Get-Together At Herb and Stuart's

Risk Assessment In Financial Systems

An exasperated Jim McElroy sent this article. He notes:

I am in awe, really, of the financial system we have today. Time was, the "Market" resembled the Saturday morning farmers market, in which people with products met with people with money and negotiated an equitable trade between equals. A hundred years ago the stock market sold fractional parts of a company that made real products that could be held in your hands and the value estimated reasonably well. Today the market is in promises to pay something of vague value some indefinite time in the future. It used to be that governments would inflate the currency by running the printing presses overtime. Now they don't even need to buy ink. Money is generated by borrowing, what, Money? No borrowing promises to pay money. And where did that money come from? Yep, that's right another promise to pay. Where is all this wealth that has been created? Indeed! My, God, the Emperor has no clothes!

This is ridiculous! Of all people, the financial people should realize that in a financial system, risk is NOT randomly distributed! It was never so in the past. Why should it be so now?

Here are excerpts:

The problem is that Wall Street and regulators relied on complex mathematical models that told financial institutions how much risk they were taking at any given time. Since the 1990s, risk management on Wall Street has been dominated by a model called "value at risk" (VaR). VaR attributes risk factors to every security and aggregates these factors across an entire portfolio, identifying those risks that cancel out. What's left is "net" risk that is then considered in light of historical patterns. The model predicts with 99 percent probability that institutions cannot lose more than a certain amount of money. Institutions compare this "worst case" with their actual capital and, if the amount of capital is greater, sleep soundly at night. Regulators, knowing that the institutions used these models, also slept soundly. As long as capital was greater than the value at risk, institutions were considered sound -- and there was no need for hands-on regulation.

Lurking behind the models, however, was a colossal conceptual error: the belief that risk is randomly distributed and that each event has no bearing on the next event in a sequence. This is typically explained with a coin-toss analogy. If you flip a coin and get "heads" and then do it again, the first heads has no bearing on whether the second toss will be heads or tails. It's a common fallacy that if you get three heads in a row, there's a better-than-even chance that the next toss will be tails. That's simply not true. Each toss has a 50-50 chance of being heads or tails. Such systems are represented in the bell curve, which makes clear that events of the type we have witnessed lately are so statistically improbable as to be practically impossible. This is why markets are taken by surprise when they occur.

But what if markets are not like coin tosses? What if risk is not shaped like a bell curve? What if new events are profoundly affected by what went before?

Both natural and man-made systems are full of the kind of complexity in which minute changes at the start result in divergent and unpredictable outcomes. These systems are sometimes referred to as "chaotic," but that's a misnomer; chaos theory permits an understanding of dynamic processes. Chaotic systems can be steered toward more regular behavior by affecting a small number of variables. But beyond chaos lies complexity that truly is unpredictable and cannot be modeled with even the most powerful computers. Capital markets are an example of such complex dynamic systems.

...The more enlightened among the value-at-risk practitioners understand that extreme events occur more frequently than their models predict. So they embellish their models with "fat tails" (upward bends on the wings of the bell curve) and model these tails on historical extremes such as the post-Sept. 11 market reaction. But complex systems are not confined to historical experience. Events of any size are possible, and limited only by the scale of the system itself. Since we have scaled the system to unprecedented size, we should expect catastrophes of unprecedented size as well. We're in the middle of one such catastrophe, and complexity theory says it will get much worse.

Ed Newman Obituary

From the Albuquerque Journal:

NEWMAN -- Edward J Newman, 86, of Albuquerque, passed away at home with family by his side on Wednesday, October 1, 2008. He is survived by his loving wife of 61 years, Dorothy Newman; sons, Kenneth and wife Marra, Richard, Gordon and wife Kimberly and Jeff; grandchildren, Melanie Parsons and husband, Dave, Jeffrey, Corey, Christy and Sarah; great-grandchildren Rebecca, Haydn and Brennan; Jeffrey's mother Susan Companion; brother, Vincent and wife, Betty; sister, Elsie Screnock; and brother-in-law, Floyd Lewis. He was preceded in death by his sisters, Mary Newman and Evelyn Lewis. Mr. Newman retired from Sandia National Labs after 39 years. He enjoyed tinkering with and fixing mechanical devices of all kinds. He enjoyed gardening, and was a member of the Bear Canyon Senior Center exercise class. His family will always appreciate his dedication, example and provision. Cremation has taken place. Memorial Services will be held at the Newman home at 13200 Indian School NE, Albuquerque, 2:00 p.m., Saturday, October 18, 2008. Should friends and family desire donations may be made to the American Lung Association of NM, 7001 Menaul Blvd Suite 1-A 87110 (505) 265-0732. French Mortuary, Inc. 10500 Lomas Blvd. NE (505) 275-3500 French Mortuary

Foreclosure Alley



Courtesy of E-Mail from John Wright. Foreclosures in the Inland Empire.

If I recall, a giant homeless camp is now open near the Ontario, CA, airport. Some of these folks literally lost everything they had.

Ignobels Out

High visibility!:

Anderson, a professor of obstetrics and gynecology at Boston University's School of Medicine, and her colleagues found that not only was Coca-Cola a spermicide, but Diet Coke for some reason worked best. Their study appeared in the New England Journal of Medicine in 1985.

...A group of Taiwanese doctors were honored for a similar study that found Coca-Cola and other soft drinks were not effective contraceptives. Anderson said the studies used different methodology.

...Duke University behavioral economist Dan Ariely won an Ig Nobel for his study that found more expensive fake medicines work better than cheaper fake medicines.

"When you expect something to happen, your brain makes it happen," Ariely said.

...Charles Spence's award-winning work also has to do with the way the mind functions. Spence, a professor of experimental psychology at Oxford University in England, found that potato chips -- "crisps" to the British -- that sound crunchier taste better.

His findings have already been put to work at the world-famous Fat Duck Restaurant in England, where diners who purchase one seafood dish also get an iPod that plays ocean sounds as they eat.

...Miller, an associate professor of psychology at the University of New Mexico, and his colleagues knew of prior studies that found women are more attractive to men when at peak fertility. So they took the work one step further: studying earnings of exotic dancers.

In the 18 subjects Miller studied, average earnings were $250 for a five-hour shift. That jumped to $350 to $400 per five-hour shift when the women were their most fertile, he said.

"I have heard, anecdotally, that some lap dancers have scheduled shifts based on this research," he said.

Armadillos helped win an Ig Nobel for Astolfo Gomes de Mello Araujo, a professor of archaeology at the Universidade De Sao Paulo in Brazil, and a colleague earned.

Pesky armadillos, they found, can move artifacts in archaeological dig sites up, down and even laterally by several meters as they dig. Armadillos are burrowing mammals and prolific diggers. Their abodes can range from emergency burrows 20 inches deep, to more permanent homes reaching 20 feet deep, with networks of tunnels and multiple entrances, according to the Humane Society of the United States' Web site.

Araujo was thrilled to win. "There is no Nobel Prize for archaeology, so an Ig Nobel is a good thing," he said in an e-mail.

The Missing 300

Where are they?:

More than 300 people are missing since Hurricane Ike hit the Texas coast last month, and the obstacles to finding them are frustrating family and friends who desperately want to know if their loved ones are dead or alive.

These family and friends want answers: Why are so many still missing? Why has the first organized search for bodies, to be held Thursday on the battered Bolivar Peninsula, taken so long?

...The frustration about the post-Ike recovery runs deep for Robin Huber, pastor of a church that was destroyed along with her home in Gilchrist. Huber estimates only seven homes are still standing in Gilchrist, which is surrounded by huge piles of debris.

Cars and dead animals float in the bay, she said.

The amount of debris is unfathomable, Huber said, and it was hurled with such force that residents can barely dig through it.

"Imagine that all of these homes were picked up and dropped from a high airplane," she said. "It looks like a bomb exploded here and the pieces are so stuck in the earth, it's impossible to pull out. Who knows what is in there."

Cars and trucks litter the road leading to the highway as if they were trying to escape at the last moment, Huber said.

