It appears that UConn will not be a #1. Lunardi who felt on Friday that UConn was a #1 inexplicably changed his tune to Memphis on Saturday. Or rather, the only explanation is that he spoke to people on the committee.
By right, Memphis ought not be in the same conversation as UConn.
UConn has one bad loss this year -- to Georgetown, a team that, ironically, also beat Memphis (along with Tourney teams Syracuse and Villanova). It has two losses to Pitt, a likely #1 seed (and a team that matches up particularly well to UConn) and the tourney loss Syracuse, a top 15 RPI team, in six overtimes -- only after three key players fouled out in earlier overtimes -- that ought count, for seeding considerations, as a tie. They beat 8 different top 50 RPI teams -- @Wisconson, @Gonzaga, @West Virginia, @Louisville, Villanova, Michigan, Syracuse and @Marquette.
This is a #1 seed's body of work. The main contra-argument, that UConn's season should be discounted because of the Dyson injury, is patently unfair.
UConn's record is remarkably similar to, and no less impressive than, Pitt's: 1 bad loss @ Providence along with quality losses @ Louisville, @ Nova and vs West Virginia. Quality wins against Sienna, @Florida State, Syracuse, @ West Virginia, UConn (x2) and Marquette.
Likewise UNC: Borderline losses to BC and Maryland. Quality losses to Florida St (down Ty Lawson) and Wake Forest. Quality wins vs Michigan St, @ Florida St, Clemson, Maryland and Duke (x2).
Lousiville, their tourney win aside, should be a borderline #1. They have bad losses to UNLV and @Notre Dame. They also lost vs Western Kentucky and vs Minnesota -- borderline top 50 rpi teams -- and to UConn. They have quality wins against UAB, Nova (x2), Pitt, Cuse (x2), West Virginia(x2) and Marquette.
Memphis lost to vs Xavier, @Georgetown and Syracuse. With quality wins against only UAB (x2), @Tennessee, @Gonzaga. They certainly should be in contention for a number 1, but their body of work does not compare favorably to UConn.
At the end of the day, they have 1 bad loss, 4 quality wins and nothing close to a signature win such as UConn's @Louisville, UNC vs MSU and Duke (x2), Louisville against Pitt, and Pitt against UConn (x2).
On one hand, its not fair to penalize Memphis for playing in an inferior conference. On the other hand, they ought not profit from it.
That said, what it comes down to, perhaps, is recent tournament performance. UConn has not won a post-season game since 2006, when, as the most talented team in the nation, it was upset by George Mason. The committee -- for good reason -- may be most afraid of UConn embarrassing them with an early exit.
Its also not irrelevant, that Calipari, not Calhoun, is on the air now lobbying for his #1.
This all gets to the reason I believe its time for Calhoun to go. There was a time when nobody wanted to win more then Calhoun, which was reflected in the performance of his teams. One gets the strong sense that this is no longer the case. He is hardly be the first coach to suffer from resting-on-laurel-itis -- Coach K fell victim 10 years ago (which is how Calhoun won his first NCAA championship) -- but the players and the State of Connecticut deserves a Coach who wants, above all else, to win.
Sunday, March 15, 2009
Tuesday, March 10, 2009
Purim
Purim is a transitional holiday. It is the first post-biblical holiday. The Megilla is, I believe, the last book the Talmud credits the Eternal Author. The story is, perhaps, the first in sacred history fully situated in exile.
There are many themes to the Megilla but the most pronounced might be Law. One of its most oft-used words is Da'ath, which in modern Hebrew usually means "religion", but in the Megilla means "Law".
The King's law, in the Megilla, is universal. It is sent to every nation, in every language and script. Once issued in the King's name and sealed with the King's ring, it cannot be withdrawn. Haman argues for the destruction of the Jewish people by describing them as a people dispersed amongst the nations who do not follow the King's laws. The Talmud reads the King in the Megilla as referring (also) to the King of Kings.
