same story in a greater depth. On May 4, in a news story titled Drug takeovers spark shortages it said:
Pricing pressures and takeovers in the US pharmaceuticals sectors have contributed to record medicine shortage and could put lives at risk, sparking calls for wide-ranging reform.

The American Society of Health-System Pharmacists said last year its members could not obtain an unprecedented 211 prescription drugs through the usual channels ...

Cynthia Reilly, director of the ASHP’s practice development division, said: “There has been a lot of consolidation among manufacturers, with fewer producing any given product, and more quality inspection by regulators. “For older, off-patent drugs, some companies are disengaging because it’s not where the profit is.”
Cynthia Reilly is barely touching upon the subject. The background of the drug shortage, in a nutshell, is that the century-old business model of pharmaceutical companies – doing research and bringing new drugs to market under the protection of the patent law – is no longer working. The problem is structural.

In the 1980s, the Big Three auto companies also faced a structural problem: they could no longer afford the social function of supporting their retirees. At one point, GM claimed $1,100 in the price of each car was earmarked for retirees' pension and insurance. With a nod from the company, the stories spread about GM being a retirement fund that also happened to make cars. In the face of stiff competition from then Japanese car makers, that could not be done. The rest is history, with bankruptcies, pension losses and layoffs.

The problem of the big pharma is likewise structural albeit of a different nature. “Structural” is the key word, though. It means that there is no cure. The business model is dying and, naturally, the vultures have descended on the scene.

Here is one, as per The New York Times of January 26, 2005, under the heading Making a Fortune by Wagering That Drug Prices Tend to Rise. As you can see, the problem has been in the making for some time.

Over the last 20 years, the packing and shipping of drugs evolved into a game of arbitrage, called speculative buying, with distributors like Mr. Rahr (who paid $45 million cash for an East Hampton estate) wagering on drug price increases.

This common industry practice seems more fitting to a casino than a distribution warehouse. And in the 1990’s and the early years of this decade, with prices far outstripping inflation, it was a sure bet…..

Mr. Rahr would not disclose exactly how much he made through speculative buying. Goldman Sachs estimated that the distribution industry, which is dominated by three large public companies, made 60 percent of its profit, or $980 million, from speculative buying in 2001, when the practice was at its peak. More recently, Goldman Sachs estimated speculative buying’s contribution at 40 percent of profits.


In some ways, the practice helped drug manufacturers, who relied on speculative buying in lieu of paying distributors to get drugs to pharmacies. In effect, it was a form of hidden compensation that never showed up as a cost to manufacturers. But speculative buying fostered many problems, industry analysts and economists said. Some said it played a role in drug cost inflation by adding an incentive for manufacturers to raise prices repeatedly. It also gave sometimes gave drug makers false signals that products were in demand, prompting them to turn out excess product.

By encouraging distributor stockpiling, the system also led to shortages in some regions of the country, a situation known as a “stock out” and one that the industry does not like to discuss. Last year, Bristol Myers Squibb paid $150 million to settle allegations … that it misled investors by aggressively encouraging wholesalers to flood their warehouses, thus artificially inflating its sales.
That’s all. Unless you want to know about Mr. Rahr, the sophisticated Brooklynite with his “trademark yellow ray ban glasses”. Then google him. Interesting character, he.

Monday, 22 August 2011

Jennifer Aniston: Beauty

Jennifer Aniston on Beauty
                                                                           Jennifer Aniston

Question 1:  What do you do with your hair?

Jennifer Aniston 1: With my hair, I just cut it and I condition it. 
                                   Just L'Oreal.

Question 2: What is your secret to looking so healthy?

Jennifer Aniston 2: I drink lots of water - water, water, water. 
                                  Water is important. And sleeping.

Speaking Style

Culturally, the topic of beauty often comes up in conversation.  Everybody wants to know what the other person is doing to stay SOOOOOO BEAUTIFUL!  When we see someone who looks great we often ask about his or her beauty routines.  We feel we might be missing something.  Deep down most people want to look handsome or beautiful.  People are always fighting against aging.

This type of conversation usually comes up once you have met or talked to a person two or three times.  However, if the person is exceptionally beautiful, you can probably ask them these questions at the first meeting.  It is a form of flattery and good-looking people are accustomed to it.

Jennifer uses a casual and natural language style to answer two common questions about beauty. 

