credit

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Climate change denialists like to cite Danish scientist Henrik Svensmark's theory that global warming is caused by sunspots in excusing the ongoing de-terraforming of the Earth (Svensmark's work was the basis for a film called "The Great Global Warming Swindle"); but research from Lancaster University undermines Svensmark's conclusions.

The idea is that variations in solar activity affect cosmic ray intensity.
But Lancaster University scientists found there has been no significant link between them in the last 20 years.
Presenting their findings in the Institute of Physics journal, Environmental Research Letters, the UK team explain that they used three different ways to search for a correlation, and found virtually none.
This is the latest piece of evidence which at the very least puts the cosmic ray theory, developed by Danish scientist Henrik Svensmark at the Danish National Space Center (DNSC), under very heavy pressure.

Link (via Futurismic)

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Filed under: Teas, Business, Asia, Trends, On the Blogs

There is a new product out in Japan that I would love to get a hold of. It's an instant, fresh matcha tea, two words that usually aren't paired together when talking about tea, especially the bottled kind. The unique bottle design allows the tea to be both.

The design makes it so that when you twist the air tight cap a portion of matcha tea is released into mineral water. All you have to do is shake it up. Matcha is a traditional Kyoto (Japan) green tea that is very green and is usually the go-to flavoring for anything "green tea". It's made from leaves that have been covered so that it grows more slowly, which makes it a little sweeter.

As a big fan of tea, I would really like to be able to try an instant, fresh matcha tea. Does anyone know if this is available in the US?

[Via Trends in Japan]

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Artist Gerald Scarfe created this chair/sculpture that looks like Chairman Mao (by way of Jabba the Hutt), so you can be cushioned by the gentle curves of the Great Helmsman as you play on your Xbox. Link

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Hip Hop Is Dead - Wikipedia, the free encyclopediaHip Hop Is Dead is a 2006 album by American hip-hop artist Nas that was released on December 19 , 2006 . The LP is Nas’ eighth album of all-original material, and his first album .

Nas Declares ‘Hip Hop Is Dead’The album is titled “Hip-Hop Is Dead, according to a Def Jam representative, who also confirmed the September release to Billboard.com. Nas capped off his roughly 15-minute set .

[link][more] Internet Game That Allows You To Be Crazy Like Heather Mills

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Team Dynamics RacingWelcome to TeamDynamicsRacing.com

Pacific Rim Mobile Technologies,PRMT,WCDMA, Air Protocol Analyzer,3G .Pacific Rim Mobile Technologies (PRMT)- Pioneering 3G testing solutions. Our 3G Air Protocol Analyzer range of products provides the only solution for capturing the wireless .

Asustek Computers has gone ahead and broke the rules with the Eee PC, a small laptop with a five-inch screen and free open-source software. (Jan. 10) Tech Test: Eee Laptop PC Shreds the Rules

German astronaut Hans Schlegel floated out of the international space station for his first spacewalk on Wednesday, two days after an illness forced the shuttle Atlantis crew member to skip an outing to install a new European lab. (Feb. 13) Raw Video: Sick Astronaut Spacewalks

Rene Ayangma, a 20-year-old star athlete and full-time university student who was studying to become a doctor, died suddenly while training for a boxing match at a Prince Edward Island gym Tuesday. He was the second young athlete to die in Canada this week. On Monday, Windsor OHL hockey player Mickey Renaud, 19, collapsed and died at his home. Ayangma “had just started (mixed martial arts’) ultimate fighting and he was being trained to go in matches across Canada,” said friend Kayla Arsenault, describing Ayangma as a dedicated athlete who loved all sports and always won his matches. She said he had never taken drugs or steroids and rarely ever drank because “he didn’t have time with all his studying” to become a doctor. The province’s chief coroner is investigating and an autopsy was scheduled for yesterday. Mixed martial arts: 20-year-old P.E.I. athlete dies while training

It’s hardly surprising Timothy Strickland’s tenure with the Alouettes is over after six seasons. Nonetheless, the veteran strong-side linebacker is upset the organization kept him waiting this long before deciding his future.

Strickland cut, rips into Popp

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Filed under: Vegetables, Television/Film, On the Blogs

I am going to have "butternut reduction" stuck in my head all day. I don't want to be singing alone, so I had to share this video with all of you. It's called "Akon Calls T-Pain" and it's brought to you by Super Deluxe.

Anyone want some lime on a steak soaked in wine?

[via Gut Check]

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James Leatham says:

Howdy!
Remember me?
The Apple //e computer animation . The film described in the Flickr posts of CineMagic Magazine has been 'special editioned' and posted in its entirety at Google Video.
That's me near the end as a government official.

Link

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One of the most complete dinosaur mummies ever found is revealing secrets locked away for millions of years, bringing researchers as close as they will ever get to touching a live dino. (Dec. 7) Mummified Dinosaur Unlocks Old Secrets

Apple CEO Steve Jobs kicked off the annual MacWorld conference by giving fans the first look at the new MacBook Air, a laptop computer so thin it fits in a manilla envelope. AP correspondent Haven Daley reports from San Francisco. (Jan. 15) Behold the Three Pound Laptop

Camera lens reviews and SLR lens tests - PopPhotoOur database of digital camera reviews includes must-know information on today’s hottest digital SLRs, superzooms, compacts, and SLR lenses. Compare prices, zero in on the specs .

Outdoor Camera Lens Reviews - Digital Camera Lens Reviews .With a variety of camera lenses on the market, how do you choose the one that’s best for your outdoor camera? Check out our camera lens reviews, roundups and articles. From wide .

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Work to begin this week on parking garage (Lancaster Online)Construction of a seven-story parking garage in the first block of South Prince Street will get under way Monday when crews begin

After years of fitful sleep, lab offers help (The Standard-Times)Almost a decade ago, my wife and I (and the Internet) put our brainpower together and determined that I had obstructed sleep apnea. I was overweight and had all the symptoms: wall-shaking snoring, gasping for air, tiredness after a full night’s sleep. No.

Mask MakingWorkshops: Mask Making. Mask making is a workshop that many people like to participate in. It’s fun and yet the process takes on a meditative quality.

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Read full story for latest details.

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CNN's Carl Azuz discusses the finer points of campaign finance and how much one can donate.

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Read full story for latest details.

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Scott says: "This is a great commentary on the 40th anniversary of Kubrick's masterpiece."

The site includes this YouTube clip from an interview with Kubrick.

The famously sniffish Renata Adler got to weigh in during her short-lived reign at the New York Times: "There is one ultimate science-fiction voyage of a man (Keir Dullea) through outer and inner space, through the phases of his own life in time thrown out of phase by some higher intelligence, to his death and rebirth in what looked like an intergalactic embryo... Its real energy seem to derive from that bespectacled prodigy reading comic books around the block. The whole sensibility is intellectual fifties child: chess games, bodybuilding exercises, beds on the spacecraft that look like camp bunks, other beds that look like Egyptian mummies, Richard Strauss music, time games, Strauss waltzes, Howard Johnson's, birthday phone calls... [T]he uncompromising slowness of the movie makes it hard to sit through without talking—and people on all sides when I saw it were talking almost throughout the film. Very annoying. With all its attention to detail—a kind of reveling in its own I.Q.—the movie acknowledged no obligation to validate its conclusion for those, me for example, who are not science-fiction buffs. By the end, three unreconciled plot lines—the slabs, Dullea's aging, the period bedroom—are simply left there like a Rorschach, with murky implications of theology. This is a long step outside the convention, some extra scripts seem required, and the all-purpose answer, 'relativity,' does not really serve unless it can be verbalized."

Link

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Boing Boing Gadgets' Joel Johnson was at McMaster University yesterday where he met a researcher who used a focus ion beam microsocope to carve his school's logo on a human hair. I would love one for my wunderkammer! More info over at BBG. Link

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Michael Moulton, a prof at the University of Florida, is suing a company tha republishes his students' notes from class, because he says that taking notes on his classes and selling them violates his copyright.

Those notes are illegal, Faulkner and Moulton contend, since they are derivative works of the professor's copyrighted lectures.
If successful, the suit (.pdf) could put an end to a lucrative, but ethically murky businesses that have grown up around large universities to profit from students who don't always want to go to the classes they are paying for.
The suit could also have ramifications for more longstanding businesses such as Cliffs Notes, which summarize copyrighted novels.
Faulkner Press publishes two e-textbooks that Moulton wrote and uses in his classes, and sells its own set of class notes for the course.

Link

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Merlin Mann's hilarious steampunk comedy monologue had me laughing hard enough to burst my gauges. Link

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Lost Forums : Discuss Lost EpisodesFeatures clues, spoilers and episode chat.