In contrast to the rule of the King, is the leadership of Mordechai and Esther. Mordechai cannot compel Esther to appeal to the King, he must persuade her. Esther similarly must persuade the King. (Persuasion, in its different flavors, is another prominent theme of the Megila.) Even in victory, they cannot annul the King's decree, the letter of its law must stand. Instead, they issue a supplementary law, which, reading between the lines, people understand as fundamental change. Finally, they must persuade the Jewish People to accept the holiday and rituals of Purim. The Talmud understands that acceptance to be not narrowly of the new holiday but, rather, of the entire Jewish Law, the prior adoption of which the Talmud views as having been co-erced.
These competing senses of Da-ath would seem to reflect the difference between biblical and contemporary Judaism. Differences which are not simply of-necessity: The tradition views Purim as one of the few holidays that will be celebrated after the ultimate redemption.
On a different note:
Haman describes the Jewish people as not-obeying-the-king's-laws. The main law of the King previously mentioned in the Megilla is that women defer to their men. The Talmud sees Haman himself suggesting the law. The law -- and the Jewish disregard of it -- must have been of particular personal concern to Haman as the Megilla describes him as having a un-deferential wife.
There are many themes to the Megilla but the most pronounced might be Law. One of its most oft-used words is Da'ath, which in modern Hebrew usually means "religion", but in the Megilla means "Law".
The King's law, in the Megilla, is universal. It is sent to every nation, in every language and script. Once issued in the King's name and sealed with the King's ring, it cannot be withdrawn. Haman argues for the destruction of the Jewish people by describing them as a people dispersed amongst the nations who do not follow the King's laws. The Talmud reads the King in the Megilla as referring (also) to the King of Kings.
In contrast to the rule of the King, is the leadership of Mordechai and Esther. Mordechai cannot compel Esther to appeal to the King, he must persuade her. Esther similarly must persuade the King. (Persuasion, in its different flavors, is another prominent theme of the Megila.) Even in victory, they cannot annul the King's decree, the letter of its law must stand. Instead, they issue a supplementary law, which, reading between the lines, people understand as fundamental change. Finally, they must persuade the Jewish People to accept the holiday and rituals of Purim. The Talmud understands that acceptance to be not narrowly of the new holiday but, rather, of the entire Jewish Law, the prior adoption of which the Talmud views as having been co-erced.
These competing senses of Da-ath would seem to reflect the difference between biblical and contemporary Judaism. Differences which are not simply of-necessity: The tradition views Purim as one of the few holidays that will be celebrated after the ultimate redemption.
On a different note:
Haman describes the Jewish people as not-obeying-the-king's-laws. The main law of the King previously mentioned in the Megilla is that women defer to their men. The Talmud sees Haman himself suggesting the law. The law -- and the Jewish disregard of it -- must have been of particular personal concern to Haman as the Megilla describes him as having a un-deferential wife.
Monday, March 9, 2009
Babies With Candy V
Krugman opines The Big Dither
While Krugman may not find the plans credible, there are certainly informed commentators who do. He is certainly not the only political commentator dismissive of those who disagree with him.
A more rigorous analyst would question the process.
While it may well be true that bold steps are required, its hard to imagine that any set of bold steps will be greeted without resistance by "informed commentators". To give "informed commentators" a policy veto is to preclude adopting bold steps.
Its clear that the administration is attuned to the politics. It is natural for political policy makers to be attuned to the political implications of policy. It also may reflect sympathy for the school of thought which believes recessions to be, above all, crises of confidence and the way out of recessions to restore confidence. Bold steps, in that view, are less medication than placebo; The actual steps are less important that the public's confidence in them.
Krugman, to my mind, also mis-states the motivation behind the policies. The concrete problem that the administration is trying to address is the banks have on difficult to price, and therefore "toxic", assets on their balance sheets that impair their ability to serve their nominal economic role. Were we to price these assets at their current, fire sale, market price most of these banks be seriously under capitalized, if not insolvent. Its reasonable to believe that getting these assets off bank balance sheets at an non-ruinous price will go along way towards pushing our troubles away.
Geithner is certainly right to a point.
