Coruscation

The NYT has a deeper look at quantitative financial risk:

MAGAZINE
Risk Mismanagement
By JOE NOCERA
Published: January 4, 2009
Were the measures used to evaluate Wall Street trades flawed? Or was the mistake ignoring them?

OP-ED CONTRIBUTORS
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
Published: January 4, 2009
We have a brief chance to cure ourselves. But first we need to ask: of what?

OP-ED CONTRIBUTORS
How to Repair a Broken Financial World
By MICHAEL LEWIS and DAVID EINHORN
Published: January 4, 2009
There are obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again.

Continue reading "VAR in 2009" »

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Facebook's targeted advertising throws up three very similar adjacent display placements onto one page. Is this evidence of a price searching algorithm, to ween wages too low to be tempting, or too high to be believed (not to mention too high to be actually available) ?

$92/hr ?

$75/hr ?

$88/hr ?

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Products under development "are in one of two states--either too early to tell or too late to change.''

He finished the book in 1982, after moving to Yale. No publisher would print it to his exacting standards. Tufte wanted the book to exemplify the design principles he articulated. It had to have lavish, abundant, high-resolution images and footnotes alongside the text so a reader wouldn't have to flip pages to find a reference. The book had to be printed on thick, creamy paper and sell for a reasonable price, about $30. "Publishers seemed appalled at the prospect that an author might govern design,'' he later wrote. So he took out a second mortgage at nearly 18 percent interest and produced the book himself.

---- Edward Rolf Tufte

Continue reading "Status: either too early to tell or too late to change; Tufte on design consulting" »

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Falkenblog (and aka Hedgefund Guy on Mahalanobis is a frequent read, and if the book is as consistently interesting, it will be recommended.

Finding Alpha: The Search for Alpha When Risk and Return Break Down (Wiley Finance) by Eric Falkenstein (Hardcover - Jun 29, 2009)

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Primary Market - Loan Originations

Fannie Mae and Freddie Mac do not originate mortgages. More than 80% of subprime loans still outstanding were originated in 2004 through 2007. The top ten subprime loan originators in 2006 were: HSBC Finance, New Century Financial, Countrywide Financial, Citimortgage, WMC Mortgage, Fremont Investment and Loan, Ameriquest, Option One, Wells Fargo Home Mortgage and First Franklin Financial. Seven of the ten (the nonbank lenders, who were not regulated by the Community Reinvestment Act) no longer exist, or were merged into banks. The lists for 2005 and 2004 were similar, but also included Washington Mutual. The top ten lenders accounted for about 60% of ALL subprime loans in 2006.

Secondary Market - Wholesale Loan Buyers

In 2004, 2005 and 2006, securitized mortgages were 73%, 79% and 81% of all subprime mortgages. So for practical purposes the wholesale market was the securitization market. For the same three years, the total volume of subprime loans securitized was $521 billion, $797 billion and $814 billion respectively.

Almost none of those securities were issued by Fannie and Freddie. They were not in the business of purchasing and securitizing subprime mortgages, although they purchased some subprime mortgages to hold in portfolio, and issued about $6 billion in subprime securities in 2004 to 2006 (one-third of one percent of the market.) The top fifteen issuers of subprime mortgage-backed securities, accounting for about 75% of the market, in 2006 were: Countrywide, New Century, Option One, Fremont, Washington Mutual, First Franklin, Residential Funding (GMAC affiliate), Lehman Brothers, WMC, Ameriquest, Morgan Stanley, Bear Sterns, Wells Fargo Securities, Credit Suisse and Goldman Sachs.

Continue reading "Market discipline has come to subprime" »

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There's several lines of thought here.

First, clearly, there were regulatory failures. The fact of the matter is that teaser mortgages were the result of the overriding of usury laws and preemption of state lender laws in favor of lax federal regulations that favored "the free market". And we don't have regulations of Credit Default Swaps and Hedge Funds because some powerful lobbies made "free market" arguments that libertarians accept. All these things contributed a lot more to the crisis than whether Fannie and Freddie guaranteed some loans they should have (remember, most of the bad mortgages were securitized by the private sector) or whether the government was overzealous in promoting minority homeownership.