In the first answer, she repeats the final part of the question in her answer:

Q:  What do you do with your hair?
Jennifer: With my hair, I just cut it and I condition it. Just L'Oreal.

This is a common conversation technique.  You respond with the final part of the question.  It focuses and links the topic smoothly and gives you a moment to think of your answer.  Try it out!  It isn’t so hard and it is FUN!  When I feel nervous I use this technique quite often.  It is almost like a game!  Nobody will know you are nervous on the inside!

In the second answer, she emphasizes her belief in water as a beauty aid by repeating it three times.  It may look odd in writing but in a conversation you would say the three extra ‘water’s quickly.  Jennifer’s character in the TV Comedy 'Friends' uses this style from time to time.  This speaking style became popular in the late 1980’s.  So, it isn’t so strange to a native speaker.  Jennifer reemphasizes that ‘Water is important’.  It is a bit unique. However, people remember unique speaking styles!

The English is not so difficult but these two natural speaking styles create a smooth, well-connected language conversation pattern with a unique twist.  ENJOY TRYING IT OUT! People will remember you!  You will make a great impression! 

Speaking Pattern


Q 1:  What do you do with your hair?
Answer 1: With my hair, I just cut it and I condition it. Just L'Oreal.


1.What do you do with your hair?
With my hair, I just cut it and mousse it. Just Herbal Essence.

2.What do you do with your hair?
With my hair, I just cut it and color it. Just Clairol.

3.What do you do to keep in shape?
To keep in shape, I jog and practice Yoga 3 times a week.

Jennifer Aniston 2: I drink lots of water - water, water, water. Water is important. And sleeping.


1.I eat lots of vegetables - vegetables, vegetables, vegetables. Vegetables are important. And sleeping.

2.I take lots of vitaminsvitamins, vitamins, vitamins. Vitamins are important. And sleeping.

3.I jog a lot! Jog, jog, jog. Jogging is important  And sleeping.

ENJOY using these Natural English Language Styles!

Below are the LINKS to Beauty Products mentioned in this language feature and Jennifer's next movie!






Celebrity English Language and Culture
                                   CELEBRITY ENGLISH
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Integrate and Enhance Your Business Links through B2B POS

Business-to-Business Sales (B2B Sales) refer to the concept of sale between businesses. A B2B sale involves a bigger picture than Business to Consumer (B2C) sale. In generating more prospective B2B POS, you can make use of the technique of covert hypnosis and NLP, Neurolinguistic Programming, since this type of sale also concerns a person-to-person interaction. Covert Hypnosis in simple terms refers to a process of putting a person in the state of walking trance without his or her realization.

This particular process in great ways can influence the buying decision of the consumer. To add to the effect, you can also use the concept of NLP. This concept believes in using certain words and phrases that can usher a huge effect on the thought process and behavior of an individual. To achieve best results, you need to build a strong relation with the consumer. Pacing is just another way of improving a strong relation with the consumer. This concept works in accordance with noticing the breathing pattern of the consumer and slowly matching up to the pattern.

The next in line focuses upon physical pacing. This process simply refers to the idea of matching up to physical posture of the consumer. You can check with the credibility of your effort by changing your posture, which will make your consumer change his or her physical stance as well. Following the posture, the salesperson looks forward in delivering in the similar speech pattern of the consumer. This involves rhythm, pattern, pitch, dictum, and tone. Success of this can be checked with the same process of changing your speech style to notice the change in the consumer.

The other types of pacing involve matching up the language and volume following the words that are specifically used by the consumer. At the end of it all, you as a salesperson also need to match up to the emotional pacing of the consumer. All these processes in combination always help in generating a better lead and a successful B2B POS.

Sunday, 21 August 2011

After Many Words, a Short Conclusion on Information-Insensitive Debt

Why six lengthy blog posts on information-insensitive debt? (By the way, they were published all at once because Blogger has been acting screwy lately, barring me from my account for more than a month. In case you want to refer back to them: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6.)

I strongly believe that the shadow banking system was never confronted and dealt with properly after the financial crisis, and that this was a tragic error.

I suspect that the shadow banks will be back, with fresh problems, in the not-too-distant future.

At that time, we may finally be forced to figure out what to do with them. I expect various approaches to be proposed.

To decide wisely how to deal with the shadow banking system, I think we have to possess the right theoretical framework for understanding it. In my opinion, policy based on a flawed theory of “information-insensitive debt" will lead us to create an even more dangerous financial system.