These assets being loans, have a long-term value: Some amount of money will be paid back. In healthy, liquid markets, the market price is the best estimate available of the expected long-term-value. The current market prices are almost certainly depressed, as they more reflect fear of short term price fluctuations. An investment manager who has to mark her portfolio to market and report P&L to clients on a monthly, or quarterly, basis and whose clients are likely to substantively withdraw money in response to paper losses, is rationally more concerned with short-term-price rather than long-term-value expectations.
To the degree that our economy depends on these markets functioning, the government has a responsibility to help get those markets working again.
Financing buyers, however, is not, to my mind, really a means to get these markets working again. The price will be dependent on the terms of the financing. To work, I think, Geithner will have to set the terms such that the price approaches the long-term-value. A price set too high will save the banks, but not restore investor confidence in price stability. Krugman is right to question Geithner's -- any individual's -- ability to gauge that long-term-value.
A more thoughtful policy would be to adjust tax policy to encourage investment pools with longer lockups, and with P&L measured in cash returns not market values. The price managers of those pools would be willing to pay for assets will be far more based on expectation of long term value.
That said, if the goal is getting these assets off bank balance sheets as quick as possible, subsidizing buyers may well be the most sensible policy.
Krugman's argument appears to be: Subsidizing private investors will not make the banking system healthy because benefit will be going to undeserving people. While, perhaps, rhetorically appealing, it is logically empty.
Krugman believes that de-zombification will make banking system healthy (I am skeptical). If these toxic assets on zombie bank balance sheets are replaced with enough cash, the banks will be de-zombified.
That cash can come from the government -- per Paulson's initial plan or proposed nationalization schemes -- or from subsidized, if undeserving, private investors (the subsidy is required because private investors are not currently willing to pay sufficient cash).
Krugman has yet to explain how nationalization is a panacea. In a vanilla nationalization model, the government will replace these toxic assets on zombie bank balance sheets with sufficient public capital, then sell the recapitalized banks and toxic assets separately into the market over some period of time.
This seems to me, on the surface, to be far a more complicated, risk laden and expensive means to the same end as a well calibrated buyer subsidy. Which more simply explains this idea's powerful grip.
One suspects that Geithner, with a much better view of the matter, understands the dire state of major financial institutions far better then Krugman. And it may well be the very dire-ness and attending expense of recapitalization, that precludes Geithner, as Paulson before him, from considering a public-capital-only solution.
Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.
Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.
Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.While Krugman may not find the plans credible, there are certainly informed commentators who do. He is certainly not the only political commentator dismissive of those who disagree with him.
A more rigorous analyst would question the process.
While it may well be true that bold steps are required, its hard to imagine that any set of bold steps will be greeted without resistance by "informed commentators". To give "informed commentators" a policy veto is to preclude adopting bold steps.
Its clear that the administration is attuned to the politics. It is natural for political policy makers to be attuned to the political implications of policy. It also may reflect sympathy for the school of thought which believes recessions to be, above all, crises of confidence and the way out of recessions to restore confidence. Bold steps, in that view, are less medication than placebo; The actual steps are less important that the public's confidence in them.
Krugman, to my mind, also mis-states the motivation behind the policies. The concrete problem that the administration is trying to address is the banks have on difficult to price, and therefore "toxic", assets on their balance sheets that impair their ability to serve their nominal economic role. Were we to price these assets at their current, fire sale, market price most of these banks be seriously under capitalized, if not insolvent. Its reasonable to believe that getting these assets off bank balance sheets at an non-ruinous price will go along way towards pushing our troubles away.
Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.
And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.Geithner is certainly right to a point.
These assets being loans, have a long-term value: Some amount of money will be paid back. In healthy, liquid markets, the market price is the best estimate available of the expected long-term-value. The current market prices are almost certainly depressed, as they more reflect fear of short term price fluctuations. An investment manager who has to mark her portfolio to market and report P&L to clients on a monthly, or quarterly, basis and whose clients are likely to substantively withdraw money in response to paper losses, is rationally more concerned with short-term-price rather than long-term-value expectations.
