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Archive for the ‘Business’ Category

Limbaugh Victim of His Own Entertainment

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Radio talk show host Rush Limbaugh, reportedly, will be removed from a group of potential investors seeking to purchase the NFL’s St. Louis Rams according to ESPN.

Naturally, when it concerns a personality archetype the caliber of Rush Limbaugh, you have a starkly divided community on the issue.  Even more predictably is the type of response from each side.  Evidence lies in the fact that Rush Limbaugh made the trending topic list on Twitter when the story broke.

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Written by huxbux

October 16, 2009 at 5:20 pm

Study Supports Expert Bias

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ne of the more common logical mistakes we make is to turn to the expert bias, also known as the logical fallacy arguing from authority.  The logical error is committed by espousing expert credentials for sound logic, in order to make a logical argument.  A logical argument is founded on logic alone.  No amount of degrees or experience can supplant concrete logic.

Recently, a study was done on how expert advice affects the decision making part of the human brain, and lends physiological evidence that we are predisposed to experts over logic.  This has long been the contention of logical proponents, the most well known being Nicholas Nassim Taleb, who detailed in his New York Times best selling book, The Black Swan, just how detrimental and pervasive the expert bias can be.

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Written by huxbux

April 15, 2009 at 1:12 am

Why Your Blog Hits Aren’t Really Yours

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With the explosion in the number of blogs littering the internet, every blogger takes extraneous efforts to increase their visitor count.  The all important hit count is the singular indicator whether your blog is popular or not.

There are blogs dedicated soley to advising bloggers on who to get their blogs noticed, and attract a larger share of readership.  Focusing on key words, interlinking blogrolls, content distribution, and comment links in other blogs are all part of the “how to get your blog hits” mantra.

You’ve followed all the steps to get you blog hits – selected a topic to focus on, included important key words in your tags and post titles, built a nice shared blogroll with other blogs, and politely commented on other blogs to get the word out about your blog.  After all these steps your blog is averaging a couple hundred hit per day.  All things considered, you’ve done fairly well for yourself.  But your blog is middle-brow.  One of among tens of thousands of other blogs that suffer from medicrioty in terms of hits.

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Written by huxbux

January 12, 2009 at 6:57 pm

Posted in Business, Logic, Philosophy

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Cantor Fitzgerald Moving HSX Into The Real World

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The trading firm Cantor Fitzgerald will be starting a real world version of the Hollywood Stock Exchange – an online virtual trading world where players buy and sell movie and celebrity stocks.  Cantor will now offer movie studios to purchase bonds relative to a movie’s financial performance.

Cantor is actively recruiting veteran HSX traders to participate in advertising and selling these bonds to movie studios.  Cantor Fitzgerald needs “experts” to sell their product.  While there are undoubtedly individuals who have fared appreciably more successful then other traders on HSX, I’m hard pressed to say there are any “experts” in the fantasy trading game.

Let us assume the Cantor incarnation will operate similar to HSX.  A movie stocks price is based on it’s expected total gross(for wide releases four weeks, twelve weeks for limited release).  On it’s opening weekend, a movie will adjust according to it’s weekend gross along with an internal multiplier(typically 2.8).

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Written by huxbux

January 7, 2009 at 7:08 pm

Attention Main Street: Don’t Panic

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With the Dow Jones Industrial average falling 369 points today and losing 3.6% of it’s value, plenty on Main Street might feel the urge to panic after taking a look at their 401k’s and modest portfolio’s.  Maybe Main Street has already started to panic after watching the stock market lose 1,100 points and 10% of it’s value over the course of one week.

But I want to tell Main Street – Don’t Panic.

I don’t want you to panic because you should know that the market hasn’t hit bottom yet, and your investments haven’t hit their low point.  In 1929 and 1987, the two largest market crashes in American history, it took 55 and 54 days respectively for the market to reach bottom from the Black Day.  We’re only about half way through if history is trying to repeat itself here.

