The Big Picture’s Big Blame List

Barry Ritholtz excerpts a list from his new book, Bailout Nation, listing those most directly responsible for the financial crisis.  It would be easy to quibble about the order of some (really, Reagan just below Clinton?  When you’re trying to make a list of those directly responsible, I would think Reagan would be far below the likes of Paulson, Rubin, and Summers) but there was one entry that I really disagree with:

27. Appraisers (the dishonest ones)

Adding his parenthetical comment makes the accusation appear safe enough, but Mr. Ritholtz knows as well as I do that appraisers make their money only when originators/lenders/brokers send business their way.  Appraisers don’t sell their services direct to the home buyer in any meaningful volume.

And Mr. Ritholtz has been among the most vociferous in pointing out that these companies that order the appraisals, and the individuals at those companies who are compensated based on their mortgage volume, had been incentivized to order appraisals that met a certain dollar value which turned out to be very optimistic during the housing bubble years.

And when the lenders desire overvaluations (Ritholtz points out that they are doing so right now, even to the point of saying the National Association of Realtors and Mortgage Brokers’ Association may be “pro-fraud”) and are the only customers for appraisers, the choice is between providing the highest number in your estimate range or trying to find another job… And I can’t imagine there are many openings within the real estate industry for those with an appraiser’s skill set.

Mr. Ritholtz’s conditional in parentheses does absolve those who left the industry from his scorn, but I would argue it is hardly fair to those who chose an occupation that they would prefer to do in a forthright manner, but were no longer to do so if they wished to stay off the Bad Appraisers quarantine list (which probably has a striking amount of overlap with the unemployment rolls).

(For more on the blacklisting of appraisers that fail to perform in-line with the brokers and lenders’ wishes, please see Calculated Risk’s Tanta’s explanation of the principle behind it)

… and the cow goes moo

Bob Barr on Troy Davis: “Georgia could set an execution date at any time”

I  posted on the plight of Troy Davis once in the past (in response to a Bob Herbert NYT editorial).

Bob Herbert has been one of the champion’s of Mr. Davis’ case, providing the attention such a case requires to gain political traction, and showcasing the apparently bureaucratic abuses and rigidity that keep the spirit of the law from being enacted even in the face of the potential execution of an innocent man.  Or at the very least, a man of very uncertain guilt.

(Bob Herbert has an updated editorial from a bit over a week ago that can be found here)

On the same pages that Herbert brought the case to my attention, former two-term Congressman Bob Barr (R-GA) has penned his own editorial making the case for Mr. Davis with fewer evidentiary specifics as Mr. Herbert, making the uncertainty and the need for a hearing with new evidence the crux of his argument.

The murder took place 20 years ago and yet it seems the State of Georgia is unwilling to wait another few months to find out whether the man they intend to kill has done any wrong.

I am ignorant of the varying pressures involved in a legal case such as this.  Is this the manifestation of a fear of administrative abuse by death row inmates intent on stalling their ultimate demise by introducing endless appeals with circumstantial and not-so-circumspect evidence?

Can we not trust the Supreme Court (or other high courts in the land) to be able to promptly discern between what appears to be legitimate investigative and judicial shortfalls versus stalling tactics?  I ask that in all seriousness.

Troy Davis is where the rubber meets the road in the balancing act between judicial and bureaucratic expediency and the diligent pursuit of justice.  If only but for a few dollars (and a few potential abusers), innocent (as they are until they are proven guilty) men and women might not die for the lack of time and money.

… and the cow goes moo

Former Gov. Eliot Spitzer exposes the NY Fed’s design for captive regulation

I love this post (and pre)-political Eliot Spitzer.  Not only is the Customer #9 stuff hilarious (see: the past weekend’s SNL Weekend Update sketch) but his public appearances and articles have been expository, to say the least.

His latest article at Slate (found at Some Assembly Required) continues to provide his Inside Baseball opinion, albeit he abstains from making any damning accusations (further hints of his re-nascent political ambitions?).  The article focuses on the New York Federal Reserve Bank in particular, in light of the recent scandal surrounding recently resigned (his letter can be found here) Chairman Stephen Friedman’s ability to regulate his former company (Goldman Sachs), and to purchase thousands of shares in GS while Chairman of the NY Fed (so what does it take to be suspected for insider trading?).  If I weren’t so numb to it all, I would pretend to be shocked.