Second, while Ilya is right about the governmental promotion of homeownership not being a libertarian idea, it is also not really one that libertarians spent a lot of effort trying to fight. Indeed, libertarians were promoting the "Ownership Society" along with conservatives, because libertarians tend to believe that property ownership has several beneficial effects on society. This doesn't mean that libertarians were necessarily supportive of efforts to lean on lenders, but it does mean that libertarians weren't exactly policing this issue (because it meant going after political allies as well as taking on an ideological contention about ownership that they had some sympathy with or mixed feelings towards).

Third, I think it's too broad to blame anything like this on libertarianism. Libertarians don't have a lot of political power; conservatives do and liberals did and will. But what Ilya seems to be really after is to counter any efforts to blame this crisis on laissez faire policies or free market policies. And that position seems untenable. Of course you can point to actions of the government that weren't good ideas which may have contributed to this. But the reality is that one of the problems with the free market is that if people can take their money out in the very short term, they don't have much of an incentive to price in longer term risk. And these mortgages lasted for 15 or 30 years. Thus, as long as someone else was going to be able to internalize the risk of a default, it made sense to make bad loans. This was true even without any pressure from the government or any "ownership society" programs.

The free market did this, because there are not any market mechanisms in the mortgage backed securities market to ensure the mitigation of long-term risk.

-- Dilan Esper responds to Ilya Somin

Continue reading "Opposing the interventionism of the Ownership Society: Who ?" »

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therealdeal vs The Real Deal.
New York real estate action.

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Commenters propose a succession from Oakland to form the city of "Piedmontclairidge" consisting of Piedmont, Montclair, and Rockridge. We suggest a Liz Krueger style campaign.

Staff from the City Attorney's office then reiterated that the Committee was not being asked to adopt ordinances the homeless advocates were objecting to as unconstitutional, but rather to allow an option of a reduced charge for existing ordinances, and emphasized the broad community support for the program. Jean Quan asked a bunch of clarifying questions, in response to which we learned, again, that adopting the item in question would not introduce a new ordinance, nor would it necessarily change the level of citation for violating the ordinance, but would simply give the prosecutors discretion to charge these crimes either as a misdemeanor (which they are currently) or now as an infraction, as they deem appropriate.

Up to this point, the discussion was fine. Sure, we heard the same thing over and over again, and sometimes after a long day, that can get pretty tiring. But in general, I don't mind. I much prefer that the Council be extremely clear on what they're voting on than they just push things through in a hurry.

Then, the whole thing just collapsed. Jean Quan, totally randomly, started talking about the County's alcohol detention center. She's bothered that the Oakland police don't take more people there, and doesn't see how approving this would do anything to get more Oakland residents into the center. You know, I don't see how the Committee approving the ordinance is going to do anything to make the sidewalks downtown less treacherous to my heels, but I didn't feel the need to march down to City Hall and protest it because of that.

She received a very polite response explaining that first, someone passed out in the street from alcohol needs to go to a hospital, not a detention center, and that two, the center is for people who want to go there willingly for treatment, and it's not something you can force people to do.

Jean Quan then asked if the proposal had been presented to Project Reconnect, and got yet another response from the attorney's office explaining that the proposal was not about homelessness at all. Quan responded that in order for the misdemeanor prosecutions to be successful, we need cooperation of homeless advocacy organizations to create restorative justice programs for them. She suggested delaying the item for a month, and said they should, in the meantime, meet with a coalition of homeless advocates to give their input about how to craft a restorative justice program for homeless people who can't pay their tickets.

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Obama's demeanor illustrates the difference between Hawaii and New York.

As he traveled across the United States mainland during the presidential race, campaigning on a promise of a different kind of politics, Mr. Obama was repeatedly asked by voters and reporters whether he had the stomach to win the contest. His standard answer? He learned how -- and when -- to use his sharp elbows from navigating the thorny terrain of Chicago politics.

Continue reading "Hawaii is not New York" »

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With financial markets in crisis and unemployment rising by the hour, many co-op boards are looking very skeptically at buyers who have large stock portfolios or who earn much of their income in year-end bonuses that may not materialize.

To counter that and to satisfy the concerns of co-op boards, these buyers are finding that they must either increase their down payment to 50 percent of the sale price or more, or put six months' to two years' worth of maintenance into an escrow account.

Some boards have also made it clear that they prefer buyers with fixed-rate mortgages over those with adjustable-rate mortgages; buyers with interest-only mortgages need not apply. These are not the sorts of requirements that appear in the bylaws or the house rules, but in this market, word gets out quickly after a board rejection.

