Friday, 30 April 2010
Why I Hate 3-D Movies
Roger Ebert: "Hollywood is racing headlong toward the kiddie market."
Thursday, 29 April 2010
A knife fight is not a mediation
interfluidity: "What happened here is nothing like what a market maker does."
Wednesday, 28 April 2010
The Big Short, and the Enormity of the World Economy Explained by Pop Culture References
There's a trick they do with one pea and three cups which is very hard to follow, and something like it, for greater stakes than a handful of loose change, is about to take place.
The text will be slowed down to allow the sleight of hand to be followed.
Mrs. Deirdre Young is giving birth in Delivery Room Three. She is having a golden-haired male baby we will call Baby A.
The wife of the American Cultural Attache, Mrs. Harriet Dowling, is giving birth in Delivery Room Four. She is having a golden-haired male baby we will call Baby B.
Sister Mary Loquacious has been a devout Satanist since birth. She went to Sabbat School as a child and won black stars for handwriting and liver. When she was told to join the Chattering Order she went obediently, having a natural talent in the direction and, in any case, knowing that she would be among friends. She would be quite bright, if she was ever put in a position to find out, but long ago found that being a scatterbrain, as she'd put it, gave you an easier journey through life. Currently she is being handed a golden-haired male baby we will call the Adversary, Destroyer of Kings, Angel of the Bottomless Pit, Great Beast that is called Dragon, Prince of This World, Father of Lies, Spawn of Satan, and Lord of Darkness.
I read Michael Lewis's The Big Short: Inside the Doomsday Machine, and I recommend it.
It was a quick read and, like all Lewis stories, half character story and half an examination of some trend or event in society. I already had a comfortable grasp of mortgage backed securities, collateralized debt obligations, and credit default swaps, so the technical details were (mostly) easy reading.
That said, I hit one point a third of the way through that I had to read three times before it clicked, and when I could finally say that I understood what I'd just read, I felt I'd wandered into a story about an ancient sunken city that will rise again when the stars are aligned.
The most merciful thing in the world, I think, is the inability of the human mind to correlate all its contents. We live on a placid island of ignorance in the midst of black seas of infinity, and it was not meant that we should voyage far. The sciences, each straining in its own direction, have hitherto harmed us little; but some day the piecing together of dissociated knowledge will open up such terrifying vistas of reality, and of our frightful position therein, that we shall either go mad from the revelation or flee from the light into the peace and safety of a new dark age.
In the process, Goldman Sachs created a security so opaque and complex that it would remain forever misunderstood by investors and rating agencies: the synthetic subprime mortgage bond-backed CDO, or collateralized debt obligation. [...]
There was a third, even more mind-bending, way to think of this new instrument: as a near-perfect replica of a subprime mortgage bond. The cash flows of Mike Burry's credit default swaps replicated the cash flows of the triple-B-rated subprime mortgage bond that he wagered against. The 2.5 percent a year premium Mike Burry was paying mimicked the spread over LIBOR that triple-B subprime mortgage bonds paid to an actual investor. The billion dollars whoever had sold Mike Burry his credit default swaps stood to lose, if the bonds went bad, replicated the potential losses of an actual bond owner.
On its surface, the booming market in side bets on subprime mortgage bonds seemed to be the financial equivalent of fantasy football: a benign, if silly, fascimile of investing. Alas, there was a difference between fantasy football and fantasy finance: When a fantasy football player drafts Peytom Manning to be on his team, he doesn't create a second Peyton Manning. When Mike Bury bought a credit default swap based on a Long Beach Savings subprime-backed bond, he enabled Goldman Sachs to create another bond identical to the original in every respect but one: There were no actual home loans or home buyers. Only the gains and losses from the side bet on the bonds were real.
And so, to generated $1 billion in triple-B-rated subprime mortgage bonds, Goldman Sachs did not need to originate $50 billion in home loans. They needed simply to entice Mike Burry, or some other market pessimist, to pick 100 different triple-B bonds and buy $10 million in credit default swaps on each of them. Once they had this package (a "synthetic CDO," it was called, which was the term of art for a CDO composed of nothing but credit default swaps), they'd take it over to Moody's and Standard & Poor's. [...]