Spitzer provides a passing mention of that scandal, but his articles focuses on a story tangential to Friedman’s:  The NY Fed, the most important Federal Reserve Bank, is captive to its regulatory charges by design.  The choice of Chairman (remember, current Treasury Department Secretary Timothy Geithner preceded Friedman as Chairman) is made entirely by the banks under regulation under the guise of representing ‘the public’.

The top regulator at the most important Federal Reserve bank is SELECTED by those he is purportedly regulating.  If that isn’t complicity by design, I don’t know what is.

Once again it is shown that regulatory and institutional failures are only failures from the public’s perception.  To those involved, failures are only the proper products of design.

… and the cow goes moo

Ted Stevens’ voided conviction update

I’ve been half-ranting about the failure in prosecution and half-celebrating the accuracy of my prediction that Ted Stevens would find himself escaping punishment in some of my previous posts.

The process of voiding his conviction on seven felony counts is incomplete, but the tone of the articles I have read recently suggest that it is simply a matter of time.  According to the New York Times:

“That victory was short-lived. Shortly after he was sworn in as attorney general on Feb. 3, Mr. Holder took the unusual step of removing the entire Stevens trial team from the case and replacing those lawyers with three new prosecutors. Last week, after discovering yet another instance of what the Justice Department concluded had been misconduct by the original prosecution team, Mr. Holder said he would seek to drop all charges.

Judge Sullivan is expected to approve the motion to dismiss in a hearing scheduled for Tuesday.”

The article goes into some more detail about the possible reasons for the prosecutions fail (bungling from all involved, conflicts between prosecutors of different ranks and law enforcement, disorganization, or perhaps a deficit in resources) but I wonder if we should be surprised.  As I have cheerfully stated several times, I have been expecting this outcome since last fall.

I simply cannot imagine that those charged with investigating the most powerful members of our government could possibly be of the highest caliber, or provided with support commensurate with the magnitude of their task.

If you are a skilled and ambitious lawyer, would you choose to work for government as opposed to higher-paying private jobs?

Would being a high-profile aggressive prosecutor for the government improve your chances at landing profitable private-sector jobs in the future?

Would a public corruption prosecutor be able to advance into careers in government through prosecutorial successes, which would undoubtedly place the prosecutor on opposing sides to many powerful politicians?

I am too cynical to even imagine that a very skilled prosecutor would choose this career path.  Does patriotism and fidelity to the law exist in any individual enough to doom themselves to such an under-appreciated role?

And even if there were a handful of individuals who, despite more promising career opportunities being available to them, opt for the limited compensation and David-versus-Goliath battles of public service, how long would those individuals last in an environment with few equally capable or similarly-motivated peers, all the while suffering exposure to the overwhelming corruption that permeates Washington?

I am quite frankly surprised that any success prosecutions come out of the Public Integrity Section of the Justice Department.  It seems to me the department is designed with a propensity to fail.

And it would appear even my cynicism may discount the actual degree of failure.  Even beyond the likelihood that the conviction would be voided, Polizeros posts that the prosecution team itself may face criminal charges for its handling of the Stevens case (they link to this AP/CQ Politics story). And from what has been revealed during the debacle of a trial, and since the conviction was handed out, an investigation should be conducted without question.

“”I was sick in my stomach,” attorney Brendan Sullivan said Tuesday, recalling seeing the new evidence for the first time. “How could they do this? How could they abandon their responsibilities? How could they take on a very decent man, Ted Stevens, who happened to be a United States senator, and do this?”"

[Sidenote:  That AP/CQ Politics story quotes 'attorney' Brendan Sullivan for his response to the news, without ever mentioning that he was Ted Stevens' chief defense lawyer.  Kind of important omission there...]

Now that I wouldn’t guess:  A senator may abuse his office and corrupt government for forty years and the lawyers who (far too vigorously, perhaps) pursue his conviction are the ones that may end up jobless, or worse:

“The investigation carries the threat of prison time, fines and disbarment.”

Oh, and btw… Stevens, who lost his Alaska Senate seat to a Democrat shortly after his conviction, might have the chance to win the seat back if calls for a re-election succeed.  Hurray.