When she was allowed back to Gilchrist after the storm, Huber swore she saw a body leaning out of a submerged car.

"Nobody could get to them, because they were still under water and because of all of the alligators in the area," she said.

Huber, like others, wants to know why officials haven't been searching for bodies.

"When there's a disaster, everyone focuses on it for a week, then everyone forgets," Huber said. "That's the problem right now. Why are there not more people out there looking for bodies?"

"I have people saying to me 'Do you know where my daddy is?' " she said. "All I can say is 'don't give up,' but now we are going on three weeks."

General McClellan Responds

I know John McCain. John and I fought side by side in Mexico. We threw back a bourbon and loved some whores in TJ. We had our fun. But that man doesn’t know how to win a war any more than I knew how to beat Robert E. Lee. What the hell is he talking about? Win wars? Back in Mexico if you got captured you’d chew off your goddamned leg and bleed to death, that’s what you’d do, not end up with lithographs of yourself in some box all over the goddamned internet. Win what war? Come on.

When Uncle Fester Was Young

Back in the day:

Sen. John McCain's senior foreign policy adviser cites a steamy romance 50 years ago with a Brazilian babe among the things that illustrate the candidate's decades-long interest in Latin America.

...Fontaine was referring to former model Maria Gracinda Teixeira de Jesus, who recently gave an interview to O Globo saying the former sailor was quite the kisser. According to McCain's memoirs, `Faith of My Fathers,` they met in 1957, when his ship, the USS Hunt docked in Brazil.

''I called him John but also my darling and my sweet coconut,'' she said. ``He was a great kisser. I liked it so much that I bought a book to learn how to kiss myself.''

Pat Robertson Speaks...

He seems uneasy about the immediate future:

The 700 Club host is convinced that Israel will attack Iran's nuclear energy facilities shortly after the US presidential election, triggering a series of "dramatic events" that conclude only once "God has rained fire on the islands of the sea and on the invading force coming against Israel."

Chaos Over At The Pirate Negotiations

Not enough rum:

The pirates want $20 million, though people close to the negotiations have said they are being bartered down and will probably settle for $5 million. Still, it doesn’t seem as if anyone is rushing to pay up.

“There are so many parties involved,” said a relative of one crew member. “It’s not clear where the responsibility lies.”

As if things were not complicated enough, one of the few people with experience in prickly pirate problems has been jailed by the Kenyan government on the suspicion he is a pirate himself.

Andrew Mwangura, program coordinator for the Seafarers’ Assistance Program in Kenya, a non-profit group that tracks pirate attacks, was arrested Wednesday night. Mr. Mwangura has extensive contacts up and down the pirate-infested Somali coast. Kenyan officials have accused him of making false statements and working with the pirates.

“Why is it he always finds out what’s happening on a ship before anyone else?” said Alfred Mutua, a Kenyan government spokesman.

Many seamen in Kenya insist that Mr. Mwangura is a good man, and that his only fault may have been being outspoken. He was the first maritime official to say that the hijacked ship was part of a secret arms deal between Kenya and southern Sudan. Kenyan officials have denied this, saying the heavy weaponry, including battle tanks, is for their use. But Western diplomats have said this is a lie.

...From the beginning, the whole story surrounding the MV Faina, which was hijacked Sept. 25 about 200 miles off Somalia’s coast, seemed a little suspicious. Why was the ship left unguarded while sailing through some of the most dangerous waters in the world, especially given its cargo of 33 tanks, 150 grenade launchers, 6 anti-aircraft guns and heaps of ammunition? Beyond that, why does Kenya, best known for its wild animals, not its wars, need so many tanks? And if it did need tanks, why all of a sudden switch from British armor, which the country has used for decades, to Eastern-bloc equipment, which is completely incompatible?

Kenyan officials have ducked these questions. Adding to the mystery is the fact that relatives of the crew disclosed earlier this week that right before the Faina set sail about a month ago, the cargo was suddenly switched from cars to tanks. Those tanks are now being closely watched by a half-dozen American warships that have boxed in the Faina against Somalia’s craggy shore. A Russian frigate is on its way. The Americans are determined not to let the pirates sell the weapons to Islamist insurgents, though it seems getting the tanks off the ship is beyond the pirates’ expertise.