So, you have time to shift your investments over to low yield, low risk bonds or even gold.  Take comfort in knowing that there’s alot more you could potentially lose of that retirement nest egg.  It could always be worse, and just might get plenty worse.  Just remember – Don’t Panic.

Written by huxbux

October 6, 2008 at 5:02 pm

Assessing Risk Management As The Problem To The Economic Downturn

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The New York Times published an article yesterday detailing how, in 2004, reduced federal regulations for investment firms where in they did not have to back their mortgage backed securities with capitol reserves, and thus allowing them to utilize those reserves in the investment market.  Keep in mind that following the repeal of the Gramm-Leach-Bliley Act, the banking and investment operations of financial entities essentially became a single, connected operation through the allowance the investment arm to leverage the banking arm’s issued mortgages into mortgage backed securities.

In the preceding meeting between the the Securities and Exchange Commission, government officials, and CEOs of the five largest investment firms , only one warning was issued to the potential dangers of the regulation change.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake.

He additionally went to cite that

the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.

and referenced a history of risk management model failures.

similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.

One single opponent whose field was specific to the risk management field aired dissent.  I can only deduce that the majority of risk management experts within both the government, SEC, and the investment firms did not warrant the reduction in capitol backing against assets as a substantial risk.  It’s of particular note that he focused on the inadequacies of risk management software models.

The article continues focusing primarily on the SEC role in it’s lack of oversight.  The point of interest for me is the issue of risk management which I have posted about previously.  The fundamental problem is not improper oversight as much as it is the inability of risk management models to qualify risk aversion.  More precisely, the problem is that these models provide a incorrect data.

It is nearly impossible to make an informed decision when supplied with an incomplete knowledge base.  No amount of regulations and oversight will balance out the risk management models shortcomings.  If what I considered the proper operation of a motor vehicle to be that the pedal on the left is the gas, the pedal on the right is the brake, spinning the wheel left turns the vehicle right and vice versa and my conviction in this knowledge was inflappable then the success with which I operated a motor vehicle would be independent of you, who shared the same knowledge base for operating a motor vehicle, were sitting next to me in the passenger seat.

The lack of knowledge problem becomes even more acute when trying to forecast future events.  Any mathematical model requires the input of initial conditions to calculate an end point.  Not having every possible set of initial conditions, therefore restricts us to a limited number of predictable end points.  An analogous example would be the knowledge problem prediciting the future of technology.  For if I could predict future technological advancements, I would necessarily be able to create that technology in the present.

Written by huxbux

October 3, 2008 at 6:24 pm

Was The CRA A Hungry, Hungry Hippo?

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Courtesy of the Freakonomic blog, a 1999 NY Times article was dug up detailing Fannie Mae’s ease in credit requirements for low and middle income individuals.  Our good friend Frank Raines has the best line in the entire article.

“Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

It’s astounding to hear the manager of the largest home mortgage entity in the country to ever utter the words “a notch below what our underwriting has required.”  Can I call into question Frank Raines and Fannie Mae’s risk management model?  I might not be a quant, but don’t a lending institution expose itself to more risk when it removes lending standards?

Even the Department of Housing and Urban Development encouraged lax underwriting.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

Quiz question – who bought up and now holds nearly 6 trillion of the 12 trillion outstanding in home mortgages in this country?

Sarcasm aside, I’m once again reexamining the CRA issue.  One of the changes in the CRA in 2005 was to redefine what lending institutions fell under the three levels of CRA review.  Any bank with assets below $1.06 billion did not fall under the strict CRA requrement which was a hike from the previous definition.  It set up a three tier level of federal review.  The three tiered asset levels stood at those above $1.06B, those between $1.06B and $250M, and those below $250M.  Regulations became more relaxed as you worked down the asset ladder.

In testimony by Professor of Law at the University of Michigan, Michael Barr…

…subprime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005. More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts.