LOST.COM Forums - Powered by vBulletinThis is a discussion forum powered by vBulletin. To find out about vBulletin, go to http://www.vbulletin.com/ . Welcome to the LOST.COM Forums. If this is your first visit, be .

MyMedia-Forum.comDiscuss and review Lost, Heroes, Galactica, Pushing Daisies, television, movies, books, gaming, sports, and music. Other bulletin board topics: Indiana Jones, Star Trek, Iron Man .

photo courtesy of PR Photos/www.prphotos.com

“At least I showed up to work on our video, unlike Amy Winehouse, who couldn’t even be bothered to do that.”

~Lily Allen slammed Amy Winehouse after they both released collaborations
with producer Mark Ronson. Sounds like someone is a little jealous.

Source Lily Allen Slams Amy Winehouse

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ABU DHABI’S SOROUGH STRIKES ALLIANCE WITH MGM, RUBICON (Asia Pulse via Yahoo!7 Finance)Tourism / leisure Sorouh Real Estate, one of the largest real estate developers listed on the Abu Dhabi Securities Market with a market cap close to AED 24 billion ($6.5 billion USD), today announced it has signed an agreement with Metro-Goldwyn-Mayer Studios Inc. (MGM) and Rubicon, Inc. (Rubicon) to explore the development of entertainment opportunities within Sorouh’s real estate .

I love Shanghai (China Daily)Comfortable black velvet lounge couches, tastefully dim lighting, hip urban graffiti photography on the walls, a sleek bar surface imported from LA, and a selection of individual cocktails, I Love Shanghai is a welcome addition to Bund Life clubbing, and a great spot for a relaxing candle-lit cocktail before heading off to the main event at Attica or Bar Rouge.

A Japanese developer who reaches for the sky (International Herald Tribune)At a time when urban planners in the West frown on hulking high-rises, Minoru Mori presents a new Asian urban sensibility, where architecture reflects soaring economic ambition.

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CNN's Nic Robertson speaks with Iraqi Prime Minister Nuri al-Maliki about the Mehdi Army, Blackwater and other issues.

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CNN's Monita Rajpal speaks with Fawaz Gruosi, the CEO of de Grisogono, about his new mechanical digital timepiece.

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A new breed of business is making both a profit and environmentally friendly goods. CNN's Miles O'Brien reports

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Everything All Of The Time Edition

Todays links of interest:

iTunes Overtakes Wal-Mart in Music Sales
So. This is a good thing in that Apple is substantially less evil and more music-focused than Wal-Mart. It’s still a bad thing in that selling music really isn’t Apple’s primary goal. Also: enjoy it while you can, Apple, because Amazon’s potentially far more awesome music store is just gathering steam.
What happened when I Googled For You
When you set up a website for a fake company as an April Fools joke, one of two things happens: naturally, some people don’t get that it’s a joke and have negative reactions to the idea as it is presented to them. But other people get the joke and want to play along, just to see how far you’re willing to go to perpetuate it. Not that we’re experts or anything, but we don’t think that Manjoo should have admitted anything, certainly not this soon. Or ever.
Radiohead Best Of Details Revealed
In case you were wondering why Radiohead wanted to leave EMI in the first place. Expect slightly different repackagings of what will be essentially the same bunch of the songs every few years between now and the end of time.
McCain Reacts to Heidi Montag Endorsement!
They. Deserve. Each. Other.
New York `Borat’ Lawsuit Is Dismissed
Borat deemed to be "journalism", which makes sense if Lou Dobbs and Bill O’Reilly and Chris Matthews are allowed to claim they’re journalists…
MySpace music venture to take on iTunes
Stop us if you’ve heard this one before.
Critics v bloggers - who’ll win?
Why do we need a winner at all? Remember, it’s all about the either/and.
MLB.TV strikes out with premium online video
Opening day mostly sucked for MLB.TV subscribers. But have no fear, usage will likely drop off dramatically for the next 150 games or so, then pick up again as playoffs approach.

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George Soros, in today's Financial Times, joins a long list of critics of the Paulson financial services reform plan, although even to dignify its bureaucratic legerdemain with the label "reform" is singularly misleading.

Soros departs from his peers in sketching out where he thinks regulators went wrong and offers two specific proposals, I am particularly keen about his idea of moving credit default swaps to an exhange; as I've discussed before, that is one of the cleanest and most sensible options available, and it would be viable in a large, active market like CDS.

From the Financial Times:

The proposal from Hank Paulson, US Treasury secretary, for reorganising government regulation of financial institutions misses the point. We need new thinking, not a reshuffling of regulatory agencies. The Federal Reserve has long had authority to issue rules for the mortgage industry but failed to exercise it. For the past 25 years or so the financial authorities and institutions they regulate have been guided by market fundamentalism: the belief that markets tend towards equilibrium and that deviations from it occur in a random manner. All the innovations – risk management, trading techniques, the alphabet soup of derivatives and synthetic financial instruments – were based on that belief. The innovations remained unregulated because authorities believe markets are self-correcting.

Regulators ought to have known better because it was their intervention that prevented the financial system from unravelling on several occasions. Their success has reinforced the misconception that markets are self-correcting. That in turn allowed a bubble of excessive credit to develop, which extended through the entire financial system. When the subprime mortgage crisis erupted it revealed all the weak points. Authorities, caught unawares, responded to each new disruption only after it occurred. They lacked the ability to foresee them because they were in the thrall of the market fundamentalist fallacy. They need a new paradigm. Market participants cannot base their decisions on knowledge, or what economists call rational expectations. There is a two-way, reflexive interaction between the participants' biased views and misconceptions and the real state of affairs. Instead of random deviations, reflexivity may give rise to initially self-reinforcing but eventually self-defeating boom-bust sequences or bubbles.

Instead of reshuffling regulatory agencies, the authorities ought to prepare for the next shoes to drop. I shall mention only two. There is an esoteric financial instrument called credit default swaps. The notional amount of CDS contracts outstanding is roughly $45,000bn. To put it into perspective, that is about equal to half the total US household wealth and about five times the national debt. The market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfil their obligations. This prospect hangs over the financial markets like a sword of Damocles that is bound to fall, but only after some defaults have occurred. That must have played a role in the Fed's decision not to allow Bear Stearns to fail. One possible solution is to establish a clearing house or exchange with a sound capital structure and strict margin requirements to which all existing and future contracts would have to be submitted. That would do more good in clearing the air than a grand regulatory reorganisation.

The other issue is rising foreclosures. About 40 per cent of the 6m subprime loans outstanding will default in the next two years. The defaults of option-adjustable-rate mortgages and other mortgages subject to rate reset will be of the same order of magnitude but occur over a longer period. With single family home sales running at an annual rate of 600,000, foreclosures will overwhelm the market and cause prices to overshoot on the downside. This will swell the number of homeowners with negative equity who may be tempted to turn in their keys. The fall in house prices will become practically bottomless until the government intervenes. Cutting foreclosures should be a priority but the measures so far are public relations exercises.

The Bush administration has resisted using taxpayers' money because of its market fundamentalist ideology. Apart from a bipartisan fiscal stimulus, it has left the conduct of policy largely to the Fed. Yet taxpayers' money will be needed to reduce foreclosures. Two proposals by Democrats in Congress strike a balance between the right to foreclosure and discouraging the exercise of that right. One would modify the bankruptcy laws allowing judges to modify the terms of mortgages on principal residences. Another would provide Federal Housing Administration guarantees that would enable mortgage holders to be paid off at 85 per cent of the current appraised value. These proposals will not solve the housing crisis, but go to the heart of the issue. They should be given serious consideration.

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How dare the CEO of Wal-Mart, the company that makes such a studied practice of paying workers so badly that taxpayers subsidize its prices, say he and big business should influence health care policy? The US has the most costly healthcare in the world while failing to produce materially better results than countries with varying degrees of so-called socialized medicine. Large corporations are the most powerful buyers in the health care system, yet their efforts to improve delivery and lower costs have been singularly unproductive. So why should a crowd that has consistently failed have any say in reform?

And Wal-Mart promoting this line is particularly heinous. The Bentonville giant is known for keeping workers just below the number of hours to qualify them as full-time, precisely to avoid giving benefits such as health care. Thus if workers are single or married to spouses who similarly lack coverage, the likelihood is high that they will upon occasion turn to emergency rooms for health care, which is an extraordinarily high cost delivery system that comes out of the collective purse.

And listen to this from CEO Lee Scott, quoted in the Financial Times:

I think government is going to be engaged after this election regardless of who wins, and I think business should be more involved in the discussion. I think it has long-term ramifications for our global competitiveness.