Information-Insensitive Debt and the Strange Case of Haircuts

Now for part 6 of my rather exhaustive (and exhausting) look at Gary Gorton's theory of information-insensitive debt.

This post is rather granular, to show inside-out how a very dubious assertion at the theory's center leads Gorton to what (I think) is a wrong-headed interpretation of what occurred during the height of the financial crisis.

We start with haircuts -- in the repo market, not at the local barber shop. Anyone who needs a refresher on how repurchase agreements work, go here.


Per Gorton, the haircut is the "percentage by which an asset's market value is reduced for the purpose of calculating the amount of overcollateralization of the repo agreement."

That's very gnarly sounding. Here's an unpack that gets at the gist of the matter.

When you "deposit" say $100 million in a shadow bank through a repurchase agreement, the bank essentially posts collateral (to guarantee your funds in case it defaults). The haircut can be thought of as a way to ensure you get ALL your money back. So you may receive $105 million of securities for that $100 million -- a haircut of 4.8 percent (5/105). If the shadow bank collapses overnight, you're holding $105 million of securities to make you whole on $100 million -- not a bad proposition, it seems.

Haircuts vary with the nature of the collateral debt. During the financial crisis, for AAA corporate debt, they were minor (about 5 percent, according to Gorton). A graph of haircuts on asset-backed securities, on the other hand, resembles a Stairmaster in profile. They climbed from zero percent to about 40 percent when the financial system was in extremis. That deep 40 percent haircut was the shadow banking equivalent of a large amount of money being sucked out of the system -- a bank run, in other words.


Now comes a question that turns out to be more interesting than it first appears. Namely, what are these haircuts based upon? This is where things get curious. You might assume, if you're a common-sensical markets person, that “depositors” demand haircuts because if their counterparty in the repo agreement fails (a la Lehman), they need to be compensated for the fact that the securities may not really be worth what they were told. Or, an alternative explanation could be that they’re afraid the value of the securities might drop while they’re holding them.

Both interpretations, however, would be incorrect, according to Gorton.

Gorton informs us that:

Haircuts are a function of the default probabilities of the two parties to the transaction, as well as of the information-sensitivity of the collateral.
Now, before we analyze that, here's another excerpt you need to read, to get the full picture of where Gorton is coming from (this is also from his paper titled Haircuts, the bold is mine):

Keep in mind that the collateral offered in repo is valued at market prices. If the bonds become riskier, and their prices go down, then they would be valued at these lower prices. Furthermore, if there is more uncertainty about their price in the future, that risk can be addressed with a higher repo rate. Repo rates can and did go up (see Gorton and Metrick (2009)). Why should repo collateral be haircut? And why should these haircuts go up? Our answer, following Dang, Gorton, and Holmström (2010a,b), is that a haircut amounts to a tranching of the collateral to recreate an information-insensitive security so that it is liquid. The risk that is relevant here is different than the risks we usually think about, which are related to the payoff on the security. A haircut addresses the risk that if the holder of the bond in repo, the depositor, has to sell a bond in the market to get the cash bank, he may face a better informed trader resulting in a loss (relative to the true value of the security). This risk is endogenous to the trading process. It is not the risk of loss due to default. Consequently, the price cannot adjust to address this risk.

The first thing you should have noticed: Gorton very much appears to be some form of EMHer (Efficient Markets Hypothesis, or the belief that market prices are efficient and reflect all existing public information). (As a reformed EMHer, I can spot a member of the species. This is precisely how they talk: "If the bonds become riskier, and their prices go down, then they would be valued at these lower prices." They don't simply make a point; their stating of a proposition has a whiff of the evangelical.)

Being an EMHer, though, paints him in a corner, starting with his explanation of the two factors contributing to haircuts. Because for an efficient markets guy, the "default probabilities of the two parties to the transaction" -- reason #1 for haircuts -- shouldn't matter at all.

After all, if the collateral for your deposit is a security at market price, that's what someone would buy it for at that moment. And you're only holding the security overnight -- or for a few days -- so where's the risk? Of course, the price may change. But Gorton covers that in the longer excerpt above, saying you'll demand a higher repo rate to compensate for that risk. The more detailed excerpt, in fact, appears to conveniently forget about counterparty risk.

So, back to square one: why do you need a haircut?