Without other additional data, this cannot be said to be a complete view of the picture.  It is alarming to discover that nearly half of all subprime mortgages issued qualified as CRA compliant to some level of supervision.  This would be another example that, just like Fannie Mae, a reduction in regulations leads to exposed risk.  I’d like to know what percentage of the 30% of lending institutions that were removed from “comphrehensive federal supervision”, and into less stringent oversight.

Minus the numbers, shifting the qualifications upwards reduced the amount of banks which fell under CRA review.  Undoubtedly, implementing a law requiring that banks meet a criteria in lending to low income individuals and then not providing proper government oversight is irresponsible.  It would akin to a supervisor at work who gave out his instructions to his employees every day then went home for the remainder.

Given the small amount that CRA loans accounted for in the subprime lending market, it wasn’t a hungry, hungry hippo.  It did suffer from a poor diet of oversight though.

Written by huxbux

October 1, 2008 at 12:52 am

How Much Blame To Throw At the CRA?

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Some experts and some non-experts have pointed a finger at the Community Reinvestment Act as part of the reason behind the housing bubble bursting and setting off an economic crisis.  I afforded it due consideration, but when all is said and done holds minimal blame in the grand scheme.

The failures in government regulation undoubtedly played a part in the economic crisis.  However, compared to other government action, the CRA accounts for a tiny share of the pie in more ways then one.  It was a mistake to change CRA compliance requirements to be measured on a quantitative basis and away from a qualitative value judgement.  This forced lending institutions to require meet an annual lending quota or risk jeopardizing government benefits.  The CRA most definitely encouraged lending to those who could not afford.

But looking at the percentage what the government qualified as CRA loans pales in comparison to the total share of outstanding subprime loans.  Between 1993 and 1998, only $467 billion dollars qualified as CRA loans – a tiny slice of the trillions and trillions of dollars in outstanding home loan mortgages.  Present day estimates indicate that CRA home mortgages only account for about 20% of all home mortgage loans.  Even taking into account the higher default rates of subprime loans, a 9% default rate on CRA loans doesn’t even begin to approach the aggregate value in total defaulted home mortgages.

Numbers aside, it’s questionable whether or not a repeal of the CRA would have stopped the subprime lending spree.  In fact, two other government actions greatly encouraged subprime mortgage practices far more then the CRA.

Combined, Freddie Mac and Fannie Mae has either bought up or issued nearly half of all outstanding home mortgages by buying up loans from other lending institutions.  Freddie Mac and Fannie Mae were able to begin buying up large amounts of outstanding home loans because they could now sell mortgage backed securities.  Prior to the passage of the Gramm-Leach-Billey Act(which repealed the Glass-Steagall Act), banks were prohibited from offering investment services.  But now Freddie Mac, Fannie Mae, and all banks could begin leveraging their outstanding home mortgage loans to raise additional capitol.

It was a new way to raise capitol revenue and a new way to increase profits.  It’s natural for all businesses to exploit their profit margins while managing risks.  However, the risks of mortgage backed securities were lessened by the nonbinding understanding in the financial sector that the government implicitly guaranteed the securities issued by Freddie Mac and Fannie Mae.  The federal government has long provided these two instutitions with tax breaks, subsidies, low interest loans, and a reduction in capitol backing regulations.

Believing the mortgage backed securities issued by Freddie Mac and Fannie Mae would always be liquid, believed, to some degree, that the risk of subprime lending were offset by the implicit government backing.  With the ability to leverage loans as capitol and the perceived invunrability of Freddie Mac/Fannie Mae, fueled an increase in subprime lending.  It was a fantastic short term way to spur growth in the housing market, but miscalculated the risk involved based on assumptions.  It was not the need to meet CRA requirements that caused banks to make high-risk loans, it was the incentive to raise capitol.  The CRA could have been nonexistent and lending institutions would have still pursued those avenues which appeared profitable.

Government missteps played a role in where we are today.  Banks should have never been allowed to enter the investment market through government deregulation.  And the government never should have allowed Freddie Mac and Fannie Mae become the lynch pin in the home mortgage market.