Hhhm. Most (read all) of our advanced economy trade partners have more generous public payment for health care. They also have lower current account deficits than we do. While correlation is not causation, tell me why I should believe the reverse is true, that a single payer system would be bad for competitiveness? There seems to be a dearth of evidence to support this view.

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Several alert readers caught the Financial Times story, "Wall St banks seek to ring-fence bad assets," and I held off from posting on the assumption it would merit coverage in the Wall Street Journal or the New York Times. Not so.

The Financial Times article says that investment banks are seeking to put dodgy assets in a separate subsidiary, with the hopes of offloading it to ~~over-eager bottom-fishing chumps~~ investors. Or if that doesn't work, to taxpayers:

According to people familiar with the matter, banks are discussing a joint proposal to regulators to set up a fund, which would absorb US subprime assets and other troubled securities, as a way of restoring confidence in the banking system and ending the pressure to recognise mark-to-market losses.

I don't give this proposal any hope of seeing the light of day, at least in this form, although a huge number of permutations later, something that might have germinated with this idea could come to life.

The biggest obstacle is the idea that this facility would be organized by the industry and all would participate on the same terms. As we found with the stillborn SIV rescue plan and the "bail out the monolines" firedrill, getting consensus among a large number of disparate players is well-nigh impossible.

This effort is likely to founder over the same issue that killed the MLEC, the hoped-for SIV garbage dump, which is how to value the assets going into the new vehicle. Prices need to be set for the instruments that will be moved out of a bank; this stuff by definition doesn't trade so how to price it is legitimately subject to debate. But that's assuming it even got that far. For participants to have a down-and-dirty discussion, they'd wind up shedding light, if in a general way, on their exposures and how much they had marked them down. I doubt that the involved parties would risk revealing that much.

The FT points to problems along these lines:

However, bankers say the prospect of a co-ordinated solution remain remote because of the difficulties in getting banks to agree on the terms and the scope of a common fund.

John Thain had said of the vastly simpler (and still unsuccessful) mononline effort that it would not work on a group basis, but institution by institution. So let's consider that case:

Under UBS's scheme, the bad assets will remain on the bank's balance sheet because the Swiss bank will initially retain full ownership of the new fund. However, UBS is expected to sell all or part of it to outside investors, or to spin it off, according to people familiar with its plan.

Um, this works only if the price to which you have marked the assets is lower than a third party is willing to pay. Otherwise, you wind up worse off. Simple example: you've written this garbage barge down to 25 cents on the dollar, convinced that that it extraordinarily cheap. But then you try getting bids, and all you get is 20 cents on the dollar, You'd have to take another 5 cents on the dollar loss to sell it, which is another hit to equity, which is precisely what you were trying to avoid.

Or just as bad, word gets out that you shopped your little nuclear waste subsidiary, but didn't like the offers. Now guess what that will do to your stock price, your counterparties' confidence, and CDS prices on your debt. You were better off having everyone believe, or pretend they believed, that your write-offs put all your problems behind you.

So this does not appear a bona fide notion to unload this stuff onto third parties, despite chatter of hedge funds and distressed investors out buying MBS and mortgages (that stuff is a walk in the park compared the complexity of some of these structures). And the volume that would be on offer is certain to swamp demand.

This effort, then, despite the brave talk (and perhaps a bit of self-delusion), is preparation to somehow dump these toxic assets on the laps of the Powers That Be. But the Resolution Trust Corporation created good banks and bad banks out of failed banks. It's an amazing bit if hubris if the industry thinks it can shove these assets onto taxpayers and carry on unimpeded.

There is also a lack of historical memory. The RTC was extremely controversial; Congress was not happy about funding its sizeable working capital requirements. And in contrast with 1990-1991, there are calls for relief from a lot more quarters. Wall Street may find it tougher than it thought to get its hoped-for rescue operation.

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Louis Uchitelle, in "Unsold Homes Tie Down Would-Be Transplants," points out that being unable to sell a house can keep people from taking jobs that require them to move. That problem is obviously now more acute given the moribund state of the housing market in many parts of the county. However, Uchitelle implies that the negative-labor-market impact of home ownership is strictly the result of a lousy real estate market.

That isn't accurate. As we pointed a year ago in "Is Owning Your House Bad for You?" we took as a point of departure an article by Tim Harford in Slate:

Even when we look only at internal migration, the barriers are formidable. Wherever people seem particularly keen to own their own homes—as in the United Kingdom, Spain, and some U.S. states—employment suffers as a result. English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment. More conventional factors such as generous welfare benefits or high levels of unionization don't explain unemployment nearly as well as the tendency to own houses. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do.

Recent research in the Economic Journal suggests that people who own their own homes form denser local networks, which help unearth local jobs. Still, the jobs tend to be less well-matched and commuting distances are longer. So, professor Oswald is right to argue that we should do everything possible to free up impediments to renting or to selling a house and buying a new one. It would be handy if we were allowed to build houses near Manhattan, too.

Even if we did all this, economists Ed Glaeser and Joe Gyourko argue that one serious barrier remains: Houses do not walk. No matter how bad things get in Detroit or Treorchy, the houses will still be there, and if they are cheap enough, people will want to live in them. The likely result is a gloomy sort of segregation: Those who feel that they can find a good job in the boom cities will move there and pay the higher rents. Those who are less confident of that would rather have no job in a cheap house than no job in an expensive house. Detroit will have residents for a long time to come.

My comments:

It's an interesting thesis, and likely some truth in it too, but there is one huge hole: the data isn't adjusted for age. Older people are more likely to own homes. And unemployed people over 40 (in some fields, over 35) find it much harder to find a job. It's age discrimination, in part, but also the reality that most organizations are pyramid shaped. There are more jobs at the bottom and the middle. Employers don't like hiring people who are overqualified (the subordinate might know more than the boss, or might get bored and quit). And for corporate and professional roles, employers also vastly prefer poaching someone from another company to hiring someone who is out of work, even if through no fault of their own.

But the demands of the workplace are at odds with home ownership and rootedness. I know of someone over 40 who did lose his job. His old employer was in Boston. His new employer is in exurban Philadelphia. He doesn't want to take his kids out of school, so he has a brutal commute. How many people are willing to do that?

The demands of labor mobility are increasingly in conflict with community life of any form. A McKinsey partner requisitioned a study by Yankelovich about 8 years ago, which reported (among other things) that college graduates would work for 11 employers before they retired. More recently, the Bureau of Labor Statistics predicts that current college graduates will have 13 jobs by the time they are 38 (note it is not clear whether this includes promotions). That kind of instability makes home ownership a risky move. It's not just the possible need to relocate, but the uncertainty over income that would get in the way.
.

Yet Uchitelle fails to acknowledge that home ownership has been discussed in the economic literature and found to inhibit labor mobility even in good times. Guess we can't question that American dream.

From the New York Times:

The rapid decline in housing prices is distorting the normal workings of the American labor market. Mobility opens up job opportunities, allowing workers to go where they are most needed. When housing is not an obstacle, more than five million men and women, nearly 4 percent of the nation's work force, move annually from one place to another — to a new job after a layoff, or to higher-paying work, or to the next rung in a career, often the goal of a corporate transfer. Or people seek, as in Dr. Morgan's case, an escape from harsh northern winters.

Now that mobility is increasingly restricted. Unable to sell their homes easily and move on, tens of thousands of people ... are making the labor force less flexible just as a weakening economy puts pressure on workers to move to wherever companies are still hiring....

With homes changing hands easily in a booming market, interstate migration reached 2.2 million people in 2006, excluding the effects of Hurricane Katrina. As the economy and home prices began to unravel in 2007, however, interstate migration plunged to 1.6 million people....Worker mobility — or rather immobility — is making a big contribution to this decline....

Corporate transfers contribute significantly to worker mobility, and employers often cover at least some of the cost of selling a home in the old location and buying one in the new. That practice can backfire, says Richard Shaw, a vice president of Applied Industrial Technologies....

Out of 3,500 employees in the United States, Applied normally transfers 25 to 30 each year from one center to another... Despite the opportunity, transfers have fallen by half, Mr. Shaw said. That is mainly because transferred employees too often find themselves owning two homes — one in the old location and one in the new — and paying two mortgages.

Applied tries to minimize the problem by paying one of the two mortgages for up to six months, the expectation being that the old home will sell by then. Increasingly, that does not happen...

He tells of one transferred executive "who ended up owning two homes for more than six months and, finding himself paying two mortgages, opted to move back to his original city, surrendering his new house to the bank."

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In an amusing bit of irony, Standard & Poors chief, in an interview, acknowledged that the bond markets are anticipating that corporate defaults will run at twice the rate foreseen by the rating agencies.

Recall that roughly half the big business debt outstanding is junk, and nearly all of that was issued in connection with LBOs.