This is where the theory starts crumbling around the edges. Remember, the centerpiece is information sensitivity, so that's the Procrustean bed Gorton has to fit his analysis into. Here's how he explains why a shadow banking “depositor” requires a haircut: if forced to sell the debt (my bold again), "he may face a better informed trader resulting in a loss (relative to the true value of the security)."

Ah, so the real problem is a "better informed trader." But what does that phrase mean? And what does it imply? I'm not sure whether Gorton tries to use it in a special way, but let's assume he doesn't. In that case, a "better informed trader" would presumably be a trader who knows the worth of the debt better than you do. And, it appears, you're worried that his information will be negative and push his offer price lower.

So a better informed trader knows something about the value of the security that you don't, so you're afraid that the debt may be mispriced, and that's why you demand a haircut?

No, Gorton would probably demur, it's not quite that. He tells us "This risk is endogenous to the trading process. It is not the risk of loss due to default." See, the market price plus the repo rate has already captured the risk of loss due to default, according to Gorton. But then, what is the nature of the knowledge possessed by a better-informed trader? When the donut cart makes its rounds at corporate headquarters? Because, seriously, when I hold a debt security, I'm concerned mainly with one thing: getting paid what I'm due, when I'm due it (and the probability of that occurring).

(Another thing: what is the "true value" of the security? What relationship does it have to the "market price"? Which should I care about? If the true value is $100 million but the market price is $200 million, why should I mind paying $200 million as long as other traders in the market are willing to pay that, especially if I possess the security for only a day or two?)

The other problem with these "better-informed traders" is that it stretches credulity that they suddenly appear on the horizon, a sagacious glint in their eyes, waiting to take advantage of you. Presumably they were also there the day before. So why weren't they pushing down the "market price" before? And if these better-informed traders are feared, why not find some of the apparently dumb traders of the day before who helped set the "market price" -- and simply sell to them instead, if they're so enamored of the security?


Gorton wants to convince us that the securities were fairly priced (they capture all the risk of loss due to default, remember) and that depositors extracted giant haircuts of 40 percent for fear that, if they got stuck with the debt, the only traders they encounter may possess an "information advantage." He never clarifies why, if this information advantage necessitates such a large haircut, the better informed traders aren't already profiting from their (considerable) advantage by trading in the market.

So Gorton basically says that market prices on asset-backed securities (a key kind of collateral in the shadow banking system) during the financial crisis were accurate. He makes this claim even though there were some 100,000 of them -- sui generis problems abound* -- and trading in particular ones probably got pretty thin and the value of asset-backed securities is often derived from a model (hence "mark to model") and investors were just starting to realize these things had been misrated and were probably lousier than they thought and ... you get the idea.

*(Brief aside: The uniqueness of these assets, and the difficulty accounting for them, was why Paulson scuttled his original plan for TARP, as Hernando de Soto recounted in Businessweek: “When then-Treasury Secretary Henry Paulson initiated his Troubled Asset Relief Program (TARP) in September 2008, I assumed the objective was to restore trust in the market by identifying and weeding out the "troubled assets" held by the world's financial institutions. Three weeks later, when I asked American friends why Paulson had switched strategies and was injecting hundreds of billions of dollars into struggling financial institutions, I was told that there were so many idiosyncratic types of paper scattered around the world that no one had any clear idea of how many there were, where they were, how to value them, or who was holding the risk.”)


Is there an alternative explanation of what happened?

Yes, and it might go like this: Before the financial crisis, the haircut was zero on asset-backed securities because it was practically unthinkable that the large investment bank opposite you on the repo transaction would fail. And so, because the counterparty is deemed safe, the asset-backed securities being offered for repo aren't examined too carefully. The "magic pig" phenomenon starts to set in. "Sure, they're worth what we claim," Mr. Investment Banker says. "Would you like to see our math-heavy, extremely complex model or just take our word that you'll get repaid?" And you say: "I'll take your word, no problem."

But then the investment banks start looking shakier, and the asset-backed securities begin looking dodgier as well. You realize too that the banks are frightfully interconnected, boosting risk further. So you begin looking askance at asset-backed securities that you suspect aren't at "market price" at all. Further, you expect you'll have trouble reselling them. This would naturally lead you to demand deep haircuts.

Now you may resist going as deep as 40 percent -- that's pretty severe -- until you get really, really scared. What would scare you the most? If you think that the collateral may be mispriced, the scariest thing would be seeing one of those investment banks go under. Say Lehman Brothers. Until then, if you think the chance of the investment bank failing is remote, you may not extract much of a haircut for the mispriced securities. Who cares what they’re really worth? But once it becomes clear you may get stuck with this collateral -- the game changes totally.