Instead of pointing our finger at a single, politically self-serving source lets all grow 90 more fingers, so we can point the blame in all directions where it rightly deserves to be.  This wasn’t the CRA’s doing.  This was a confluence of events ranging from government to free market to populace none of which are to be used to gain the political upperhand.

Playing The Wrong Kind of Politics Dooms The Bailout Package

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Question.  What kind of recipe do you get when you have a Congressional election year, a financial crisis, and misinformed voter anger?  A recipe for disaster.

And now our politicians in Washington are, for all intensive purposes, are sitting on their hands by voting down the $700B bailout package in the House today.  In response the stock market had it’s worst day in history in points lost and it’s worst percentage drop since 1987.  All of this following on the heels of the beating Wall Street has suffered since September 18th.

We are witnessing a colossal tragedy unfolding if it continues.  What is occurring in Washington, alongside an angry populace fuming at the “greed” of Wall Street, is the equivalent of driving a car with your eyes closed down a winding mountain road.  There is a confluence of forces playing their part in this Shakespearean tragedy, none of which are constructive to our future economic health.

I expect when our elected officials to cast their vote on any bill, especially a bill that of such critical importance, to decide based on the merits of the bill.  Any other factors that enter into the decision making process are unacceptable.  Yet, today some House Republicans blamed “blamed Ms. Pelosi for a speech before the vote that disdained President Bush’s economic policies, and did so, in the opinion of the speaker’s critics, in too partisan a way,” to explain their nay votes.  Republican Jeb Hensarling said the bailout package would the nation on “the slippery slope to socialism,” and added that saddle taxpayers with “the mother of all debt.”

Democrats of course fingered Republicans in the typical partisan merry-go-round that has become standard practice.  In the end, all Washington accomplished today was politicizing the most important event of a generation.

Understanding why the vote became politicized is so perfectly simple, yet infuriatingly frustrating.  All it requires is a look at the vote roll.  Another reason opponents of the bailout package gave for voting no was that they had “encountered too much hostility for the bill among their constituents, and were worried that a vote in favor would be political suicide.”  Not surprisingly, in an election year, political suicide can be onset by taking action that might jeopardize your reelection.  Don’t rattle the cage too much.  People might get scared.

I came across the Robot Pirate Ninja blog today which had an interesting article on this very topic.  The post linked to FiveThirtyEight were political suicide is explained in the most simpliest of terms.  38 incumbent Congressman who are in tightly contested races voted on the bailout package.  Only 8 of the 30 voted in favor.  That’s a .211 average.  Of those not in a contested election race, 197 voted for and 198 voted against.  Almost a 50/50 split.  Is this just a statistical anamoly or did 30 elected Representatives decide their vote on what’s best for keeping them in Washington?  I’ll take the former and run with it.

Following the introduction of the bailout package by President Bush, a Gallup poll showed 78% of American’s supported some form of bailout package.  But only 22% of voters favored Bush’s proposal while 56% favored a different plan other then Bush’s.  Clearly, most American’s favor some form of a bailout package.

I contend that the 56% of voters who favored something other then the proposed plan responded on their deep distrust of Bush(note his 22% rating in polls), and a backlash reaction to the idea of using tax payer dollars to rescue Wall Street.  Bush sits as a lame duck President with an unbearable approval rating.  Any proposal he makes is going to be met with such ferocious backlash it’s destined to fight an uphill battle.  That hill has about a 78% incline.

Combine that with a misconception among the populace that the $700B in taxpayer money is going straight into the pockets of corrupt, greed driven corporations, it creates an irrational fear that the bailout package is the epitome of Wall Street excess and irresponsibility.  It’s an emotional reaction, and these types of reactions incite a disregard for analysis.  Logic bows in the face of feverish passion.  I have read so many blogs that are a mouthpiece for a blinding rage pointed at Wall Street.  I’ve talked to many people who ardently contend that they should not be spending their dollars to save money hungry con artists.  The bailout package has become something deeply personal for many people.

