Monday, January 26, 2009

VaR Reloaded: Hear it “From the Horses' Mouths”

No Mathematical Construct Is So Useful That It Can’t Be Misused by Greedy Bankers

Four blogs ago I introduced you to an essay by New York Times financial columnist, Joe Nocera, who told the tale of the Value at Risk (VaR) calculations that have been developed by physicists and mathematicians to model the risks facing equity traders and bank managers. Just six paragraphs into his highly informative article, Nocera writes: “Nassim Nicholas Taleb, the best-selling author of ‘The Black Swan,’ has crusaded against VaR for more than a decade. He calls it, flatly, ‘a fraud.’” (In fact, The Black Swan was the #1 Highest Selling Nonfiction book on Amazon published in all of 2007.)

In this 10-minute film you can listen to an interview with both Taleb and mathematician Benoit Mandelbrot, the father of fractal fractal geometry. Although coming at the problem from different directions, both are in agreement that what is yet to happen to the economy before it gets better is both unknown and unknowable, but surely includes possibilities far worse than any historical antecedent...

Monday, January 19, 2009

An Inconvenient Truth That Krugman Isn’t Allowed to Mention...

When I was attending the National Election Reform Conference in Nashville back in April of 2005, I happened to overhear a conversation between two other attendees that went something like this:

Attendee 1: I wonder why Paul Krugman doesn’t write anything about all the evidence for election fraud.

Attendee 2: I know someone who knows Krugman, and he asked him that very question.

Attendee 1: What was his answer?

Attendee 2: Well, he went completely silent until the subject changed...

My interpretation of his silence: The owners of the New York Times (part of the crowd that owns all of the “mainstream media”) told him that in the event that he ever turns in such a column (a) it wouldn’t be published and (b) he would be fired.

At that same Nashville meeting I happened to meet Jonathan Simon, who at his home in Cambridge, Mass., on the night of the 2004 Election had downloaded from the CNN web site the unadjusted Edison-Mitofsky exit-poll predictions for 46 states, showing a Kerry win by 4.6% nationally, versus the official count (and the soon-thereafter “adjusted” exit polls) showing a Bush win by 2.4% — an unprecidented swing of 7%!

N.B. For the full story of Jonathan’s screen captures, together with the statistical analyses that he and others applied to these data showing extremely high probabilities of election fraud in all battleground states, I highly recommend the scholarly, very readable, and still timely book “Was the 2004 Presidential Election Stolen?: Exit Polls, Election Fraud and the Official Count.”

As it turns out, just today I received the following broadcast e-mail from Jonathan, which I reproduce here as though an article, using his first sentence as the title:

My comment in response to Krugman's excellent open letter

All very brilliant by Paul Krugman, but he pays little attention to the POLITICAL obstacles bound to be strewn in any progressive path Obama chooses to take. In particular, Krugman fails to consider the impact of the continued ownership and operation of America's electoral apparatus by rank right-wing partisan corporations Diebold/Premier, ES&S, etc.

How crazy is it that the radicals of one side count the votes in secret? It brought us eight years of Bush and a right-wing Congress and Court--too much, at last, for Americans to stomach. BUT you can't expect to win every election by a landslide, just to eke out a narrow victory. Nor can you expect to be abetted by unexpected incidents such as the outing of Congressman Mark Foley (2006) or THE CRASH (2008) to outstrip the rig set in the machines.

We found more evidence of that rig in 2008, but for most Americans, even the normally astute, it's "Obama won, everything must be OK." It's not. Not only does the right maintain a chokehold over Senate business (and hence appointments as well as legislation), but Diebold and ES&S are in position to "take it all back" in 2010 and 2012. How then is President Obama to enact the bold program that Krugman wisely, but naively, recommends?

Until we repair the breached vote-counting system in the United States--which means counting the ballots for the federal contests (there are only three, at most, per election) by hand in the open--few of the policy decisions of our government will escape the cynical and toxic stamp of the corporate and religious right that has brought us so low in the Bush years, and not coincidentally in the time since partisan-programmed computers began to tally our votes.