You need a deep discount, and 40 percent would be reasonable. Gorton would have you think that such a discount implies crazy sale prices. This alternative explanation doesn't need to invoke a fire sale to make sense. It would, however, suggest there was a bit of the "magic pig" in those asset-backed securities.

Next: Many words later, a short conclusion: why should anyone care so much about this arcane subject?

Down the Rabbit Hole on Information-Insensitive Debt: Inscrutable Complexity Is a Good Thing!

Part 5 of a detailed look at Gary Gorton's curious theory of information-insensitive debt in which we ask two key questions.


Not really, it seems.

A more useful theoretical construct would steer away from the bi-phase nature of "information insensitive" and "information sensitive" and would at least posit a sliding scale between the two. But an even better theory would ditch information sensitivity completely. Risk is the key to understanding how the world of debt works and how securities are analyzed, not information sensitivity (note: it’s probably no accident, in fact, that certain bloggers have equated Gorton's "information insensitivity" phrasing with the quality of being "risk free" -- but a careful reading of Gorton shows he makes no such equivalence, so he appears to be aware that there's a critical distinction).

A better theory might assert that, with the financial sector's demands for collateral to back derivatives transactions and so on, there will be a need for less-risky securities to fill that role.


Gorton seems to like asset-backed securities as information-insensitive debt for all the wrong reasons.

He likes them partly because of the senior nature of the debt and the fact that it's backed by a portfolio. He doesn’t recognize that the worth of being senior is firmly attached to credit risk. As an investor, which would you rather hold, if you're anti-risk: the senior debt of Energy Future Holdings (the former TXU that’s freighted with debt after being bought in the biggest LBO in history) or some (not senior) debt of AAA rated Johnson & Johnson?

This isn't a gratuitously needling point, because structured debt likes "yieldy" (read: riskier) assets. Collateralized loan obligations, a type of CDO, are stuffed with leveraged loans -- the high-risk borrowing that private-equity firms take out to make an acquisition. Why? The structuring doesn't make sense using investment-grade debt; you can't wring out enough yield.

So to say a securitization is more "information insensitive" because it may be backed by a portfolio composed of senior debt -- and then to be agnostic about the contents of that portfolio -- is very wrong. And what's more, you should be looking at how correlated the movements within the portfolio are. Junk loans in CLOs will display high correlation if the economy double-dips; that's pretty much a given.


Then there's the really dangerous feature of asset-backed securities that Gorton, bizarrely, is attracted to: complexity. This should be a bug, not a feature, but we've gone down the rabbit hole, folks. Here's his rationale: complexity raises the cost of producing private information. It's too expensive to figure out the debt is mispriced. Ingenious, though the arrant screwiness of this is never acknowledged.

However, here's the catch: that same complexity will, at some point, confer a significant advantage for a dedicated investor (such as a Michael Burry type in the Big Short) to do enough research to determine the extent of the mispricing. This will only occur though, after the mispricing becomes significant enough.

So what you get in the trading of this complex debt is the equivalent of a tectonic shift, violent and jarring, instead of the smooth adjustments that are made by say a U.S. Treasury, which trades largely on public information -- millions of bits of it, clashing and conflicting and impressing various traders in various ways. The asset-backed security, however, manifests itself as stable and information-insensitive -- partly because of its impenetrability -- then, on reaching a certain tipping point of mispricing, lurches into “information sensitivity.” Also, because of its complexity, ratings services will be sluggish to downgrade the debt -- especially after they have been complicit in the initial misrating -- adding to the sudden volatility.

Note, however, that this volatility wouldn't have to be characteristic of a panic or widespread fire sales, as Gorton wants us to believe was the main problem during the financial crisis. This aspect of volatility is inherent in the very nature of complex debt -- a kind of debt that Gorton lauds because it raises the cost of producing private information.

And Gorton sees this as a feature, not a bug. Hmmm.


Information insensitivity is NOT what we need more of in our financial system. Magic pigs are information insensitive, until there is a revelation (the discovery that they are not magic), at which time they become dangerously information sensitive. We DON'T WANT a shadow banking system built on magic pigs (or on securities that want to become magic pig-like).

Next: What’s behind haircuts in the repo market, according to Gorton? (Surprise: It’s not what you think.)