To the degree that our economy depends on these markets functioning, the government has a responsibility to help get those markets working again.
Financing buyers, however, is not, to my mind, really a means to get these markets working again. The price will be dependent on the terms of the financing. To work, I think, Geithner will have to set the terms such that the price approaches the long-term-value. A price set too high will save the banks, but not restore investor confidence in price stability. Krugman is right to question Geithner's -- any individual's -- ability to gauge that long-term-value.
A more thoughtful policy would be to adjust tax policy to encourage investment pools with longer lockups, and with P&L measured in cash returns not market values. The price managers of those pools would be willing to pay for assets will be far more based on expectation of long term value.
That said, if the goal is getting these assets off bank balance sheets as quick as possible, subsidizing buyers may well be the most sensible policy.
...The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.
Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste...
But would it be enough to make the banking system healthy? No.
Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.
And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit...Krugman's argument appears to be: Subsidizing private investors will not make the banking system healthy because benefit will be going to undeserving people. While, perhaps, rhetorically appealing, it is logically empty.
Krugman believes that de-zombification will make banking system healthy (I am skeptical). If these toxic assets on zombie bank balance sheets are replaced with enough cash, the banks will be de-zombified.
That cash can come from the government -- per Paulson's initial plan or proposed nationalization schemes -- or from subsidized, if undeserving, private investors (the subsidy is required because private investors are not currently willing to pay sufficient cash).
So why has this zombie idea ... taken such a powerful grip? The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.Krugman has yet to explain how nationalization is a panacea. In a vanilla nationalization model, the government will replace these toxic assets on zombie bank balance sheets with sufficient public capital, then sell the recapitalized banks and toxic assets separately into the market over some period of time.
This seems to me, on the surface, to be far a more complicated, risk laden and expensive means to the same end as a well calibrated buyer subsidy. Which more simply explains this idea's powerful grip.
One suspects that Geithner, with a much better view of the matter, understands the dire state of major financial institutions far better then Krugman. And it may well be the very dire-ness and attending expense of recapitalization, that precludes Geithner, as Paulson before him, from considering a public-capital-only solution.
Thursday, March 5, 2009
TO
Dallas Cowboys release Terrell Owens
From ESPN, Jerry Jones didn't initially plan to fire Owens, but was pressured to do so by OC Jason Garrett, QB Tony Romo, and TE Jason Whitten.
It seems like, oddly, TO was particularly popular amongst defensive players (for example Terrance Newman), while disliked by some offensive players and coaches. His supporters credit his unmatched heart, work-ethic and talent. His detractors point to his divisiveness -- being a "cancer" -- in the clubhouse. This divisiveness stems from his demands on how he is used in the offense. In his defense, one often hears quotes along the lines of "Show me a WR who does not want the ball more and I'll show you a WR who doesn't belong in the NFL."
Its worth noting that TO is extra-ordinarily divisive to the degree that team-mates buy his arguments. It is precisely because many of the Dallas players believed that Garrett, Romo and Whitten were under-using TO to the team's detriment, that TO had to be cut. A lesser player making similar comments would be less divisive and, therefore, more tolerable,
It is not clear to me that Romo is an winningNFL QB. He certainly has the talent, but thus far has yet to develop the judgment, especially under pressure. Given his central role in TO's dismissal, he will playing this season under a tight microscope. While talent left in DAL, far exceed that which Garcia and McNabb were left-with post TO, offenses have not improved with a TO departure.
ESPN reports that OAK is the team most interested in TO. This would be a good move for OAK, given their investment in JaMarcus Russell. It might be good for TO as Al Davis is not afraid to spend money.
Baltimore would be a great fit for TO personel-wise. With TO, if they can keep their defense mostly intact, they may well be the pre-season favorite for the super-bowl. Cameron -- who knows how to use stars -- must be salivating at the prospect of coaching TO. Harbaugh tho, was on Philly when TO disrupted there and may hold it against him.