The credit markets for some time have operated on the assumption that the financial system is under severe stress (which is confirmed almost daily in the press) and recession, likely a deep one, is in the offing.

Even if that view seems a bit dour, would you side with the rating agencies given their track record?

From Bloomberg:

Investors are pricing in defaults on corporate bonds twice as high as projected by rating companies, said Deven Sharma, Standard & Poor's president.

The rating assessor said on March 31 the default rate for non-investment grade U.S. corporate bonds may rise to as much as 5.7 percent and at least 3.4 percent by February next year, as companies are hurt by rising funding costs and a slowing economy. The rate was 1.09 percent in January.

``The markets are pricing in a default rate of nine or 10 percent for high-yield corporate debt, which is a lot higher than we're forecasting,'' Sharma said in an interview with Bloomberg TV. ``There is a recession and the recovery will be somewhat slower than we anticipated.''

The number of companies at risk of having their credit ratings downgraded rose by three to a record 703 in March amid a slowdown in housing and consumer spending that has pushed the economy closer to recession, S&P said on April 1. The number of potential downgrades is 90 more than reported a year ago and 68 more than the 2007 average.

Almost 76 percent of negative ratings changes have been among high-yield, high-risk companies, the rating assessor said...

``There is a fundamental change of behavior by consumers,'' he said. ``For many years, going back to the Great Depression, consumers always first paid their mortgage and if they default, they would default on their credit cards. For the first time, in 2005, we started to see the line being crossed, where consumers are willing to walk away from their mortgages.''

New home foreclosures in the U.S. rose to a record high in the fourth quarter as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said in a March 6 report. Late payments, or delinquencies, were the highest in 23 years, the bankers' group said.

Um, doesn't it occur to her that the change in consumer behavior might have been triggered by the new bankruptcy law? If you are above median income in your state (meaning ineligible for Chapter 7), it is easier to walk from your mortgage than your credit card debt. Another example of unintended consequences...

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The 1990-1991 recession hit New York City particularly hard, with deep cuts in Wall Street jobs. The city has become even more dependent on financial services, so a similar or deeper contraction in percentage terms would have an even greater impact. We're getting a first whiff via the fall-off in apartment closings.

One assumption have been that foreign buyers would hold up the market. However, as non-residents, they would add much less to the tax base, and if government services are cut back, Manhattan may not look like such a desirable place to live.

From Bloomberg:

Manhattan apartment sales plunged the most in 18 years in the first quarter as buyers faced the prospect of a recession and job cuts at Wall Street securities firms.

Sales fell 34 percent from a year earlier and inventory rose 4.6 percent to 6,194 units, New York-based real estate appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said in a report today. The median price of a Manhattan co-operative apartment or condominium increased 13.2 percent to a record $945,000.

``If it continues along this pattern, we're in a period of transition to a weaker market,'' Miller Samuel President Jonathan Miller said in an interview. ``You typically see a slowdown in sales activity precede a slowdown in pricing.''

Financial companies have cut at least 34,000 jobs in the past nine months as losses and writedowns related to mortgage- backed securities climbed to at least $230 billion. Wall Street drives Manhattan real estate, with the median apartment price roughly tracking bonuses paid by investment banks since 1997, Miller said.

``There are a lot of buyers out there,'' said Prudential Douglas Elliman Chief Executive Officer Dottie Herman.

``It's not that they're not looking, but there is no sense of urgency,'' she said. ``If you continue to see inventory rise, that would be a sign that you are going to see a price dip.''

Until now, Manhattan has avoided the national housing slump. Last year, the U.S. saw the first drop in existing home prices since the Great Depression, while Manhattan apartment prices rose 3.6 percent, according to Miller Samuel.

Gains continued in the first quarter, according to today's broker reports. The Corcoran Group said the median for condos and co-ops rose 9 percent to $917,000. Terra Holdings LLC, which owns brokers Brown Harris Stevens and Halstead Property LLC, said the median climbed 13 percent to $855,000. The numbers vary in part because each broker includes some of its own sales that have yet to show up in the city's public records database.

About 30 percent of all first-quarter closings were for apartments in new developments that went into contract before turmoil hit the credit market, said Gregory Heym, chief economist for Terra Holdings.

``They are pre-credit crisis, pre-Wall Street worries, pre- new mortgage standards,'' he said in an interview. ``You see a delay in impact in these numbers.''....

Apartments are already taking longer to sell. The average time spent on the market rose 12 percent to 146 days, according to Miller Samuel....

The average price per square foot of a Manhattan co-op rose 16 percent to $1,128 for the quarter, Miller said. For condos, the price per square foot gained 21 percent to $1,416. Co-ops make up more than two-thirds of Manhattan apartments. Residents of them buy shares in a corporation that owns the building, rather than having a deed to the property itself.

On the East Side, the greatest price appreciation was in apartments with at least four bedrooms, with the average rising 53 percent to $13.6 million, according to Brown Harris Stevens. On the West Side, three-bedroom apartments gained 90 percent to an average of just under $5 million.

Prices on Fifth Avenue jumped 63 percent in the quarter to a median of $6.5 million, and on Park Avenue the median jumped 23 percent to $3.3 million. The median price of lofts fell 12 percent to almost $1.45 million, Corcoran said.

The luxury market also saw big increases, largely due to multimillion dollar condominium sales at the recently converted Plaza, and at architect Robert A.M. Stern's 15 Central Park West.

The median price of a luxury apartment rose 46 percent to almost $5 million, Miller Samuel said. Corcoran's estimate was an increase of 18 percent to $4.4 million. Both companies consider apartments of more than $2.8 million as luxury.

``There is no question 2007 was the record year for real estate in New York City,'' Liebman said. ``I don't think any of us will be surprised if 2008 doesn't hold up in comparison.''

baby

Bloomberg tells us that the IMF has lowered its global growth outlook due to the severity of the financial crisis, yet for those of us living in advanced economies, the discounted level of 3.7% still sounds pretty robust. I did go to the IMF website to see how the forecasts changed for the first versus the third world, but found no link (the latest news releases is April 1). I assume that will be remedied shortly.

From Bloomberg:

The International Monetary Fund cut its forecast for global growth this year, citing the worst financial crisis in the U.S. since the 1930s Great Depression.

The world economy will expand 3.7 percent in 2008, according to a document titled ``IMF Background Paper on the Update of the Global and Regional Outlook'' obtained by Bloomberg News at a meeting of Southeast Asian deputy finance ministers and central bank officials in Da Nang, Vietnam. In January the fund projected world growth of 4.1 percent.

``The financial shock that originated in the U.S. subprime mortgage market in August 2007 has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system,'' the statement said.

``The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression,'' it said.

The IMF gave a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009, a pace the fund described as equivalent to a global recession.

``The greatest risk comes from the still unfolding events in financial markets, particularly the potential that big losses related to the U.S. subprime mortgage market and others sectors would seriously impair financial system capital and initiate a global de-leveraging that would turn the current credit squeeze into a full-blown credit crunch,'' the statement said.

The IMF lowered its forecast for U.S. economic growth to 0.5 percent this year, according to the document, below a 1.5 percent prediction made in January. The world's biggest economy will expand 0.6 percent in 2009, it said.

The euro region will expand 1.3 percent in 2008, the document said, down from the fund's 1.6 percent projection in January.

Although this is largely anecdotal, a story in today's New York Times on the 45% fall in the Shanghai stock market illustrates how precarious prosperity can be in emerging economies, Keep in mind that the fall was induced primarily by increases in interest rates, rather than a marked slowing of the economy. Nevertheless, short-sighted banking policy virtually guaranteed a stock market bubble, since deposits pay interest at a rate of 1% when inflation is 7-8%. Savers thus need to put their holdings at risk to avoid losing out in real terms.

From the New York Times:

A year ago, investors like Guan Ling were ebullient. Chinese share prices had climbed over 500 percent in the span of two years, setting off a nationwide stock buying frenzy....

That was last year. The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.

"These days my family quarrels a lot," says Zhang Liying, 55, a retired hotel waitress who with her husband invested all their savings in the stock market. "My husband asked me to sell; I wanted to hold for a while. Now my husband condemns me as so stupid that we lost our family's savings."

Si Dansu, 68, and a retired engineer, is even more distraught, but she blames the government.

"I devoted my whole life to the country. I went to the countryside after graduation, and worked as an engineer in a Shanghai factory until retirement. I invested almost all my savings and retirement fund in the market 10 years ago. But now I'm totally penniless. All my stocks went down."

Other parts of Asia are as bad, or worse. In India, stock prices have plunged 31 percent in Mumbai; they are off 31 percent in Japan and a whopping 53 percent in Vietnam, another booming economy. Angry investors have burned a securities regulator in effigy in Mumbai, and some are in tears in Ho Chi Minh City, Vietnam.