The Worrisome Analogy at the Heart of the Theory on Information-Insensitive Debt

Now for Part 4 on Gary Gorton's theory about information-insensitive debt, in which we begin by dusting off our SAT analogy skills.

Retail banking : deposit insurance :: Shadow banking : x

"X" is, of course, the kind of insurance that will save the day when there's another run on the shadow banks, as we saw during the financial crisis. Deposit insurance is a neat innovation that traces back to 1934; it eliminated runs on commercial banks in times of panic. It also made deposits at a bank "information-insensitive" debt -- the value of your $1,000 at Fidelity and Security Trust is secure, even if the CEO absconds to Tahiti with $10 million in a duffel bag.

Before solving for "x" -- or, better, asking whether we should even try to solve for "x" -- let's look at how shadow banking works.


Retail banking is for you, me, Aunt Edna. Shadow banking is for the giants in the financial system, who have large amounts of cash to park -- typically money market mutual funds, insurers, pension funds. They make “deposits” and “earn” interest through a process that involves something called a repurchase (repo) agreement.

Here's an example of how that works.

A pension fund spends $100 million to "purchase" AAA asset-backed securities from JPMorgan. As part of the deal, JPMorgan agrees to buy back these securities, after a short period of time -- overnight, or maybe a week or two. The pension fund will receive a small amount of interest (a fraction of 1%, as the lending is so short term). If JPMorgan goes insolvent, the pension fund holds those securities as collateral. They can be sold and (theoretically) the pension fund recovers all its money.

Now consider what happens with retail banking with a $100 deposit if the bank becomes insolvent. The FDIC makes the investor whole, paying the $100. Similarly, the pension fund in our example really wants its $100 million returned and doesn't want to deal with those collateral securities, which may not really fetch $100 million on the open market if they happen to be complex products, especially in times of stress.

So what happens in the repo market during a "bank run"? Nervous depositors -- like this pension fund -- demand greater and greater haircuts on securities they “purchase.” In other words, instead of “depositing” $100 million and accepting say $102 million of securities, they may demand much more collateral: $110 million, $120 million. Haircuts on asset-backed securities may go from zero to 40 percent (as they did in the crisis). This has the effect of sucking 40 percent of that $100 million out of the shadow banking market.

Spread this effect around, and the impact is similar to that of a bank run.


Here’s a big problem, for those who see insuring shadow banking "deposits" as the obvious solution to bank runs: This kind of banking has a wrinkle that's not found with its retail counterpart. In the shadow system, to guarantee a depositor’s $100 million, you essentially would have to say, “Whatever the actual value of that security you bought in a repo agreement, we’ll buy it back for $100 million.”

Think about this. If you deposit $100 in a commercial bank, the FDIC says you’ll get that $100 back -- which seems fair; you have deposited a fiat currency, and you receive the same amount of that fungible currency in return. But this differs hugely from what the shadow banking system would be guaranteeing: that you would be made whole no matter what the true value of the security that you hold as collateral.

Why is this problematic (other than for the obvious reason that the security, especially if thinly traded and "marked to model," could be mispriced -- and that this tendency to mispricing will be exacerbated because of the very existence of the insurance)?


Well, significant differences exist between retail and shadow banking systems.

"Deposit insurance" for commercial banking means: You're insuring that a depositor of money (common currency) will receive that money back. The bank involved is usually not too risk-loving, not too large, not too interconnected, and not too complex -- plus its commercial banking activities are regulated.

"Deposit insurance" for shadow banking means: You're insuring that a depositor of money (common currency) will receive that money back. The bank involved is usually risk-loving (often an investment bank), large, highly interconnected and complex -- plus its shadow banking activities are unregulated.

Being large and highly interconnected implies that when a bank in the shadow system gets in trouble, others will soon be at risk and the amount of "deposit insurance" ultimately needed may be very high (and the FDIC model won't work, where a team of examiners takes over the bank on Friday and sorts out things so the institution can re-open on Monday -- Lehman, which was enmeshed in the shadow banking system, is still painfully crawling through bankruptcy, almost three years later, even spawning its own periodical: Lehman Brothers Bankruptcy News).


Enormous problems arise when it comes to how securities will be chosen to be insured in the shadow banking system. It's comparatively easy in retail banking. The FDIC insures dollar claims. Dollar claims are in money, or fungible currency.