A more interesting option mentioned may be IND. TO has arguably never played with a great QB. He need not fear insufficient attention to the passing game in Indy. If he could come to terms with it mentally, he would only benefit statistically from being a #2 WR.
With either IND or BAL, TO stands a better chance of winning a ring next year then Jerry Jones has.
A dark horse team may be MIA. On account of his heart and work-ethic, I've always seen TO as a Parcels sort of guy. On the other hand, Pennington does not seem to have the arm to take real advantage of TO.
In the end, I see TO's exit from "America's Team" as a metaphor for the general decline of America. TO exemplifies those qualities that used to be most identified with American greatness. He was a late third round draft pick from a forgettable school, initially buried behind more gilded players. But he had god-given talent buttressed by uncompromising work-ethic and all-encompassing commitment and heart, alongside a willingness to speak the truth as he sees it.
Romo and Garrett represent what America is becoming. Garrett was tagged as future head coach while still a backup QB. Romo famously took a mini-vacation with his pop-singer girlfriend days before a playoff game (which he lost). Neither has done much to indicate they really have what it takes to get going when the going gets tough. For example, as TO did putting up a MVP caliber performance in the super bowl, with a panic-ridden QB, on a strained ankle and against doctors orders.
Jerry Jones, an oilman, in his heart of hearts must identify with the old America TO still stands for. Which is why he has stood by TO this long. There is a note of tragedy in his finding his hand forced by the new America's Team.
From ESPN, Jerry Jones didn't initially plan to fire Owens, but was pressured to do so by OC Jason Garrett, QB Tony Romo, and TE Jason Whitten.
It seems like, oddly, TO was particularly popular amongst defensive players (for example Terrance Newman), while disliked by some offensive players and coaches. His supporters credit his unmatched heart, work-ethic and talent. His detractors point to his divisiveness -- being a "cancer" -- in the clubhouse. This divisiveness stems from his demands on how he is used in the offense. In his defense, one often hears quotes along the lines of "Show me a WR who does not want the ball more and I'll show you a WR who doesn't belong in the NFL."
Its worth noting that TO is extra-ordinarily divisive to the degree that team-mates buy his arguments. It is precisely because many of the Dallas players believed that Garrett, Romo and Whitten were under-using TO to the team's detriment, that TO had to be cut. A lesser player making similar comments would be less divisive and, therefore, more tolerable,
It is not clear to me that Romo is an winningNFL QB. He certainly has the talent, but thus far has yet to develop the judgment, especially under pressure. Given his central role in TO's dismissal, he will playing this season under a tight microscope. While talent left in DAL, far exceed that which Garcia and McNabb were left-with post TO, offenses have not improved with a TO departure.
ESPN reports that OAK is the team most interested in TO. This would be a good move for OAK, given their investment in JaMarcus Russell. It might be good for TO as Al Davis is not afraid to spend money.
Baltimore would be a great fit for TO personel-wise. With TO, if they can keep their defense mostly intact, they may well be the pre-season favorite for the super-bowl. Cameron -- who knows how to use stars -- must be salivating at the prospect of coaching TO. Harbaugh tho, was on Philly when TO disrupted there and may hold it against him.
A more interesting option mentioned may be IND. TO has arguably never played with a great QB. He need not fear insufficient attention to the passing game in Indy. If he could come to terms with it mentally, he would only benefit statistically from being a #2 WR.
With either IND or BAL, TO stands a better chance of winning a ring next year then Jerry Jones has.
A dark horse team may be MIA. On account of his heart and work-ethic, I've always seen TO as a Parcels sort of guy. On the other hand, Pennington does not seem to have the arm to take real advantage of TO.
In the end, I see TO's exit from "America's Team" as a metaphor for the general decline of America. TO exemplifies those qualities that used to be most identified with American greatness. He was a late third round draft pick from a forgettable school, initially buried behind more gilded players. But he had god-given talent buttressed by uncompromising work-ethic and all-encompassing commitment and heart, alongside a willingness to speak the truth as he sees it.