… and the cow goes moo

I called it! Ted Stevens conviction might be voided!

This is a bittersweet personal victory for me.  Kinda sucks when your cynicism is proven apt.

For background on some of the ridiculousness that has transpired during the trial (and if it takes decades to gather enough evidence to prosecute a dim-witted loudmouth Senator for corruption, should we expect anything other than breathtaking incompetence from the prosecution?) please see a post about Ted Steven’s ex-BFF Bill Allen, the prosecution’s key witness, here.

An update, including some “I dare you to call me on my bullshit” testimony from Mrs. Catherine Stevens, Ted’s wife, can be found here.

My own personal congratulations (a bit premature, perhaps, but still appropriate) for Mr. Stevens’ acquittal from October can be found here (God bless the internet and self-serving personal blogging.  Proof that I was right, recorded for posterity.)

I celebrate his late-October conviction here, as well as mentioning the likelihood of successful appeal.

One incidence of ridiculousness at the trial can be found here (a new juror was needed to replace a Ms. Marian Hinnant who just had to watch the Breeders’ Cup during deliberation.  And who lied about her dad dying so that she could do so.  Fishy.  I’d like to see some before and after photos of her house, pre- and post-trial).

And here’s a re-cap of some of the oddities and prosecutorial blunders, including the sexy sexy revelation that perhaps a female FBI agent was getting all hot and bothered for star witness and apparent sex god, ‘Big’ Bill Allen.  Re-capping my favorite quote from FBI Agent Chad Joy, who is central to the allegations of misconduct by the prosecution (I’d also like to see a before and after photo of his house, not that I doubt the validity of his claims, just the motivations):

“Mr. Joy said his colleague, Mary Beth Kepner, almost always wore pants but on the day the witness, Bill Allen, took the stand, Ms. Kepner donned a skirt, which Mr. Joy said she described as “a present” to Mr. Allen.

…

In its court filing, Mr. Stevens’s defense team has magnified Mr. Joy’s complaint about an improper relationship between Ms. Kepner and Mr. Allen, asserting that they appeared to have had a sexual relationship. Mr. Joy did not raise that possibility in the redacted version of his statement, but did say Ms. Kepner had improperly gone alone to Mr. Allen’s hotel room.”

Bow-chika-wow-wow.

And here’s what you’ve all been waiting for…  The New York Times today reports that the Justice Department is now looking to void Teddy’s conviction!

“The Justice Department moved on Wednesday to drop all charges against former Senator Ted Stevens of Alaska, who lost his seat last year just days after being convicted on seven felony counts of ethics violations.”

Congratulation, Ted Stevens!  Due to massive incompetence by prosecutor Brenda K. Morris, among others, and the irresistible sexiness of star witness, Bill Allen, as well as what must be by-design universal retardation at the special ed section of the Justice Department (the Public Integrity Section), you will probably live to 120 as a free man rather than see a day of prison.  And you probably have a fair chance at re-election in the asshole-of-a-state, Alaska, in 2012, at age 88.

Who else thinks that perhaps the Public Integrity Section’s staffing and funding is influenced by the very people they are meant to police?  I cna’t imagine why the department might be designed in manner that would allow it to do its job without impedance from the powerful members of Congress it is likely to investigate.  There’s no reason why anyone in power would want the dirty laundry aired.

… and the cow goes moo

David X. Li’s Gaussian Copula Function and the birth of the CDO

Wired Magazine has an interesting, nerdy history of the Gaussian copula function and it’s creator, Chinese-born, Canadian-educated David X. Li.  All this talk of excessive risk-taking, CDOs, abstract derivatives, and betting trillions on the accuracy of a mathematical formula… Well, come meet said formula!

“The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.

At the heart of it all was Li’s formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

…

Li’s copula function was used to price hundreds of billions of dollars’ worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years. But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.”

The article itself has a nice little image of the formula with a quick-and-easy explanation of the variables and, I must say, it is a pretty one.  But you would have thought it would have been clear to see that it’s value existed to provide a loose, theoretical estimate and NOT to price the risk of trillions of exposed dollars.