"If you get a board turndown, you can ask how to improve the application," said Richard Grossman, the executive director of downtown sales for Halstead Property. "I've seen some approvals lately where the board tried to work with the buyer, either by asking for money in escrow for maintenance or for additional down payment to increase the equity in the apartment."
Robert J. Rosa, an executive vice president at Century 21 NYC, said that's exactly what happened in a recent deal. He represented a father buying an alcove studio for his daughter on East 21st Street. The father, an investment banker, planned to take out an interest-only mortgage even though he had about $10 million in liquid assets and could easily have paid cash for the studio.

Continue reading "NYC Co-ops Apartments: sticky on credit and price, flexible on renting" »

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Imagine you are stranded on a desert island. For fresh water, there are three natural springs, but it is possible one or more have been poisoned. To minimize your risk, what is your optimal strategy for drinking from the springs? You might:

• select one of the three springs at random and drink exclusively from it
• select two of the springs at random and drink exclusively from them, or
• drink from all three springs.

Your best strategy is to drink from just one spring. Yet, according to a certain financial theory, the optimal strategy is the diversified approach of drinking from all three springs.

Continue reading "Irony of diversification" »

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In Beijing, it didn't matter what the Dow was, of course, since the Chinese government's decision to make itself the world's leading patron of architecture was dependent on other things, including cheap labor. In time for the 2008 Olympics, the world saw the fruits of China's decision to put aside nationalism, hire the greatest architects from around the world, and let them do the kind of things they could never afford to do at home. That brought us two of the greatest buildings of the year, Herzog and de Meuron's extraordinary Olympic Stadium, the stunning steel latticework structure widely known as the Bird's Nest; and Norman Foster's Beijing Airport, a project that was not only bigger than any other airport in the world, but more beautiful, more logically laid out, and more quickly built. And the headquarters of CCTV, the Chinese television network, by Rem Koolhaas and Ole Scheeren, of the Office for Metropolitan Architecture--a building which I had thought was going to be a pretentious piece of structural exhibitionism--turned out to be a compelling and exciting piece of structural exhibitionism.

-- Paul Goldberger, the New Yorker's architecture critic.

Continue reading "Best building, 2008: Peking International Express" »

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New York is city of excitement and dream-making. Nice American Agency introduce this girl to many nice and sexy American men of wholesome goodness with upper east side doorman buildings. One day, the girl goes to drink with George, a business man of hedgefunds who is getting in on bottom floors and is also liking of back doors. She is so nervous before date, she does the bronze of herself twice in tanning booth. Ha ha! Is not matter, George likes very much what he sees and offers her highest of compliments, she is like the Barbie Doll that is come to life!

Precis.

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Lessig argues for publicly funded election campaigns.

Without suspicion of lobbyists and campaign contributions motivating legislators,
the public would suspect stupidity, not corruption, as the causal mechanism in law.

Continue reading "Lessig for publicly funded election campaigns" »

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Mathew Yglesias gets some attention this week.

What makes Matt worth noting ?

He's mildly ingratiating, sometimes merely diplomatic; and he shows the education and writing ability to articulate the practical consensus of his readers.

On the downside, he moves is blog every six months, to the American Prospect, Tapped, Atlantic, to ThinkProgress; maybe he should just park it on Xanga.

Continue reading "Mathew Yglesias" »

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According to Henny Sender of the Financial Times, the disgraced Bernard Madoff "did not charge his investors fees but was paid through commissions on his trades instead." In this way, Mr. Madoff's incentive compensation was aligned with the number of trades he generated and had little to do with his returns.

In contrast, most fund managers are typically compensated with a fixed management fee and a variable incentive fee. The management fee is a set proportion (typically 0.5% to 2% per year) of a fund's assets under management and is paid regardless of the manager's performance. The incentive fee, on the other hand, depends squarely on the manager's ability to generate positive returns. Specifically, the incentive fee is computed as a percentage (anywhere from 0% to 50%) of gains above a certain threshold known as a hurdle rate. The hurdle rate is typically set at a level (0% to 3% per month) above the last highest cumulative return value delivered by the manager. The last highest cumulative return value of the fund is known as the high watermark level. Most of the income of a successful fund manager is derived from his incentive fee.

Several academic studies have analyzed the relationship between fund fees and future fund performance. The results show that while the management fee has no relation to future fund performance, the incentive fee does. Furthermore, most studies suggest that the higher the investment fee, the higher fund's return is likely to be in the future.

Continue reading "Invest for a fee or a share of gains ?" »

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