"Some of them have cried," says Nguyen Quang Tri, 74, a retired cement company manager who was visiting a Ho Chi Minh City brokerage house this week. "I have my own equity, but most of the people here borrowed money from the bank."....

Few experts say the stock plunge is a major threat to growth in the real economy here. But there are worries that a prolonged downturn could reverberate through China's financial markets — especially since a large number of corporations had aggressively shifted money, sometimes secretly, to play the market.

By some estimates, 15 to 20 percent of the profits reported last year by publicly listed companies in Shanghai that are not involved in banking or finance (which usually invest in stocks) came from stock trading gains.

Companies with primary businesses like selling electricity, or even sports jackets, were moonlighting by trading stocks, hoping to bolster their earnings....

But the big companies were following the small investor. JPMorgan estimates that 150 million people in China were invested in the Chinese stock market as of the end of last year. That may still be a small slice of China's 1.3 billion people, but it is a huge new constituency, and it has led to the birth of both a new source of potential popular discontent and a new lifestyle: the diehard investor...

Shopkeepers, real estate brokers, even maids and watermelon hawkers are said to have become day traders.

A new version of the national anthem made its way around the country last year, beginning, "Arise! Ye who haven't opened an account! Pour your gold and silver into the hot market!"

The anthem went on: "The Chinese nation faces its craziest time. The passionate roar of our peoples will be heard!"...

In some brokerage houses, entire floors are divided into small and midsize rooms that investors camp out in, from opening to closing bell, with their lunch bags, knitting gear, playing cards and newspapers to help them feel at home.

Only now, many investors cannot bear to look at their screens.

"I'm getting out of the game," said Yuan Yuan, 23, a researcher at a fund company in Shenzhen who also invests on his own. "The game is over. Big institutions pulled out first, only leaving the small investors."

In China, the government fears that angry investors can be a social problem. And so while the state-run media report on the ups and downs of the market, and even warn investors of the risks and pitfalls of investing, the press does not usually report on investors' anger....

"It's a deformed market, an unhealthy market," Mr. Guan says. "We've always had long bear markets and short bull markets."

"Look," he said, "it took two years to go from 1,000 to 6,000 but two months to go from 6,000 to 3,500."

baby

According to the New York Times, Congress is suddenly keen to get a homeowner bailout program in place, and made a rare bipartisan show of a joint news conference, with the hope of tabling the bill as soon as noon Wednesday.

Key elements:

At a minimum, the bipartisan package was expected to include up to $200 million to expand counseling programs for homeowners at risk of foreclosure, $10 billion in tax-exempt bonds for local housing authorities to refinance subprime loans, $4 billion in grants for local governments to buy foreclosed properties and a $15,000 tax credit for purchasers of foreclosed homes or newly built homes that have been sitting vacant.....

Both the Senate Banking Committee and the House Financial Services Committee have been working on bills that would allow the Federal Housing Administration to insure $300 billion to $400 billion in additional mortgages, with an upfront cost of $10 billion.

As the Times notes, despite the big numbers being thrown about, it isn't at all clear how many will be helped. First, any plan would have tough approval requirements and require borrowers to demonstrate the ability to repay. Second, the servicers would have to write down mortgage balances voluntarily and then the loan could be refinanced through the FHA (although the Democrats are trying to revive proposed changes to the bankruptcy laws that would allow judges to write down mortgages to the value of the collateral).

Moreover, even die-hard liberals are voicing reservations:

Critics warn that taxpayers could get stuck with a huge bill if large numbers of borrowers defaulted yet again.

That risk is especially great in places like Las Vegas and Phoenix, where home prices are falling fast, said Dean Baker, the co-director at the Center for Economic Policy Research.

"In the bubble-inflated markets, you still have a long way to go down. That's one of the things that I don't think people have fully appreciated," he said.

What got us in this mess in the first place is that America has the most heavily subsidized housing market in the world. Is more of the same a wise solution?

baby

A Financial Times story reports that the Financial Stability Forum, which is tasked with finding remedies to our credit crisis, is circulating a paper which suggests some radical possible solutions. The fact that these measures are under consideration says that the authorities do not expect a resolution any time soon.

One paragraph caught my eye:

Among the ideas floated was getting a large group of the most important banks simultaneously to disclose their financial positions based on a "common template" including information on the prices attributed to different securities and the methodologies used to derive them.

This would include standardised disclosure of exposures to collateralised debt obligations, residential and commercial mortgage-backed securities, leveraged finance, exposure to off-balance sheet entities and capital and liquidity resources. One party present said there was widespread interest in this idea.

This is a stunning request. The banking authorities don't already posses this information? What were they doing in their regulatory reviews, drinking sherry while listening to PowerPoint presentations? Regulated entities should be reporting on a periodic basis, in formats dictated by the regulators, and that ought to include their pricing methodologies. Otherwise, any data gathering is a garbage-in, garbage-out exercise.

This development confirms my worst suspicions. The regulators weren't merely out-maneuvered by bankers skilled in ~~deception~~ financial wizardry; they enabled it by taking a "see no evil, hear no evil, speak no evil" stance.

The only thing that might make this need defensible is if various national regulators have widely differing frameworks for data compilation, and a one-shot probe is needed to calibrate them. But the FT article did not give that impression. If anything, it implied that the FSF was having to pressure recalcitrant central bankers and financial regulators.

From the Financial Times:

Radical strategies to fight the credit crisis including temporary suspension of capital requirements, taxpayer-funded recapitalisation of banks and outright public purchase of mortgage-backed securities are being actively discussed by governments and central banks.

These were among possible next steps discussed in Rome on Friday at a meeting of the Financial Stability Forum, the body co-ordinating the global response to the market turmoil....

The steps are set out in an options paper prepared for governments, banks and regulators by the FSF, led by Mario Draghi, the governor of the Bank of Italy, a copy of which has been obtained by the Financial Times....

The FSF floated temporarily suspending capital and reporting rules that tie prudential requirements to market values of securities.

Regulators could temporarily change capital rules under Basel II to allow trading assets to be treated as available-for-sale, reducing their impact on capital calculations.

Alternatively, regulators could temporarily relax regulatory capital minimums wholesale, the FSF said. It noted that an alternative approach would be to suspend accounting rules for some assets, but said this could "damage market confidence."

Authorities could organise a consortium of long-term private investors to buy mortgage assets from banks, possibly with state "co-investment" or governments could buy assets outright.....

The FSF raised the possibility that governments might want to "announce a coordinated operation to boost capital simultaneously in a number of institutions" with the help of public funds, to avoid stigma problems.

Central banks could further expand their liquidity support operations, including expanding the eligible collateral and providing emergency liquidity support to troubled institutions.

Many of the FSF's ideas are likely to encounter resistance from governments and central banks, but the fact they are being mooted points to policymakers' concern about the outlook and willingness to explore unorthodox solutions.

baby

Bloomberg reports that stock hedge funds carried unprecedented levels of cash in the first quarter, which is usually considered to be a highly bullish sign. However, note that their cash levels fell by 28% from January to February due to deleveraging (which may not have been entirely voluntary given new tough-mindedness on behalf of prime brokers).

Some observers anticipate that there will be a large number of hedge fund closures this year, so high cash levels in hedge funds may not be a conclusive a bull market indicator as high cash balances in more conservatively managed mutual funds is.

From Bloomberg:

Stock hedge funds, unsure about which direction the markets would move, sat on a record amount of cash as the industry headed for its biggest quarterly decline in almost six years.

Equity managers, who oversee about one-third of the $1.9 trillion in hedge funds, held an estimated $90 billion of cash in January, a hoard that dropped to $64.8 billion the next month, according to data compiled by Merrill Lynch & Co. analyst Mary Ann Bartels. The last time equity funds held cash outside of their trading accounts was in 2004, according to Merrill. At that time, market direction was also unclear, with the Standard & Poor's 500 Index up less than 2 percent through October.

``The data indicates to us the equity hedge funds have de- leveraged and have record cash balances,'' she wrote in a report last week. ``Margin debt has declined sharply in recent months as investors have grown more cautious on the U.S. equity market.''

Hedge funds dropped an average of 2.83 percent this year through March 28, according to Chicago-based Hedge Fund Research Inc.'s Global Hedge Fund Index, which is updated daily with a two-day delay. If the decline holds, it would be the biggest in a quarter since a 3.85 percent drop in the second quarter of 2002 for HFR's Weighted Composite Index...

``Hedge funds have not covered themselves in any form of glory in this quarter,'' said Paul Ross, chief executive officer of London-based Iveagh Ltd., the investment arm for the Guinness family brewing fortune. ``They've been extremely difficult markets for hedge funds in general.''....