...The trick now seems to be getting all the vested interests on the same page: the ship owner is Israeli; the ship operator is Ukrainian; the ship was registered in Belize; and the sailors are 17 Ukrainians, 2 Russians (on Russian has already died on board) and 1 Latvian.

“I don’t see anything moving,” one person close to the negotiations said on Friday.

Sarah Wants To Go To Michigan



Let Sarah, be Sarah.

Neon On Chrome

My latest project is trying to get a solid picture of trucks at a refueling facility located at Cottonwood and Main, in Woodland. Closeup, the pinkish reflection looks ultra-cool, but unfortunately while I'm creeping up to the fence, I can see an alarmed-looking truck driver, probably thinking: "dad gum towelhead terrist!"

So, just a crap picture so far...

Suspended Baton Twirlers

"I Kissed A Girl" is frowned upon in Van, Texas.

Chumps And Patsies

New marks are eagerly welcomed into the casino:

WASHINGTON (AP) -- With the economy on the brink and elections looming, Congress approved an unprecedented $700 billion government bailout of the battered financial industry on Friday and sent it to President Bush for his certain signature.

The final vote, 263-171 in the House, a comfortable margin that was 58 more votes than it garnered on Monday. The vote capped two weeks of tumult in Congress and on Wall Street, punctuated by daily warnings that the country confronted the gravest economic crisis since the Great Depression if lawmakers failed to act.

Bush was poised to make a statement on the historic vote.

...Even before the measure cleared Congress, the White House sought to dampen optimism of its immediate impact on the economy. "This legislation is to fix a problem in our financial markets," said spokesman Tony Fratto. "It's not sold as giving a boost to the economy, but rather preventing a crisis in our economy... If it works as we hope it will, credit will be able to begin flowing again."

..."How can we have capitalism on the way up and socialism on the way down," said Rep. Jeb Hensarling of Texas, a leader among conservative Republicans who oppose the central thrust of the legislation -- an unprecedented federal intervention into the private capital markets.

...The core of the plan remains little changed from its inception -- the Treasury Department would have $700 billion at its disposal to purchase bad mortage-related securities that are weighing down the balance sheets of institutions that hold them. The flow of credit has slowed, in some cases drying up, threatening the ability of businesses to conduct routine operations or expand.

At the same time, lawmakers have dramatically changed the measure, insisting on greater congressional supervision over the $700 billion, taking measures to protect taxpayers, and insisting on steps to crack down on so-called "golden parachutes" that go to corporate executives whose companies fail.

Earlier in the week, the legislation was altered to expand the federal insurance program for individual bank deposits, and the Securities and Exchange Commission took steps to ease the impact of the questionable mortgage-backed securities on financial institutions.

...Across the Capitol, Senate leaders reacted quickly, deciding to sweeten the bill with a series of popular tax breaks as well as spending on rural schools and disaster aid. They also grafted on a bill to expand mental health coverage under private insurance plans.

At the same time, the change in federal deposit insurance and the action by the SEC on an obscure accounting rule helped produce a steady trickle of converts.

That IS Impressive!

I'd flee too, if I was the shooter:

A Croatian man has impersonated Superman by catching a bullet in his teeth and spitting out the hot lead.

Just like in the comics his attacker fled.

The drama occurred after Stipe and Mirna Cavlovic, both 37, got caught up in a row between two men. One of the men fired at the couple but the bullet ricocheted off Mirna's cheek and got stuck in Stipe's false teeth.

The surprised Stipe then spat out the hot bullet, terrifying his attacker, according to Telegraph.co.uk.

I thought I was dead for sure," he told police. "I didn't even see the bullet hit my wife. I just saw the flash of the gun's barrel.

"The next thing I knew was something hit my false tooth and I spat out the hot lead. It hurt like hell but we're both still alive."

Police believe he survived because the bullet lost so much speed when it grazed Marla's cheek. She was also uninjured.

The 58-year-old gunman was arrested.

"Conservatives" And Debt

For all their yammering, they are just a bunch of drunken sailors.