Romo and Garrett represent what America is becoming. Garrett was tagged as future head coach while still a backup QB. Romo famously took a mini-vacation with his pop-singer girlfriend days before a playoff game (which he lost). Neither has done much to indicate they really have what it takes to get going when the going gets tough. For example, as TO did putting up a MVP caliber performance in the super bowl, with a panic-ridden QB, on a strained ankle and against doctors orders.
Jerry Jones, an oilman, in his heart of hearts must identify with the old America TO still stands for. Which is why he has stood by TO this long. There is a note of tragedy in his finding his hand forced by the new America's Team.
Tuesday, March 3, 2009
Red Herrings
from the WSJ, Buyers Should Pay for Bond Ratings:
It is certainly true that agency mis-ratings and misaligned incentives are big parts of the story of the financial system meltdown. On the other hand, the claim that mandating that buyers pay for bond ratings will solve anything withstands little scrutiny and betrays a stunning ignorance about the manner in which regulation and markets work and interact.
The argument, simply put, is that so long as rating agencies are paid for by sellers, sellers will pressure agencies to artificially inflate ratings. If only agencies were paid by buyers, there would be no such pressure.
The problem with this argument is that buyers well know that rating agencies are paid for by sellers, and if they perceive or suspect that a seller is in the habit of pressuring or an agency is responsive to such pressure, they will question the accuracy of the rating, which -- if buyers are basing purchasing decisions on their faith in the rating -- would reduce demand and therefore profits. Agencies and Sellers knew, then, that they were playing a dangerous game if they pressured and responded to pressure.
While it is certainly imaginable, it is not clear to me that this pressuring and being pressured actually happened. We have seen emails from dealers about pushing products they knew to be crap, but if there has been similar from rating agencies, I missed it.
If it did happen, the question is why sellers and agencies -- rightfully it turns out -- where unafraid that the perception of tainted ratings would not affect demand. Phrased differently: Buyers too saw what was going on and were unconcerned. Which argues that buyers were more interested in getting the high rating then whether or not the high rating was meaningful. If that is the case, ratings will be no more reliable if buyer purchased.
It is, of course, hardly true that rating agencies' failures were not rooted in a lack of talent or insight. As compensation at the agencies substantively lags that of both the buy and sell side, people with more talent and insight are (to put it mildly) less likely to choose to work for a ratings agencies. Given the talent gap, it would be surprising if an investment manager -- constrained by regulatory and, perhaps, client mandates which gave ratings weight in portfolio construction -- was not simply interested in getting the high rating, and less concerned about whether or not that rating reflected some reality.
Even we pretend that agency raters are as insightful and talented as investment managers, given any reasonably liquid market, savvy investor managers are going to trust the rating implied in the price far more then the agency ratings.
Finally, and above all, no amount of resolving conflict of interest gets to the heart of the square, the regulatory regime is trying to circle: Risk, by definition, defies easy measurement and management. As noted previously on this blog, were that not the case, we would be better off with command economies rather then free markets. It does not strain the imagination, of course, to suspect that a regulator, in his heart of hearts, prefers command economies to free markets.
This analogy is illustrative. Reasonably informed investors understood that Blodget's advice was tainted, and took it with an appropriate grain of salt. Given the decline in equity research since these conflict of interest issues were resolved, its reasonable to claim that the value of the "research" to the market was, all along, to the sell, not buy, side.
In the case of ratings, their value to the market is likely to regulators, not investors. It gives regulators some measure of the safety of the companies they regulate. Investors who trust rating agencies to measure risk better then their investment managers, ought hire a different manager.
This paragraph is near perverse, Dinallo substitutes himself for the buy-side. His proposal, unsurprisingly, is to give himself -- a regulator -- control over selecting rating agencies. He would fund this control via a tax hike.
Rating agencies, of course, are already a (federal) regulator construct. His proposal then is less about buyers taking control from sellers and more about state regulators seizing control from federal regulators -- who currently govern rating agencies.
There is no reason to believe that state regulators will be more effective in policing rating agencies then federal regulators.