How is it an inaccurate mathematical formula used to price risk could cause all this trouble?  In the event of mis-priced risk, should there not be someone who benefits as well as someone who suffers from the error?  Where is the party that has benefited from the pricing of risky AAA tranches of MBS as sound investments?  Would it be homeowners (or former homeowners) who received low mortgage rates due to the cheap source of investment funding?  Or the originate-to-securitize model lenders who creates these CDO and MBS with fictional AAA ratings?

The disconnect between those directing investments and the quants who doubted the accuracy of the Gaussian copula function doesn’t shock me.  Nor the massive entry into the poorly understand market for CDOs of trillions of dolalrs of investments.  But why does it seem like a misunderstood equation managed to create far more losers than winners?  The two sides of the equation are horribly out of balance.

… and the cow goes moo

Quick question: Did we imagine letting the major banks fail would have had worse consequences than what we face today?

If Citi, Bank of America, Bear Stearns, Washington Mutual, and Wachovia all went bankrupt, with all their counterparties taking huge hits and facing bankruptcy all over North America and Europe, would things be much worse?

I’m not sure, but I think we’d feel closer to the end of this recession.

On a related note, was Lehman’s failure really a step in the right direction?  Certainly the decision-making behind it, clearly revealed after the fact, that a bank could be allowed to fail as long as it was not deemed systemically important, turned out to be horrible for the financial system.

Knowing that banks will be allowed to fail unless they are deemed too important (i.e. ‘big’) to be allowed to fail, we’ve seen seemingly masochistic acquisitions take place and further consolidation within the banking sector.  And as AIG and Citi make clear, as long as you remain too important to be allowed to fail, any amount of wrongdoing will be tolerated.

… and the cow goes moo

NYT Editorial: Why couldn’t the US financial system be more like it’s like Canadian brother’s?

Being that the World Economic Forum report from a few months back ranked Canada’s banking sector as the most stable in the world, the notion shouldn’t come as any surprise.  And since I’m working for a Canadian bank and am not either (a) jobless; (b) stealing taxpayer money to pad my annual bonus-but-don’t-call-it-a-bonus (… not to the same extent anyways); or (c) under investigation for the decades-long theft of billions, it seems that I should understand the appeal of emulating the Canadian system.

But in today’s New York Times editorial, Theresa Tedesco, a correspondent for the Canadian paper The National Post, comes to a mind-blowing conclusion:

“This would entail building a national banking system based on a small number of large, broadly held, centrally and rigorously regulated firms. Imitating the Canadian model would require sweeping consolidation of American banks. This would be a very good thing. Washington had difficulty figuring out the magnitude of the financial crisis because there are so many thousands of banks that it was impossible for regulators to get into all of them.”

Where the fuck did she get the idea that too many banks was the biggest problem with the US banking sector?  I believe toobigtofailitis was actually the biggest problem.  Last I checked, the FDIC wasn’t breaking too much of a sweat cleaning up two banks a week (including two yesterday) at a relatively-minor-but-adding-up loss, selling almost all of them to other small, regional banks.

Ms. Tedesco’s dream scenario is a nightmare to me:

“Washington is already on the path to achieving consolidation. Eventually, some of the larger banks into which the government is injecting taxpayer money will probably be deemed beyond help, and will either be allowed to die or be partnered with other banks. The market will take its cues from this stress-testing, and make its own bets on which banks will survive. It’s hard to predict how many will have survived when the dust settles, but the new landscape might consist of only 50 or 60 banking institutions”

We’re currently in the midst of a super-double-top-secret auditing of the top 19 banks’ books in the US (those with assets over $100 billion), largely to avoid another Lehman-like collapse (they had $600 billion in assets and their failure brought the global financial system to its knees).

In Ms. Tedesco’s fantasy solution, the US system would have 50-60 banks, all with hundreds of billions in assets (at $12 trillion in total US bank assets, according to this graph, that would leave roughly $200 billion in assets in each bank.  And that could be a massively underestimated value, as Google Finance indicated that just JP Morgan, Citigroup, and Bank of America combine for $6 trillion in assets).

So how are you Americans enjoying gambling your economy on the hope that your systemically-vital 19 largest financial institutions are healthy enough to survive on welfare without bringing down the whole US (and global) economy?  Ms. Tedesco recommends you triple-down.

… and the cow goes moo

Ted Stevens Trial Re-Do?

Holy crap.  This guy cannot be stopped.