Aye, Matie!

You know, for $700 billion, we could get a kick-ass health care system rather than a bunch of lame-ass CDO's:

Rep. Steven C. LaTourette, R-Ohio, angrily denouncing the Drunken Sailor Bailout Act of 2008 (my words, not his) by mentioning, among other things, that the bill provides a rum tax payment to Puerto Rico and the US Virgin Islands in the amount of about $192 million over ten years:

At least we have the pirate vote.

So that would not be an “aye” I’m guessing.

Yolo County Wins!

Selection from Bev Sykes' article regarding the Ellys:

The Davis Musical Theatre Company took home three awards for its production of 'La Cage aux Folles.'

Ryan Adame won the award for actor in a lead role for his performance as Albin, star of the La Cage Club, and his alter ego, the drag queen dubbed 'Zaza.'

'I fell in love with the character,' Adame said. 'He's just a person; there's a flamboyance to him, but every person has his quirks. His might be a little more out there than the average person, but what's so wonderful is that he's part of a family and just wants to have a normal life.'

Adame, who performed Albin's 'I Am What I Am' during the awards ceremony, was very surprised at his win.

'I don't devote all the time I spend after work and school to get something for it, but it's always nice to get some recognition for your hard work,' he said. 'It's important to me that I received this award for a DMTC show. I did my first show with DMTC five years ago, and I've had many opportunities because of what this company has allowed me to do.'

Adame also was pleased to see choreographer Ron Cisneros and costumer Jean Henderson both acknowledged for their work on the same show.

'I can't ever be grateful enough to Ron, for giving me the chance to play this role,' Adame said, 'and Jean has always been wonderful to me.'

This marked a second triumph for Henderson, honored last year for her costumes for DMTC's 'Camelot.' The 13-time nominee is proud of her win.

'It was a lot of hard work,' she said. 'It was glitzy and totally different from anything I've ever done. It was stressful at times, but I don't do this for the awards. I get to meet so many nice people, and we had a great cast for this show.'

DMTC founder Steve Isaacson, himself a nominee for his lighting design for 'The Secret Garden' - which he feels was one of DMTC's better shows - was happy with the acknowledgment for his company.

'To be recognized by our peers is very special,' he said. 'Winning an award is just the icing on the cake.'

Director Jason Hammond took home an Elly for his set design for the Woodland Opera House production of 'Sarah, Plain and Tall,' a young people's production that garnered nine nominations and also a costume design award for Angela Shellhammer and Lauren Austin.

'I like doing things that aren't done a lot,' said Hammond, who had fun creating a show that was new to him. 'I like doing things I haven't seen before, so I can take an artistic stab at it. Sometimes there's a lot of recycling in community theater.'

Although pleased about his win, he admitted, 'You don't want to base your whole production on winning an award. I always let the cast know that nominations and awards are just based on someone's opinion ... but it's very nice to win, too!

'This was a fun show, and everyone in the cast made the story so natural, that people believed it.'

This Man Asks For Directions

Directly, forcefully:

That's what happened to a Bronx man yesterday, when he became [lost and] befuddled as he left a West 43rd Street parking garage at about 8 a.m. and made a right turn into the front of a Hagstrom Map shop next door, smashing the plate glass to smithereens.

Steve Wynn On The Bailout

Interestingly, Steve Wynn condemns no one, but is still against the bailout:

Steve Wynn: I think I understand the nature and the heart and soul of the liquidity crisis we face. I believe we got there because good business self-interest and good business sense got out of line and incorrectly focused. If you were a financial company, it became very good business to do as many deals as possible with as much volume as possible, because most of the companies were making a spread. There was a very unusual situation in our country where credit could be passed on from a lender to a third party. I am speaking of investment banks, savings and loans and regular banks. They could print paper in the form of a home mortgage or financing for the acquisition of a company and that sort of thing.

And that paper would be resold after big fees were charged to investment funds and mutual funds and all of the other pockets of money that are created in our economy by 401ks and pension plans and things of that sort. There is this huge cash flow of money every month that goes into funds that have invested in them to fulfill their charters. And in the case of home mortgages, it was the Mac and the Mae. And there was encouragement for everyone to do this. First, politically from the government, Mac and Mae were encouraged to give everybody in America a home.