Strategies that should profit as stocks and bonds decline have also been hurt because of short-term rallies as the U.S. Federal Reserve takes steps to restore confidence after the decline in the U.S. subprime-mortgage market....

``Even if the view has been correct and negative, it's been very difficult in these markets to make money because the moves are violent and the rallies sharp,'' said Ross, who invests a large portion of Iveagh's $800 million in assets with hedge funds.

Update 4/2/08. 12:00 AM: A reader e-mailed us:

Corporate buybacks have been the single biggest support to the market for some time now, and they didn't slow in the last quarter of the year, when over $1.1 trillion at an annual rate was plunged into the market by non-financial corporations. In doing that, they bought back 9.6% of their year-end market cap. Over the course of 2007, non-financials spent 150% of their net income on the combination of buybacks and dividends. With those profits falling, with debt on balance sheets rising, and with credit tightening, that is not going to continue. Just look at the financials. TMA's money raising adventure on Monday, the "success" of which gave its stock a nice 20% boost today, took their shares outstanding from 172 million to 4 billion. Them's serious dilution. Lots more of those coming.

And speaking as a hedge fund that's holding a ton of cash, I'm nowhere near the point where I'd deploy it, and in fact when I get close to that point, I strongly suspect that I'm going to be looking at Japan and Thailand and Brazil, and not at the United States.

baby

It's remarkable how otherwise sophisticated individuals want to believe in magic bullets. If they get a horrific illness, surely there must be a treatment somewhere that will restore them to health. Similarly, some investors know how to tease superior returns on a consistent basis out of highly efficient markets.

Now I am willing to accept that markets are not perfectly efficient, that there are individuals who can do very well year in, year out. But they probably are 1/10000th the number of the pretenders to the throne. And it's much easier to be really good if you are obsessive (which usually means anti-social) and manage comparatively small amounts of money. Yet the economics of money management is that profits are a function of the size of the fund. So the industry's return objectives will every and always conflict with superior results.

Michael Gordon, global head of institutional investment at Fidelity, argues in the Financial Times that private equity, more properly called its original name, leveraged buyouts, is a scam that used leverage to produce the illusion of winning performance (a recent post carried a similar argument about hedge funds).

I'll give the LBO crowd some credit it may not deserve. In theory, its business model could work, particularly now that the public market have gotten so short-term oriented as to impede the pursuit of prudent strategies. But the popularity of private equity (or one might say its aggressiveness in launching new funds) guaranteed that the economic benefits its professionals might add would be paid to the seller. Many academic studies have concluded that the big reason most corporate acquisitions fail (the estimates range from 60% to over 75%) is that the the value of any synergies winds up being paid to the sellers, With hypercompetitivenes in LBO land (mid-market deals routinely would attract 40 bids), it's easy to imagine a similar, or even more extreme, process taking place.

From the Financial Times:

So now we know. The boom in private equity, which was promoted as the superior business model, based on patient capital, superior management and an alignment of interests, was nothing more than a trick of financial engineering – and a clumsy one at that. The magic of leverage works both ways, as we are discovering.

Henry Kravis of Kohlberg Kravis Roberts is asking his investors to be patient after a bout of negative returns and writedowns, echoing the cries of Alan Bond and other entrepreneurs of earlier credit cycles. Hamilton James, Blackstone's president, said at the Super Returns private equity conference on February 26: "We're a proxy for the credit markets." David Rubenstein, co-founder of Carlyle Group, recently asked whether "modest return" was a more apt name for private equity. He thinks it's funny. It's not.

As investors are increasingly bruised by the recognition that reality has once again triumphed over hope, the private equity barons are having to confess that the benefits of superior management, alignment of interest and, of course, the superior reward structure counted for very little.

Many of the private equity deals look no different from Yell and other highly leveraged public companies. As Warren Buffett notes, when the tide is going out, we find out who has been swimming without their shorts.

Sometimes a simple observation can prove an important point. In November 2006 Citibank published a research report that highlighted how private equity returns could be achieved by just leveraging basic stock market indices. It is a seminal note. "How do they do that?" asked the report, and then went on to provide the answer.

By leveraging the basic stock market indices by three to one, Citibank pointed out, returns could exceed even the best historical private equity returns. Never mind that as they were spellchecking the final version of the note, leverage on that season's deals was reaching four to one and even five or six to one.

As Citibank pointed out, the private equity barons would always emphasise alpha over beta – their ability to outperform a market rather than merely ride the market wave – but it showed clearly that leveraged beta was where the returns were being generated.

Interestingly, a similar lesson could be being learnt in other asset classes.

Shaken but not stirred, the private equity barons are looking to move on. Dismayed and disillusioned western investors will not play ball. In the leveraged loan markets, assets have been marked down by a fifth, so 80 cents in the dollar is the new par. Thus the financial alchemists have turned to the huge pools of money available in the Middle East and Asia.

Guy Hands of Terra Firma believes they will enable the disintermediation of Wall Street and the City of London. Perhaps, but in what shape and form?

Does he really assume that these new investors will be as naive as many of the investors in some of the five- and six-times-levered private equity deals of the past three years? I would be surprised. Commentators have suggested that many state-backed funds are still in their infancy and thus do not have the experience and organisation to cope with "big debt investments". That gives the private equity guys something of a problem.

Private equity as we have come to know it is all about debt – lock, stock and sinking barrel. There may have been better management and better incentive structures in the deals of recent years. But they really contribute nothing to the overall return when compared with the impact of the leverage in the capital structure.

So let us be candid. The deals of recent years are leveraged buy-outs. Let us give them their proper name. It is a shame that private equity has been degraded by misused financial engineering that was permitted by easy monetary policy and lax credit conditions. Moreover, the fact that these structures generated enormous management fees bears further questioning. These LBO deals and their business models were held up as superior in structure and therefore in worth. Massive fees were thus justified. That the market was happy to pay these for a simple leveraged structure that could have been assembled in a DIY fashion seems remarkable now.

In reality, private equity should not be about debt. Pure, properly capitalised private equity remains a wonderful business model. It should be able to prosper without recourse to cheap and easy finance.

baby

Avinash D. Persaud gave a speech to the Committee of European Securities Regulators (posted at Willem Buiter's blog) that argues that banks' risk models and regulation based on market based pricing were bound to fail. That's a very bold claim, yet Persaud appears to have the goods.

If any of you have worked with models, one of basic yet regularly-ignored rules is to understand and respect their assumptions, because they usually constitute a major limitation on their usefulness (the best remedy is to rely on multiple metrics and tools and apply good old fashioned human judgement, but many people prefer to default to the answer that pops out of a spreadsheeet).

Persaud tells us that an underlying assumption of "market sensitive risk models" is that the user is the only party taking that approach. Now instead of going to Zurich or the Caymans to coin money based on their findings, Harry Markovitz and George Dantzig instead made them public, which should have made them merely interesting. However, the practical implication was that they could be used successfully on a relatively small scale, but once they became common, their success became more and more erratic, as many quants and risk managers have learned to their dismay.

Persaud then launches another fundamental attack. He argues that the logic of regulation is circular. The purpose of regulation is to prevent market seize-ups (actually, I thought it was to prevent institutional collapse and damage to innocent and/or unsophisticated bystanders, but let's go with his interpretation, since many have come to view well functioning markets as automagically producing those other results). But (and here Persaud is not as explicit as he might be) making market sensitive risk tools part of how financial institutions are regulated insures they will be widely, nay almost universally used, guaranteeing their failure. Eeek.

I would be curious to get the reaction of those skilled in the art. I've also included the reference to a paper by Persaud in 2000 which goes into his theory in more depth.

From Persaud:

Sir Alan Greenspan, and others have questioned why risk models, which are at the centre of financial supervision, failed to avoid or mitigate today's financial turmoil. There are two answers to this, one technical and the other philosophical. Neither is complex, but many regulators and central bankers chose to ignore them both.

The technical explanation is that market-sensitive risk models used by thousands of market participants work on the assumption that each user is the only person using them. This was not a bad approximation in 1952, when the intellectual underpinnings of these models were being developed at the Rand Corporation by Harry Markovitz and George Dantzig. This was a time of capital controls between countries, the segmentation of domestic financial markets and to get the historical frame right, it was the time of the Morris Minor with its top speed of 59mph.

In today's flat world, market participants from Argentina to New Zealand have the same data on the risk, returns and correlation of financial instruments and use standard optimization models, which throw up the same portfolios to be favoured and those not to be. Market participants don't stare helplessly at these results. They move into the favoured markets and out of the unfavoured. Enormous cross-border capital flows are unleashed. But under the weight of the herd, favoured instruments cannot remain undervalued, uncorrelated and low risk. They are transformed into the precise opposite.