In the continuing saga of our mess of a justice system, and joke of a political system, the Ted Stevens conviction is starting to look like it was written in pencil.

Not only was the trial fraught with oddities (a juror taking off, claiming her father just died, but actually just to watch the Breeder’s Cup), prosecutor Brenda Morris’ serial incompetence (leading her to be berated by the judge, being caught withholding information that they were obligated to share with the defense, and sending home a witness that may have helped the defense), and now, in a continuation of the sexy undertones permeating this trial:

From the New York Times:  FBI agents involved in the investigators may have had inappropriate relations with the star witness for the prosecution!

“Among the startling accusations in the statement by the agent, Chad Joy, is that another agent maintained an inappropriate relationship with the prosecution’s star witness. Mr. Joy said his colleague, Mary Beth Kepner, almost always wore pants but on the day the witness, Bill Allen, took the stand, Ms. Kepner donned a skirt, which Mr. Joy said she described as “a present” to Mr. Allen.

…

In its court filing, Mr. Stevens’s defense team has magnified Mr. Joy’s complaint about an improper relationship between Ms. Kepner and Mr. Allen, asserting that they appeared to have had a sexual relationship. Mr. Joy did not raise that possibility in the redacted version of his statement,but did say Ms. Kepner had improperly gone alone to Mr. Allen’s hotel room.

His statement also said agents received gifts from Mr. Allen, including help in getting a family member a job.”

Holy Jesus!

The system is not necessarily corrupt, but apparently every other human component within the system is entirely compromised!

How do you get in the FBI if you can’t keep it in your pants?  And if you CAN’T keep it in your pants and you’re in the FBI, how do you now figure out a way do slut it up more subtly than dolling yourself up for the witness on the stand?

And arranging private meetings at hotels with the witness that is paramount to the prosecution’s case?

Perhaps she just wanted to see Ted Stevens humiliated as much as I did.  If so, isn’t it sad that the only way an FBI agent knows how to bring about ‘justice’ is by sexual means as opposed to… you know… police work?

Perhaps this isn’t fortuitous (for Ted Stevens)  incompetence.  Perhaps this is part of the way Washington can subtly influence the outcome of a trial by attacking the weakest links in the system: the people.

Or perhaps it’s just animal instinct.  I mean, who could resist?

I'm wearing shorts at my computer just for you, Mr. Allen. Did you notice?

… and the cow goes moo

VIDEO: Malcolm Gladwell at Rotmans (University of Toronto)

Please go to Rotman’s website to view an hour+ length video interview of Malcolm Gladwell by Rotman’s Dean Roger Martin (an apparent old/close friend of Gladwell’s).

They discuss Gladwell’s new book, The Outliers, the concepts contained therein, and mostly, about Dean Martin.  The interview is often funny and does manage to explore the concepts touched upon in The Outliers, Gladwell’s excellent articles in The New Yorker, and his two previous interesting, but not quite convincing, books The Tipping Point, and Blink.  I’ve read his two previous books and enjoyed them but found them inferior to his articles.  His books read essentially like a collection of his related articles, but where his books let me down is in the manner he ties the suggested conclusions of the articles together to make a bold and far-reaching claim.  I never feel the claim is supported by the evidence far beyond simple plausibility.

Gladwell’s talks, on the other hand, are consistently fantastic.  His secure nerdiness shines through in every word and anecdote.  His embrace of the self-deprecating and the ticklishly silly incongruities between the formality of his settings and his somewhat childish-seeming intellectualism provides even his more sserious anecdotes and research citations with humour.  His affinity for language and for odd ideas makes his talks consistently entertaining and thought provoking.  Even if you, like myself, have not enjoyed his books all that much, I’d highly recommend trying to listen to an interview or presentation given by Mr. Gladwell.  I think you might like it.

And if you do, you might want to check out Mr. Gladwell’s TED presentation and, if you enjoy his humour and his autobiographical story telling, here is his riotous performance at The Moth, hosted by the radio show This American Life.

(More about his performance at The Moth can be found here, but I would highly recommend listening to Gladwell’s presentation before reading the article at Slate.  Interviews with Malcolm Gladwell regarding his books can be found on Youtube.  A BBC Radio interview about The Outliers can be found here.)

… and the cow goes moo