And, Dinallo's claim that his system would be conflict free is so obviously untrue it is unlikely he really believes it. Rating agencies, after all, rate public debt as well. States and municipalities have long complained about what they see as unfair treatment from rating agencies. The more control state regulators have over rating agencies the more positive rating agencies are likely to be toward state issuances.
The largest obstacle to effective market regulation is, to my mind, regulators -- like Dinallo -- who, simply, do not believe in markets, and do not take seriously the choices of market participants. One has to have precious little faith in markets to believe that companies with poor track records will be trusted or long survive.
By ERIC DINALLO
There has been a great deal of justified criticism of the credit-rating agencies that gave triple-A and double-A ratings to billions of dollars of debt securities that clearly did not deserve these high ratings. Everyone agrees that something needs to be done to prevent inflated ratings. But what?
A recent report by the Group of 30 (international financial experts led by Paul Volcker) recommended that regulators encourage the development of payment models that "improve the alignment of incentives" and permit rating users to hold rating providers accountable. Similarly, Securities and Exchange Commission head Mary Schapiro recently called for an examination of " how the rating agencies are compensated, how they manage conflicts of interest, and what role they should play in our markets."
The insurance industry and its regulators can lead the way by implementing the only effective proposal: self-funded, independent buy-side ratings. Ratings, that is, that are paid for by the investors who use them.
Rating agencies' failures are not rooted in a lack of talent or insight, but rather in a fundamentally flawed business model. Those who issue the securities also pay for their ratings. This structure has created powerful incentives to bias ratings to keep debt securities' sellers satisfied and the rating fees flowing.It is certainly true that agency mis-ratings and misaligned incentives are big parts of the story of the financial system meltdown. On the other hand, the claim that mandating that buyers pay for bond ratings will solve anything withstands little scrutiny and betrays a stunning ignorance about the manner in which regulation and markets work and interact.
The argument, simply put, is that so long as rating agencies are paid for by sellers, sellers will pressure agencies to artificially inflate ratings. If only agencies were paid by buyers, there would be no such pressure.
The problem with this argument is that buyers well know that rating agencies are paid for by sellers, and if they perceive or suspect that a seller is in the habit of pressuring or an agency is responsive to such pressure, they will question the accuracy of the rating, which -- if buyers are basing purchasing decisions on their faith in the rating -- would reduce demand and therefore profits. Agencies and Sellers knew, then, that they were playing a dangerous game if they pressured and responded to pressure.
While it is certainly imaginable, it is not clear to me that this pressuring and being pressured actually happened. We have seen emails from dealers about pushing products they knew to be crap, but if there has been similar from rating agencies, I missed it.
If it did happen, the question is why sellers and agencies -- rightfully it turns out -- where unafraid that the perception of tainted ratings would not affect demand. Phrased differently: Buyers too saw what was going on and were unconcerned. Which argues that buyers were more interested in getting the high rating then whether or not the high rating was meaningful. If that is the case, ratings will be no more reliable if buyer purchased.
It is, of course, hardly true that rating agencies' failures were not rooted in a lack of talent or insight. As compensation at the agencies substantively lags that of both the buy and sell side, people with more talent and insight are (to put it mildly) less likely to choose to work for a ratings agencies. Given the talent gap, it would be surprising if an investment manager -- constrained by regulatory and, perhaps, client mandates which gave ratings weight in portfolio construction -- was not simply interested in getting the high rating, and less concerned about whether or not that rating reflected some reality.
Even we pretend that agency raters are as insightful and talented as investment managers, given any reasonably liquid market, savvy investor managers are going to trust the rating implied in the price far more then the agency ratings.
Finally, and above all, no amount of resolving conflict of interest gets to the heart of the square, the regulatory regime is trying to circle: Risk, by definition, defies easy measurement and management. As noted previously on this blog, were that not the case, we would be better off with command economies rather then free markets. It does not strain the imagination, of course, to suspect that a regulator, in his heart of hearts, prefers command economies to free markets.