When a market participant's risk model detects a rise in risk in his portfolio, perhaps because of some random rise in volatility, and he tries to reduce his exposure, many others are trying to do the same thing at the same time with the same assets. A vicious cycle ensues of vertical price falls prompting further selling. Liquidity vanishes down a black hole. The degree to which this occurs is less to do with the precise financial instruments, but more with the depth of diversity of investor behaviour. Paradoxically, the observation of areas of safety in risk models, creates risks and the observation of risk, creates safety.

Quantum physicists will note a parallel with Heisenberg's uncertainty principle.

Policy makers cannot claim to be surprised by all of this. The observation that market-sensitive risk models, increasingly integrated into financial supervision in a prescriptive manner, was going to send the herd off the cliff edge was made soon after the last round of crises*. Many policy officials in charge today, responded then that these warnings were too extreme to be considered realistic.

This brings us to the philosophical problem of the reliance of supervisors on bank risk models. The reason we regulate markets over and above normal corporate law is that from time to time markets fail and these failings have devastating consequences. If the purpose of regulation is to avoid market failures, we cannot use as the instruments of financial regulation, risk-models that rely on market prices, or any other instrument derived from market prices such as mark-to-market accounting. Market prices cannot save us from market failures. Yet, this is the thrust of modern financial regulation, which calls for more transparency on prices, more price-sensitive risk models and more price-sensitive prudential controls. These tools are like seat belts that stop working whenever you press hard on the accelerator.

My purpose is to explain why the reliance on risk models to protect us from crisis was always foolhardy. In terms of solutions, there is only space to observe that if we rely on market prices in our risk models and in value accounting, we must do so on the understanding that in rowdy times central banks will have to become buyers of last resort of distressed assets to avoid systemic collapse. This is the approach we have stumbled upon. Central bankers now consider mortgage-backed securities as collateral for their loans to banks. But the asymmetry of being a buyer of last resort without also being a seller of last resort during the unsustainable boom will only condemn us to cycles of instability.

The alternative is to try and avoid booms and crashes through regulatory and fiscal mechanisms designed to work against the incentives, fed through risk models, bonus payments and the like, for traders and investors to double up or more into something that the markets currently believe is a sure bet. This sounds fraught and policy makers are not as ambitious as they once were. We no longer walk on the moon. Of course, President Kennedy's 1961 ambition to get to the moon within the decade was partly driven by a fear of the Soviets getting there first.

Regulatory ambition should be set now, while the fear of the current crisis is fresh and not when the crisis is over and the seat belts are working again.

*Sending the herd off the cliff edge: the disturbing interaction between herding and market-sensitive risk management models, A. Persaud, Jacques de Larosiere Prize Essay, Institute of International Finance, Washington, 2000.

baby

The word was out earlier today that UBS was going to take a stunning first quarter writedown of $18 billion (the total turned out to be $19 billion), far and away the largest credit crunch writedown to date.

But for my money, the attention-getting number is the quarter's net loss in relation to equity: $12 billion, in comparison to a book value of SFr 35.6 billion as of year end (the dollar and Swiss Franc are more or less at parity these days). That's 1/3 of the big bank's equity. No wonder my trader buddies put UBS high on the list of Firms at Risk of Serious Trouble.

Bloomberg noted:

The bank will raise 15 billion francs ($15.1 billion) in fresh funds from shareholders to replenish capital, Zurich-based UBS said in an e-mailed statement today.

Now if you were a shareholder, would you be so keen to give more equity to a business that lost a third of its net worth in a mere three months? UBS got a capital injection of Sfr 19 billion last year, much of it from friendly sovereign wealth funds. I'm sure they'll be delighted to stump up more cash.

baby

A reader sent me the link to this week's Institutional Risk Analystics, and I am posting despite the fact that at points it undermines its own credibility.

Most of the article, "Novated Bears & the Education of Ben Bernanke," is a combination of trader gossip about the fall of Bear Stearns, some of it quite informative, such as Goldman CFO David Viniar maintaining "we have 100 percent confidence in Lehman Brothers," when the firm was refusing to trade with Lehman and take clients out of Lehman exposures.

But the piece takes some interesting tidbits and goes overboard, muttering darkly that the government allowed Bear to fail and not Lehman and Goldman.

Simple explanations are usually best. Bear hit the wall first, therefore it went under. The government made the mistake of announcing a new liquidity facility for primary dealers a good, what, ten days or two weeks before the facility was effective. The Fed's announcement made it sound as if the delay in implementation was due to the need to work out technical details. But Bear's liquidity crisis hit before the lending program was in place. The Fed felt could not allow two sizeable dealers to fail (it may be hard to recall the panic of two weeks ago). As an aside, I'm not of the school that Bear should have been salvaged, but that's a separate issue.

Moreover, Bear did not put up much of a fight. Alan Schwartz was reported to given a presentation on the firm's liquidity that if anything heightened worries. And as we noted, Bear had substantial bank credit lines that it did not use. By contrast, Lehman has gone on the offensive (one investor called the conference call March 17 "Orwellian," but hey, those techniques have proven effective).

What is most surprising is that the newsletter puts its most important bit of information at the very end, as almost an afterthought:

Many people inside and outside the Federal Reserve System don't seem to appreciate that the US Treasury is dependent upon the primary dealers. Dealers like BSC, LEH and GS are the main outlet for funding all of the great ideas that emanate from Washington. We hear from several Fed insiders that Geithner, at least, understands this nuance, but it seems incredible to us that the Fed staff in Washington were not able to construct a rationale for invoking Section 13 (3) of the FRA [the "unusual and exigent circumstances" provisions] long before March 16.

"People were not novating with Bear and the CDS market was careening out of control, like a collapsing Ponzi scheme" the head of asset allocation at one of the largest corporate pension funds in the world tells The IRA. "The Fed finally stepped in very late to save the Treasury's ability to issue debt, but this clumsy effort is not without cost. The credit standing of the United States has started to be perceived as being impaired because foreign investors think our government officials don't know what the hell they are doing. Even though asset quality problems inside many European banks are far worse than in the US, for example, you don't hear any noise coming from the EU."

The pension mogul continues: "Now add to this perception problem the fact that Bernanke has pushed interest rates on US government debt down to Japanese levels. At Japanese levels, the yen-dollar carry trade unwinds and we are going to see a massive contraction of liquidity coming out of Japan. The yen crashes through 100 and is most likely going to 80 per dollar as liquidity is sucked back into that market like an imploding black hole. People are looking at the US for the deflationary problem. No, the deflationary problem is coming from the collapse of the carry trade and the liquidity created by the Bank of Japan."

As the yen has rallied from below 120 to under 100, talk of the carry trade unwind has receded. It may well be that a fair number of foreign borrowers were able to make timely exits and reestablish positions at higher yen/dollar levels. But a fair bit of the pain and losses emanating from hedge fund land no doubt come from carry-trade-related losses.

Despite the negative that a higher yen has on Japanese exports, our contacts in Japan tell us that the officialdom regards the yen as still cheap and the dollar's fall as the result of developments internal to the US. That means they will not be terribly inclined to intervene, at least for a while. Thus the yen going to 80 is far from implausible, and the consequences would be, to use a Japanese turn of phrase, severe.

Now to the gossipy parts of the newsletter:

First, we all of us need to understand that the bailout was not of BSC, but rather of Lehman Brothers (NYSE:LEH), Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM), and the rest of the primary dealer community. BSC was the sacrifice, the Easter Pascal lamb put to the knife while the Fed belatedly bailed out the rest of the Street.

The actions taken by the Federal Reserve Bank of New York during the week of March 10, culminating with the March 16 announcement of the acquisition of BSC by JPM and the creation of an emergency loan facility for broker dealers, was not to rescue BSC but instead everyone else on Wall Street, particularly LEH, GS and JPM. In the case of JPM, a BSC bankruptcy filing could have started a chain reaction in the credit default swaps ("CDS") market that might have seriously damaged this huge derivatives dealer.

Some BSC partisans tell The IRA that the firm was the victim of a concerted "bear raid" by a number of hedge funds, which actively worked to undermine the BSC's liquidity while shorting the firm's stock and debt. Hedge funds reportedly were buying counterparty risk positions with BSC from other parties, and then demanding immediate payment or the return of collateral, deliberately accelerating the firm's collapse. Note: It is illegal to take such actions against a commercial bank, but not against a broker dealer.

On Wednesday March 12, BSC CEO Alan Schwartz told investors that the firm remained liquid and solvent, but by the market close on the following day BSC's fate was sealed by the hedge fund mafia, at least according to this version of events. Strange, is it not, that the managers of BCS's mortgage and repo desks did not give Schwartz a friendly heads up on the Wednesday.