But in shadow banking, how will securities be selected that will qualify as "information-insensitive" collateral worthy of insuring? Will government regulators be involved in picking and/or rating them? If so, why does anyone think our regulators have the expertise to assess asset-backed securities (one form of information-insensitive debt prevalent in shadow banking) that S&P and Moody's failed miserably to understand properly during the financial crisis?

Who determines how much of this insured information-insensitive debt is appropriate? Who pays for this "insurance" and how? And, if the debt is insured to market value, that will pervert the price at which it trades (Q: What would you pay for a security that is insured for however much you pay for it? A: Potentially, the sky’s the limit.).

And if the debt is insured to market value minus a haircut, who sets the haircut? How is the haircut adjusted if that debt class grows riskier? And, even with a haircut, insurance will tend to push the price higher as traders discover ways to game the system (Here's a scenario: X buys Security C for $100, its true price. Security C, which is classified as "information-insensitive" debt, is insured up to 90 percent of its market value. X sells Security A to Y for $200, who later sells it back to X for $210. Y makes $10 and X now possesses a security that's insured to $189 -- a great game for everyone but the insurer of the debt.)

Also what precautions will be taken to ensure that financial institutions don't start smuggling in junk disguised as quality securities, trying to get them classified as "information-insensitive debt" -- the designation of which will immediately boost the value of the assets?

Next: Is “sensitivity to information” really the way investors analyze debt?

The Theory of Information-Insensitive Debt Prompts Some Head-Scratching Questions

Here's Part 3 on the magic pigs of high finance, information-insensitive debt (everyone still awake?). Last time we looked at the concept using a common-sense definition of the term. Now let's try to figure out where the theory is unsatisfying on a more granular level, by using Gorton’s own words.

First, to show us what qualifies as information-insensitive debt, he offers examples: high-grade corporate debt, government bonds (presumably U.S. Treasuries, and not Greek 10-year bonds), and AAA rated asset-backed securities.

In different places, he characterizes such debt as (the bold is mine):

[Debt that] "is very liquid because its value rarely changes and so it can be traded without fear that some people have secret information about the value of the debt. If speculators can learn information that is private (only they know it), then they can take advantage of the less informed in trade. This is not a problem if the value of the security is not sensitive to such information."
Also (page 7 of the same document, Slapped In the Face by the Invisible Hand):

"Bank debt is designed to be informationally-insensitive, that is, these bonds are not subject to adverse selection when traded because it is not profitable to produce private information to speculate in these bonds."
These definitions sound impressive, in that arid academic way, but what do they mean when applied to real debt in the wild? For example, the first one doesn't really make sense. He's saying that speculators can't take advantage of the less informed while trading information-insensitive debt, even after learning private information, because "the value of the security is not sensitive to such information."


What debt could Gorton possibly be thinking of here? Does he really believe that even Treasuries are immune to being profited upon, by someone who possesses private information? If I wiretap the Federal Reserve Board meeting, and learn the Fed is about to announce an operation to purchase $800 billion of Treasuries, he doesn't think that gives me an advantage trading in this market? (Note: the second definition does add "it is not profitable" to produce private information, but this opens a new can of worms, which we’ll soon see.)

Also, U.S. Treasuries are very liquid, but it’s not true that their value rarely changes -- their value changes constantly. Now, do the bonds trade without fear that some people possess secret information about that value? For the most part, yes -- but there may also be certain junk bonds that trade without fear that some people have secret information about them. If so, could these junk bonds qualify?

And what if the junk bonds are "information insensitive" for six years, then the company reveals itself to be tottering near bankruptcy and their price becomes volatile? Do they suddenly become information sensitive, or were they always information sensitive but only seemed information insensitive?

In other words, is this quality of being “information insensitive” only ascertained after empirical evidence of how the security actually behaves? Or is a security considered information insensitive only if we can’t imagine a situation in which someone could profitably produce private information to speculate in the debt? But, honestly, no security exists for which that’s an inherent quality, as the thought experiment for Treasuries shows.


And "it is not profitable to produce private information" raises many fresh questions. What's profitable for a trader to do at any given moment depends on many variables that seem as though they should have little to do with information sensitivity.