The details were complicated, but the gist of this new money machine was not: It turned a lot of dicey loans into a pile of bonds, most of which were triple-A-rated, then it took the lower-rated of the remaining bonds and turned most of those into triple-A CDOs. And then, because it could not extend home loans fast enough to create a sufficient number of lower-rated bonds -- it used credit default swaps to replicate the very worst of the existing bonds, many times over. [...]
The market for "synthetics" removed any constraint on the size of risk associated with subprime mortgage lending. To make a billion-dollar bet, you no longer needed to accumulate a billion dollars' worth of actual mortgage loans. All you had to do was find someone else in the market willing to take the other side of the bet.
I find it a stretch to call this the "subprime crisis." Yes, subprime mortgages were involved, but in the way of the chicken's -- not the pig's -- involvement in a breakfast of ham and eggs. Bear Sterns didn't blow up because it found itself holding too many defaulting mortgages -- it blew up because it found itself guaranteeing unrelated third parties' mortgages, and income streams not from mortgages but indexed to the mortgages of unrelated third parties, and income streams from the income indexed to the mortgages, and so on. And it was doing this many times over.
I've seen arguments that the subprime crisis was caused by Federal pressure to expand lending to minorities and thus Fannie Mae taking on excess risks. I thought this argument implausible -- subprime mortgages were the loans that didn't meet Fannie Mae's underwriting requirements. Subprime mortgages were a way around Fannie Mae and its underwriting requirements. Synthetics were a way around the subsequent lack of demand for new mortgages.
It turns out this reply isn't relevant, because the Fannie Mae claim isn't even wrong. The subprime mortgage crisis isn't about the implosion of a pool of bad mortgages -- it's about the implosion of a pool of no mortgages.
For a specific example, consider Abacus 2007-AC1 -- the security Goldman Sachs is accused of inappropriately marketing to its clients. Abacus 2007-AC1 is being described as a mortgage security; but it appears to contain no mortgages, just side bets. Calling it a mortgage security gives the impression there's something backing it, but it's just a gamble on someone else's (mis)fortune.
And if you're wondering how this didn't show up on anyone's radar:
[...] Goldman would buy the triple-A tranche of some CDO, pair it off with the credit default swaps AIG sold Goldman that insured the tranche (at a cost well below the yield on the tranche), declare the entire package risk-free, and hold it off its balance sheet. [...]
As a risk mitigation strategy, this makes about as much sense as the scene in Sunshine where a man stands in the equilibrium between a thermonuclear bomb explosion and the core of the Sun. It's very pretty, and theoretically interesting, but it makes no sense and you know he's getting nuked in short order.
- Investors wanted something to buy.
- Fannie Mae wasn't sourcing more mortgages.
- Private lenders made more mortgages by lowering standards.
- Investors took out insurance against the low-standard mortgages.
- More investors took out naked insurance against the low-standard mortgages.
- Wall Street sold and repackaged those naked insurance policies as if they were mortgages.
- Wall Street clients didn't get the memo that they were no longer investing but were now gambling.
- Wall Street didn't get the memo that it was no longer a group of banks, but a group of casinos.
- No one got the memo that Wall Street's financial position was a net of cyclopean unsupported long and short positions that weren't as balanced as the spreadsheet claimed.
- The house doesn't always win: In particular, it doesn't win when it doesn't realize what game it's playing.
- If the town drunk owes $50 on a Roulette game, that's his problem. If the town drunk owes $5,000,000 on a Roulette game, that's your problem. If the town drunks collectively owe $50,000,000,000,000 on a Russian Roulette game, that's why we're here.
For maybe a hundred thousand years or more, grownups have been waving tangles of string in their children's faces.... No wonder kids grow up crazy. A cat's cradle is nothing but a bunch of X's between somebody's hands, and little kids look and look at all those X's.... No damn cat, and no damn cradle.
The Big Short has its protagonists and antagonists. By the end, I couldn't sympathize with either camp. They were all playing a game no one should have been playing, and even the "losers" were making a bundle doing so.