Times of crisis are one of the few times our elected officials start taking the pulse of their constituents.  They have almost assuredly taken note of the wrath that’s resonating throughout our country.  They are certainly not going to poke an angry bear.  It just might bite.

Some of this would be alleviated by an American populace that viewed the bailout with less theatrics and with more understanding of the economic implication in having a massive bank failure in this country.  What we face is not a singular, isolated event.  There is a cascade of dominos that follow if we allow banks to crumple.

Banks holding trillions of dollars in illiquid assets amass massive debt.  Without capitol reserves, banks drastically reduce corporate loans.  Corporate entities unable to raise needed capitol investment scale back their production.  The supply and demand equilibrium becomes unbalanced and price delfation sets in.  Existing assets lose their value sending businesses scrambling to stabilize their capitol reserves.  Lacking necessary capitol reserves and unable to sustain operations, some businesses shut down completely.  Existing business hoard capitol reserves and make severe cut backs.  The unemployment rate spikes upwards.  Lost home income translates into a plummet in consumer spending.  Supply and demand ratios become more imbalanced and deflation continues.  With reduced loans, banks start calling in their loans.  Borrowers, already struggling to meet their own capitol needs, default further reducing existing banks ability to lend.  Squeezed with minimal capitol reserves and debt either are unable to pay their loans.  A further string of bank closing occur.

The vicious cycle that unfolds goes on and on.  This sort of cycle has taken place once before in this country and that was the Great Depression.  Understand that bailing out the financial institutions that are now treading water is to put a stop to the falling domino’s – to stop this country from experiencing a massive bank failure and the subsequent evaporation of the necessary capitol to keep the economy functioning.  $700B is a small amount of money to potentially to minimize a catastrophic risk.

Handcuffed by political preservation, the gears have ground to a halt.  Let us all hope that there are enough of our elected officials in Washington who aren’t driven by partisan politicization, and can hash out a needed bailout package.  In the end, I do believe some sort of package will go through.  Yes, our tax payer dollar will go to corporate America.  And yes, it’s going to save them from running aground.  But it’s also going to save our jobs, our health insurance, and our retirement benefits.

This isn’t the first time the government has had to save the free market.  It happened once before but not before plenty of foot dragging.  In if helps, last time this happened the government came out recouping our tax dollars and then some.

Written by huxbux

September 30, 2008 at 12:24 am

Telecommunication Companies Gouging Via Text Message

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When Comcast announced it’s plan to begin instituting a bandwidth cap, the tech community was in general consensus that bandwidth limits was not consumer friendly, and sparked considerable outrage from some consumers.  But there’s something else that should infuriate you about your data much more then how much your allowed to use every month.  Namely, how much your paying for what kind of data you send and receive.

Our data works on an astronomic pay tier, and to illustrate this lets do a little math.

Your average home internet bill is probably around $50.00 a month.  If your a Comcast customer your allotted 250 GB per month for your monthly payment.  Your paying Comcast $0.20 for every GB of data.  That equates to you paying paying $0.0000019 per kB of data transferred.

Telecommunications companies like AT&T and Sprint charge $0.10 for each text message sent and received.  The average text message data size is 10kB.  1 GB holds 1,048,576 kB.  104,857 text messages would consume 1 GB of memory.  At an average cost of $0.10 per text message, you are paying $1,048,570 per GB of text messages.

There’s a 524,285,000% cost increase from wired data to wireless text message data.  Show me another industry where you’ll encounter this sort of price increase for the same product?  Now, it’s understandable that wireless data infrastructure requires more investment then a wired infrastructure, but to this degree?

Wireless telecommunications companies are gouging it’s customers for text message data transmissions, and you rarely hear any outcry from consumer advocacy groups much less government officials.  What’s even more perplexing is that while our wired data limits are being restricted, our wireless data transmissions via text messaging continues to explode according to a CTIA report.

Regardless of the fact that text messages account for a minuscule proportion of the data we send and receive, it’s absolutely unethical for this kind of tier pricing for data to exist.

Written by huxbux

September 26, 2008 at 5:32 pm