--Jonathan Simon, Election Defense Alliance

Sunday, January 18, 2009

Paul Krugman, Winner of the 2008 Nobel Prize in Economic Sciences, Tells Obama What He Must Do – and Do Soon – to Avert a Depression

(Photo: Jeff Zelevansky / Getty)

In the 22 January 2009 issue of Rolling Stone, Paul Krugman writes “What Obama Must Do – A Letter to the New President.” In it he emphasizes that Obama will face an unprecedented economic crisis that is “worse than almost anyone imagined” and will grow still worse unless and until adequate measures are taken to combat it. Primary among those measures is to put Americans back to work. Under Bush from 2001 through 2007 job growth was insufficient to keep pace with population growth, resulting in 1.5 to 2 million additional unemployed. Then in 2008 alone 2 million jobs were lost outright. Krugman asserts that “There's nothing in either the data or the underlying situation to suggest that the plunge in employment will slow anytime soon, which means that by late this year we could be 10 million or more jobs short of where we should be.” (snip) “Add in those who aren't counted in the standard rate because they've given up looking for work, plus those forced to take part-time jobs when they want to work full-time, and we're probably looking at a real-world unemployment rate of around 15 percent — more than 20 million Americans frustrated in their efforts to find work.” (snip) “As many as 10 million middle-class Americans would be pushed into poverty, and another 6 million would be pushed into 'deep poverty'...”

Because 75% of our Gross Domestic Product (GDP) is due to American consumers consuming, growing impoverishment of the middle class is the single most important factor that must be reversed, and reversed fast, if we are to have any hope of avoiding another great depression. And Krugman explains why the burden of reversing this trend now falls squarely on the shoulders of the new president (because “the FED has lost its mojo”) and how much it will cost (likely double Obama’s present plan in the short run, and more in the long run).

Required reading, folks!

Friday, January 09, 2009

Real Estate Wasn’t the Only Bubble in 2004-2006 That's Now Abursting...

Easy Loans Financed Dividends


New York Times

“Dividends don’t lie.”

Chalk up the death of another Wall Street cliché.

In the late bull market, dividend payments provided one of the seemingly strongest arguments for the bulls. Maybe earnings numbers could be manipulated, but dividend payments required cash. If the company had the cash to hand out, you could be confident the earnings were real.

It was a lie.

It is now becoming clear that the great news on the dividend front from 2004 through 2006 was not an indication of solid corporate performance; it was just another sign of lax lending standards. Lenders who willingly handed out money to homeowners with bad credit were even more generous to corporate borrowers.

Click here for the full article

Thursday, January 08, 2009

VaR: The Story of How the Best Wall-Street Minds Imploded the World’s Economy

VaR stands for Value at Risk. It’s a single number that can be calculated for any investment bank, trading desk, or individual trader using statistical methods worked out by physicists and mathematicians over a period of years (so the math is good). This number represents the maximum value that could be lost in a specified number of trading days – accurate 99% of the time irrespective of asset class – assuming “normal” market conditions inferred from performance in the recent past. As trading in derivatives exploded in the late 1990’s, the SEC allowed the use VaR calculations to disclose firm’s market risks, and soon thereafter an international rule-making board permitted banks to use their own internal VaR calculations to determine how much capital to set aside to cover their risks. Thus, industry-wide capitalization of their loans shrank ever smaller during the years when the still-inflating real estate bubble was interpreted as “normal.” In this time interval, firms took on ever more risk in their headlong race to increase their trading profits. To facilitate this insanity, they began to manipulate their VaRs by loading up with products that generate small gains but were (insanely) deemed unlikely to lead to losses. Foremost among these products were the credit default swaps (CDSs), a kind of insurance against losses due to defaults of their risky loans. The total CDSs issued summed to $45 trillion (roughly twice the size of the entire U.S. stock market) and subsequently rose to about $500 trillion in the course of totally unregulated trading (about 10 times the total value of the world’s stock and bond markets!). Like the story of “The Emperor’s New Clothes,” greedy bankers deluded themselves into believing they had bought themselves fool proof protection, whereas in fact they had left themselves completely naked to bankruptcy. Unfortunately for us ordinary taxpayers, however, the greedy perps usually seem to hold on to their ill-gotten riches, leaving us to pay the tab.

In a recent New York Times essay, Joe Nocera does an outstanding job of relating the story of VaR in layman’s terms, yet allowing physicists to understand how their fine math was misused to bring about the presently unfolding financial meltdown. He doesn’t say much about the CDSs though, so you might also want to check here.