Tuesday, 27 April 2010
Brief meditative exercise helps cognition
ScienceDaily: "... after only four days of training for only 20 minutes each day ... consistently higher averages than the reading/listening group on all the cognitive tests and as much as ten times better on one challenging test that involved sustaining the ability to focus, while holding other information in mind."
Is Technology a Friend or Foe to Food?
Ezra Klein: "In 1977, Americans reported eating about 186 calories between meals. By 1994, that had rocketed to 346 calories. That difference alone is enough to explain the changes in our national waistline."
We Have Met the Enemy and He Is PowerPoint
- Everyone makes bad PowerPoint presentations
- Everyone knows this
- Please stop
Friday, 23 April 2010
Prescription Data Used To Assess Consumers
washingtonpost.com: "although consumers sign consent forms, they effectively have to authorize the data release if they want insurance"
Thursday, 22 April 2010
Apple passes Microsoft on S&P 500 market cap list
MarketWatch: "Apple trails only Exxon Mobil"
Gut Check: Here's the Meat of the Problem
washingtonpost.com: "The pity of it is that compared with cars or appliances or heating your house, eating pasta on a night when you'd otherwise have made fajitas is easy."
Tuesday, 20 April 2010
Big News on April 15, 2010
The Zetetic Forum: "Early in the next decade we will be testing capabilities that will take us beyond low Earth orbit. By 2025 we will send a crew into deep space, beyond the Moon. A Near Earth Asteroid will be our first destination. By the mid-2030’s we will send a crew to orbit Mars. Landing on, and ultimately living on Mars will follow."
Explaining FinReg: Resolution authority
Ezra Klein: "Any firm that goes into resolution -- or that taps into the liquidation fund -- is destroyed. Its management is fired. Its shareholders are wiped out. Its creditors lose money. It's broken into pieces and sold. That's why it's closer to execution than resolution, and why it's so deeply misleading to call this a bailout. No company wants to go through resolution. In fact, once a company goes through resolution, there's no more company." -- "Toxic Bank Death Panel?"
How Wall Street Became a Giant Casino
NYTimes.com: "The mortgage investment that is the focus of the S.E.C.’s civil lawsuit against Goldman, Abacus 2007-AC1, didn’t contain any actual mortgage bonds."
Monday, 19 April 2010
Wall Street says Washington doesn't understand finance. Well, neither does Wall Street.
Ezra Klein: "And then, of course, there's the holy grail: a high-return product that's so complicated that people can't tell where its risks are and so it's treated as if it has no risk at all."
Sunday, 18 April 2010
Clinton: Rubin and Summers Gave Me Wrong Advice on Derivatives, and I Was Wrong To Take It
Jake Tapper: "sometimes people with a lot of money make stupid decisions and make it without transparency"
Friday, 16 April 2010
Obama's asteroid goal: tougher, riskier than moon
The Associated Press: "If humans can't make it to near-Earth objects, they can't make it to Mars"
Three questions about the Goldman fraud filing
Ezra Klein: "The stock market has taken a dive on news that the SEC is going after Goldman. Is the market upset that major investment banks swindled investors? Or is it upset that the government is holding one of them to account?"
Wednesday, 14 April 2010
The Atlantic: "The people most vulnerable to obesity, however, do not have access to healthy food, to role models, to solid health-care and community infrastructures, to accurate information, to effective treatments, and even to the time necessary to change their relationship with food. And if that is true for fat adults, it is even more true for fat children, many of whose choices are made for them."
Tuesday, 13 April 2010
Some hot Jupiters orbit the wrong way
ars: "This suggests that the orbital interactions aren't limited to pushing and pulling within the plane—large bodies must get close enough to swing a Jupiter-sized planet out of the plane of orbit, and possibly flip it to the opposite plane."
Monday, 12 April 2010
Slow Food vs. Naked Lunch
Tea Leaves: "But the truth is that the school district, even with all the State resources behind it, cannot afford a slow-foodish lunch for its students."
The Agony of Long-Distance Runners -- Coronary Plaque
Medical News: ACC: "better heart rates than people being tested for cardiac disease, but, paradoxically, the runners had more calcified plaque in their heart arteries"
U.S. military's green projects to save $1.6 billion over time
USATODAY.com: "The energy savings usually recover the investment within 90 days, he says."