A trade may be profitable simply because I can lay my hands on large-enough blocks of securities to make chasing a minuscule gain on each one worthwhile. Or, a narrower trading spread may allow me to turn a profit more easily. (Of course more-liquid securities tend to trade with narrower spreads, which leads to a Gortonian paradox, as being liquid is supposed to be a sign of information-insensitivity.) Profitability also hinges on what I pay my workforce -- so does a security become information sensitive simply because I’ve got six traders in Bangladesh who work at one-sixth the salary of their U.S. counterparts? Also how does "private information" factor in? What if it's profitable to ransack Company X's Dumpster for trading information. Does that make its debt information sensitive until the Dumpster is relocated to a more secure place?

Some of the above may sound a bit picayune. But here are the takeaway points: (1) If so many questions can be posed, doesn’t information-insensitive debt sound like a theory that presents a false dichotomy at best? (2) There are so many trades, and so many price movements on securities (especially liquid ones), how do you sort out evidence that proves a security is information insensitive, instead of the opposite?

Next: The troublesome analogy that Gary Gorton’s theory leads to.

Information-Insensitive Debt: An Unnatural Concept, For Starters

Now for Part 2 on Gary Gorton’s theory of "information-insensitive debt" in which we continue to study the question, "Is it a bad thing or is it a really bad thing?" :)

One big problem: the concept happens to be quite unnatural.

Fiat currency is probably the best example of information-insensitive debt, but it's essentially a trivial, artificial case. Retail banking deposits also qualify as a good example, but they're something different: a special case. Exactly how they're special is important to understand.


Gorton likes to illustrate the information insensitivity of retail banking deposits by using an example involving a check. Let's say I write a check for a $14 haircut. That piece of paper isn't worth $13.89 or $14.05 to my barber. It's worth exactly $14.

Likewise, if I go directly to my bank instead to withdraw that $14, I can be sure of getting the full amount, even if my bank is Lehman Brothers Savings Inc. and everyone's glumly packing their desk contents into boxes when I arrive. The FDIC insures my deposits up to $250,000. I can breathe easily.

So it doesn't behoove me, or anyone I trade with, to spend time investigating the financial soundness of my bank. No matter what terrible information surfaces about that bank, my deposits are covered.

See a problem already? The debt isn't naturally insensitive to information. It achieves this property by being insured. But the value of anything -- your collection of Pokemon cards or seashells -- can become information insensitive if insured. So, becoming information insensitive this way feels like cheating a bit.

That leaves the tantalizing question: which debt is naturally information insensitive?

None of it, really. On its face, the phrase is oxymoronic, like “jumbo shrimp.” (Note: Gorton parses the term in a special way, which we'll look at later.)


Pretty much all debt in its natural state is information sensitive. Markets trade on this information. Some is public. Some is private (e.g., a stock price spikes right before a merger announcement, as the news leaks out). Much information arguably occupies a gray area between public and private. Is private analysis of public data showing that a bond is undervalued private or public information?

Even fear and wild speculation is information of a sort. Say there's a rumor that a neutron bomb will be detonated in Microsoft's main cafeteria tomorrow, based on absolutely nothing. If enough stupid investors believe it (ever hear the phrase "dumb money"?), they may sell their bond holdings in the software giant. Information about this crazy rumor will prompt a smart trader to jump in, scoop up Microsoft debt, and score a neat profit when the price rebounds.

A smart theory would posit that just about all debt is information sensitive. The theory might make an argument that there are varying degrees of sensitivity, and that a particular instance of debt lies on a continuum between very information sensitive and not-that-information sensitive. Okay, fine -- that would at least be nuanced and cautious. But instead, in Gorton's world, we get debt that is either "information insensitive" or "information sensitive" -- and of course debt that lurches from the former to the latter during a financial panic, as if undergoing a change of phase, like ice to water.


Because there’s a shadow banking system in the U.S. that’s larger than the retail banking system. It’s where the financial crisis began in 2008.

Information-insensitive debt plays a key role in shadow banking’s repo market, according to Gorton (later, we’ll look at how repo works). Asset-backed securities, for example, are posted as collateral against repo borrowings. During the financial crisis, the securities suffered huge haircuts once they became "information sensitive" (or once investors discovered they more closely resembled magic pigs than Treasuries). At the same time, Gorton notes, other kinds of debt suffered very minor haircuts.

So here’s something to ponder: If we must have "information-insensitive" debt in our financial system, shouldn't we look to these other types for what it should look like, and not to securitizations that are opaque and become thinly traded with alarming suddenness?

Next: Gorton’s own definition of information-insensitive debt comes up short.