Secondly, this ability to pass on a credit. The bigger the credit, the bigger your fee, the bigger your bonus. And every intelligent business person in the world did exactly what any other intelligent business person would do. They did bigger deals for more fees and more bonuses to make more money for their enterprises and themselves. They resold these things to funds or to the government until everybody was so filled and so out of cash that it started to back up on itself. When the music stopped, there weren't enough chairs for all the people holding the paper.

The liquidity crisis was exacerbated by the fact that banks and savings and loans are regulated by law in terms of the equity they have to keep in their reserves. So agencies step in and shut them down, or they are completely trapped by insolvency: The liquidity crisis takes its toll.

These were not stupid people. These were not greedy people. They were just people acting naturally. One of the groups acting naturally were all of the folks who wanted a home they could not afford. Or the folks who had a home and got a phone call from some dope telling them their home was worth twice what they paid for it (without seeing it or knowing anything about your neighborhood) followed up by another dope calling saying, based on that appraisal, "I will loan you 100% of the money." This allowed the home builders, in effect, to conduct an auction and say, "Pay $400,000 for this $250,000 home or four other people want to buy it. Why not? It's no money down."

There were no victims here. They were people caught up in a short-term explosion of unfocused self-interest. Short-term thinking. They borrowed long term and invested short term. It was the consumer public, the home buyers and the home lenders, and the politicians who encouraged everybody that prosperity was unlimited. It was a great weekend party and there was no Monday morning. Now we come to this.

Well, I hate to disagree with politicians, but it wasn't greedy, nasty, dishonest people who did this. This was anybody who borrowed from a bank for a price they could not afford. They were not greedy or dishonest. They were acting in a very instinctive and human way. Discipline had been removed from the system, and intelligence was perverted or misdirected. And now is the time to fix it, and you fix it in the same place it happened: in the communities at the root of the problem. It is too big a bundle of stuff to hand over to the government in mass by having them buy it.

Q: You mean the mortgages?

A: Yes, the mortgages. Government can't handle it. It is too complicated and it is too tricky. They will misprice it again and create another problem down the road. These things should be ironed out by people on the ground. Pretend this is a failed savings and loan association where the executives could not handle it and got confused. The government steps in with a proffered that is designed to meet the minimum amount of the liquidity needed to preserve the enterprise. The equity provided a proffered stock can be leveraged at 4, 5, 6 or even 7 times to 1 and so they start lending again.

But the proffered has teeth in it. It says that all loans made hereafter will have a certain equity to loan ratio, that the loan amount must be limited to a certain percentage of the monthly established income of the lender, that there cannot be a 100% loan on an asset, and that nothing but plain operating expenses and minimal salaries are to be paid to every employee including senior management and directors until and unless the proffered dividend is paid to the proffered shareholder.

This equity on the proffered is perpetual for a very important reason: It gives government a chance to decide how much it wants to be paid when redemption time comes around. Normal proffered carries a redemption time period of like 10 or 15 years. But this proffered is perpetual, which means the seller of the proffered, in this case Uncle Sam, the taxpayers of America, get to decide what we want.

Now, what happens is that all the loan executives have to eat the loans. They have to write them off, which means their stock goes through the floor. Then one thing will always happen: Somebody will evaluate the enterprise as a whole and understand that under a worst-case these homes are worth 2X and I can buy them for 1X and purchase the stock. He will buy this savings and loan and run it efficiently with new management and he is totally incentivized to pay off Uncle Sam. He doesn't want to have the proffered over his head. He wants to declare a dividend. He is going to make it worth enough to buy back the proffered so he can get his hands on the real money. And every one of these loans has a value. It may be 40% of what it was issued at or it may be 60% or 30% of it or maybe 20%. But there is value.

But to say that Uncle Sam can sort through hundreds of billions of dollars of these things and price them properly is one of the most immature, unsophisticated judgments anyone can make. Have I clarified my position for you?