Other observers, however, tell The IRA a different story, whereby the dealer community, and not vicious hedge funds, actually caused BSC to fail by refusing to face the struggling bank in the interdealer market. As all manner of clients tried to trade out of or novate counterparty positions with BSC to other firms, dealers began to refuse to take further exposure with BSC.

By the close of business on Thursday, March 13, BSC effectively lost access to the repo and interdealer markets, the death knell for any investment bank. As one BSC official told The IRA on a not-for-attribution basis, had the Fed acted a week earlier, there would have been no liquidity crisis....

As BSC was being shut out of the interdealer market, LEH was also being shunned by other dealers and attacked by the hedge fund hordes in the same fashion as BSC. Several veteran traders in the CDS market say that LEH was essentially in danger of failing as well.

One hedge fund veteran, who was and is short LEH, complains to The IRA that LEH was essentially dead in the water on Monday, March 17, but the Fed intervened. When the markets opened after the Easter holiday, clients and other dealers were backing away from LEH and the shorts were swarming in for the kill, he claims....

Indeed, the only reason that LEH did not fail as well, claims this well-connected trader, was a conference call on that Monday with the top ten dealers organized by the Fed of New York. During that call, the Fed of New York reportedly told the other dealers that it would lend LEH "whatever is necessary" to keep that leading mortgage-backed security underwriter and CDS house afloat. That open-ended promise, not the Fed's new lending facility, reportedly saved LEH from collapse - for now....

Chairman Dodd and his SBC colleagues should understand that the real beneficiaries of the "BSC Bailout" are neither that firm nor its shareholders, who have paid a very steep price for not being part of the "Too Big to Fail" club. Rather, in our view, it is GS, LEH, JPM who benefited indirectly from the Fed's tardy largesse. When Chairman Dodd convenes his hearing, hopefully he will ask the witnesses from the Fed several key questions:

** What logic drove the Fed to pick LEH et al to survive and BSC to die? As and when any other of the major dealers become insolvent, will the Fed allow a market resolution? Is there an objective standard used by the Fed in picking winners and losers? If so, what is that standard?

** What role has Secretary Paulson played in the Fed's bailout of LEH, GS and the other major dealers? Do Fed officials have any concerns about the existence of a real or apparent conflict of interest in having the former CEO of GS involved in these deliberations? Despite the fact that Paulson is in almost constant contact with Chairman Ben Bernanke, are we really expected to believe that the Fed went into that week unaware that the primary dealer community was about to collapse?

** Secretary Paulson has proposed giving the Fed additional oversight responsibility for dealers, funds and other non-bank institutions. In view of the Fed's failure to anticipate this crisis and the fact that no other industrialized nation in the world gives its central bank primary responsibility for safety and soundness of financial institutions, why should Congress not instead strip the Fed of its regulatory role and limit its responsibility to monetary policy and providing market liquidity?

baby

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baby

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baby

I just wanted to thank everyone for being sooooooo incredibly nice to me-- you know who you are! Everything from the User of the Year nomination, my anxiety post, happy birthday thread (got me there! lol. ), to the User of the Month thread, pictures posts, and possibly a few others I'm neglecting... Not to mention all the help you guys have provided not only for myself when I needed it, but for the rest of A4F as well. I am still blown away at the amount of support and overall kindness A4F exudes. I never expected so much from a forum, such a warm environment.

I know my time is limited for User of the Month, but it's been really awesome!! Thanks again to all my voters and for the abundance of congrats messages. I know RocksJa has the most votes so far, and I hope he gets it this month; his chances are looking good!! He's a cool guy, instantly likeable. Always has been constructive when helping users, and just there when you need him most. I remember our first conversation, too. We chatted for 5 hours on AIM, lol, but it was fun!! I'm ready to hand over the crown (or should I say ribbon? lol) to RocksJa, or whoever wins for this month. It's just exciting to have become the User of the Month, and the first one at that!! I wish everyone for the month of March the best of luck!!

I definitely have to agree with others on how addictive A4F is...you always return even after you leave!

k, mission accomplished. *breaks out the Kleenex... sniff sniff* I knew this would happen! j.k lol.

baby

I really want to try this, but the catch is you would have to have someone then can vouch that a $2 is real.

QUOTE The $2 Bill. Everyone should start carrying them!

I am STILL laughing!! I think we need to quit saving our $2 bills and bring them out in public. The younger generation doesn't know they exist.

On my way home from work, I stopped at Taco Bell for a quick bite to eat. In my billfold are a $50 bill and a $2 bill. I figure that with a $2 bill, I can get something to eat and not have to worry about anyone getting irritated at me for trying to break a $50 bill.

Me: "Hi, I'd like one seven-layer burrito please, to go."

Server: "That'll be $1.04. Eat in?"

Me: "No, it's to go." At this point, I open my billfold and hand him the $2 bill. He looks at it kind of funny.

Server: "Uh, hang on a sec, I'll be right back."

He goes to talk to his manager, who is still within my earshot. The following conversation occurs between the two of them:

Server: "Hey, you ever see a $2 bill?"

Manager: "No. A what?"

Server: "A $2 bill. This guy just gave it to me."

Manager: "Ask for something else. There's no such thing as a $2 bill."

Server: "Yeah, thought so."

He comes back to me and says, "We don't take these Do you have anything else?"

Me: "Just this fifty. You don't take $2 bills? Why?"

Server: "I don't know."

Me: "See here where it says legal tender?"

Server: "Yeah."

Me: "So, why won't you take it?"

Server: "Well, hang on a sec."

He goes back to his manager, who has been watching me like I'm a shoplifter, and says to him, "He says I have to take it."

Manager: "Doesn't he have anything else?"

Server: "Yeah, a fifty. I'll get it and you can open the safe and get change "

Manager: "I'm not opening the safe with him in here."
Server: "What should I do?"

Manager: "Tell him to come back later when he has real money."

Server: "I can't tell him that! You tell him."

Manager: "Just tell him."

Server: "No way! This is weird. I'm going in back."

The manager approaches me and says, "I'm sorry, but we don't take big bills this time of night."

Me: "It's only seven o'clock! Well then, here's a two dollar bill."

Manager: "We don't take those, either."

Me: "Why not?"

Manager: "I think you know why."

Me: "No really, tell me why."

Manager: "Please leave before I call mall security."

Me: "Excuse me?"

Manager: "Please leave before I call mall security."

Me: "What on earth for?"

Manager: "Please, sir."

Me: "Uh, go ahead, call them."

Manager: "Would you please just leave?"

Me: "No."

Manager: "Fine -- have it your way then."

Me: "Hey, that's Burger King, isn't it?"

At this point, he backs away from me and calls mall security on the phone around the corner. I have two people staring at me from the dining area, and I begin laughing out loud, just for effect. A few minutes later this 45-year-oldish guy
Comes in.

Guard: "Yeah, Mike, what's up?"

Manager (whispering): "This guy is trying to give me some (pause) funny money."

Guard: "No kidding! What?"

Manager: "Get this .. A two dollar bill."

Guard (incredulous): "Why would a guy fake a two dollar bill?"

Manager: "I don't know. He's kinda weird. He says the only other thing he has is a fifty."

Guard: "Oh, so the fifty's fake!"

Manager: "No, the two dollar bill is."

Guard: "Why would he fake a two dollar bill?"

Manager: "I don't know! Can you talk to him, and get him out of here?"

Guard: "Yeah."

Security Guard walks over to me and......

Guard: "Mike here tells me you have some fake bills you're trying to use."

Me: "Uh, no."

Guard: "Lemme see 'em."

Me: "Why?"

Guard: "Do you want me to get the cops in here?"

At this point I am ready to say, "Sure, please!" but I want to eat, so I say "I'm just trying to buy a burrito and pay for it with this two dollar bill.

I put the bill up near his face, and he flinches like I'm taking a swing at him. He takes the bill, turns it over a few times in his hands, and says, "Hey, Mike, what's wrong with this bill?"

Manager: "It's fake."

Guard: "It doesn't look fake to me."

Manager: "But it's a two dollar bill."

Guard: "Yeah?"

Manager: "Well, there's no such thing, is there?"

The security guard and I both look at him like he's an idiot, and it dawns on the guy that he has no clue.

So, it turns out that my burrito was free, and he threw in a small drink and some of those cinnamon thingies, too.

Made me want to get a whole stack of two dollar bills just to see what happens when I try to buy stuff. If I got the right group of people, I could probably end up in jail. You get free food there, too.
http://www.whatistruth.info/silly1/7.html

baby

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