Why Americans are angry
Ezra Klein: "But where the decline of manufacturing was greeted with sanguine talk about 'retraining,' the decline of journalism has been greeted with something akin to grief."
Sunday, 11 April 2010
Book Review - The Bridge - The Life and Rise of Barack Obama
NYTimes.com: "But continuity easily turns into inertia, as we found when Obama wasted the first year of his term, the optimum time for getting things done." Why oh why can't we have a better press corps?
George W. Bush 'knew Guantánamo prisoners were innocent'
Times Online: "Colonel Wilkerson, who was General Powell’s chief of staff when he ran the State Department, was most critical of Mr Cheney and Mr Rumsfeld."
Scott and Scurvy
Idle Words: "The story of how this happened is a striking demonstration of the problem of induction, and how progress in one field of study can lead to unintended steps backward in another."
Saturday, 10 April 2010
Donovan McNabb: 'I'd Like To Thank The Ungrateful, Over-Expecting,Oftentimes-Racist Fans Of Philadelphia'
The Onion - America's Finest News Source
Thursday, 8 April 2010
Building a Green Economy
Krugman: "James Hansen, the renowned climate scientist who deserves much of the credit for making global warming an issue in the first place, has argued forcefully that most of the climate-change problem comes down to just one thing, burning coal, and that whatever else we do, we have to shut down coal burning over the next couple decades." This piece is mostly an argument for incentives that let markets do the work.
Confirmed: Obama authorizes assassination of U.S. citizen
Glenn Greenwald: "Congratulations, Barack Obama: you're now to the Right of National Review on issues of executive power and due process"
Wednesday, 7 April 2010
Cloud Standards Considered Harmful
stochasticresonance: "If we are talking about IaaS (infrastructure as a service) then the compute abstractions for starting, stopping, and querying instances are almost trivial compared to the work of configuring and coordinating instances to do something useful. Sysadmin as a Service isn’t part of the standards."
How the GOP Purged Me
Chris Currey: "You have to be blind to wish for the suffering of millions of Americans just because you believe in personal responsibility."
Michael Lewis and the idiots
Ezra Klein: "There is not one single piece of the system that worked the way it was supposed to." I disagree with the quotation -- every single piece of the system worked the way it was supposed to, but the system was destined to fail. I also disagree with the sentiment that everyone involved was an idiot. Almost everyone in Lewis' story was at least fairly smart, but the incentive structures were such that smart people were paid well to lead everyone to disaster. This suggests that we should be reading Austin, not Summers.
Monday, 5 April 2010
I Saw the Crisis Coming. Why Didn’t the Fed?
NYTimes.com: "And at this point there is no reason to reflexively dismiss the analysis of those who foresaw the crisis."
Invisible IPv6 traffic poses serious network threat
Network World: "like it or not, you are running IPv6 in your network"
The Moderate's Position on iPad Openness
Alex Payne: "This is one of the odd things about our particular place in the history of art and technology: a program that allows someone to create music from pre-recorded loops is itself a first-class creation; the music that is pieced together from those loops may be enjoyable, but it has an innately lower creative value unless re-contextualized (for example, released by a hot record label, with no mention made of the software used to create the song)."
Why Microsoft did the right thing in ditching XP for IE9
ars technica: "The track record of Web browsers is pretty lousy. Actually, it's not just Web browsers; the track record of computer software is pretty lousy. Bugs are absolutely rife. But Web browsers are particularly important here, because Web browsers are exposed to potentially hostile code all day long."
Thursday, 1 April 2010
Forking, The Future of Open Source, and Github
tecosystems: "Among the questions posed to us was this: is the future of open source going to be based on communities such as Apache and Eclipse or will it be based on companies that sell open source? My reply? Neither. It’s Github."
Geriatric Java struggles to stay relevant
InfoWorld: "Nothing screams 'get off my lawn' like a language controlled by Oracle"
The Collapse of Complex Business Models
Clay Shirky: "Since then, a battalion of media elites have lined up to declare that exactly the opposite thing will start happening any day now."
Why Internet connections are fastest in South Korea
CNN.com: "We just haven't taken it that seriously."