Consider that in 2003, on the equity side, regulators entered into settlements with Wall Street firms to resolve conflict-of-interest issues between their research and investment banking divisions. Like the rating agencies, equity research analysts held themselves out to be objective in their analysis. But they were paid by the issuers and their bankers. The regulators' investigations demonstrated that the firms and their client-issuers pressured equity analysts to provide bullish recommendations on their worst stocks.This analogy is illustrative. Reasonably informed investors understood that Blodget's advice was tainted, and took it with an appropriate grain of salt. Given the decline in equity research since these conflict of interest issues were resolved, its reasonable to claim that the value of the "research" to the market was, all along, to the sell, not buy, side.
In the case of ratings, their value to the market is likely to regulators, not investors. It gives regulators some measure of the safety of the companies they regulate. Investors who trust rating agencies to measure risk better then their investment managers, ought hire a different manager.
The solution is for investors to buy and control publicly available bond ratings. Insurance regulators, who use ratings to determine capital reserves for insurance companies, can contract with rating agencies on a competitive basis to provide public ratings of issuers and their securities. This approach would solve the conflict-of-interest problem, because the primary users of the ratings are the ones who will be paying for them.
To fund a buy-side proposal, insurance commissions could collect a small fee from insurance companies that hold nearly $3 trillion in rated bonds, making them the largest industry sector that relies on credit ratings. The New York State Insurance Department estimates that for less than two basis points (0.02%) per year on that $3 trillion, insurers in partnership with insurance regulators can purchase transparent, conflict-free and cost-effective ratings. Buyers have a strong incentive to pay into a system that ensures the independence and accuracy of their ratings.This paragraph is near perverse, Dinallo substitutes himself for the buy-side. His proposal, unsurprisingly, is to give himself -- a regulator -- control over selecting rating agencies. He would fund this control via a tax hike.
Rating agencies, of course, are already a (federal) regulator construct. His proposal then is less about buyers taking control from sellers and more about state regulators seizing control from federal regulators -- who currently govern rating agencies.
There is no reason to believe that state regulators will be more effective in policing rating agencies then federal regulators.
And, Dinallo's claim that his system would be conflict free is so obviously untrue it is unlikely he really believes it. Rating agencies, after all, rate public debt as well. States and municipalities have long complained about what they see as unfair treatment from rating agencies. The more control state regulators have over rating agencies the more positive rating agencies are likely to be toward state issuances.
Ratings will never be flawless -- no institution can have perfect foresight. But buy-side ratings will be conflict-free, and the process will be controlled by the investors that bear the long-term risk of the rated securities. Rating agencies with poor track records, errors or conflicts will not be trusted to serve and protect policy holders. And rating agencies will bid for contract renewals based on merit, so that they remain independent of the issuers they evaluate.The largest obstacle to effective market regulation is, to my mind, regulators -- like Dinallo -- who, simply, do not believe in markets, and do not take seriously the choices of market participants. One has to have precious little faith in markets to believe that companies with poor track records will be trusted or long survive.
Sunday, March 1, 2009
Killing The Goose
Lawmakers want Calhoun reprimanded:
I suppose Coach Calhoun could have responded with a more appropriate tone. The question about his salary, however, was not at all perfectly fair, neither in the context -- a press conference to discuss Basketball -- nor content -- Calhoun is not over paid relative to market, and he is a net earner for the State of Connecticut.
He is a Hall of Fame coach, who built that program from scratch. As a Huskies fan, I have been increasingly dis-enamored with the manner in which Calhoun treats his players and not sure his best coaching days are behind him. That said, given his popularity in-state, if he was to announce his retirement after the season due to the criticism and lack of support from the administration and politicians, they would likely bend over backwards begging him to return, and would lose their jobs if he didn't.
HARTFORD, Conn. -- The leaders of the Connecticut General Assembly's higher education committee say UConn coach Jim Calhoun should be reprimanded for his tirade at a freelance journalist who questioned his $1.6 million salary.
Sen. Mary Ann Handley, D-Manchester, and Rep. Roberta Willis, D-Lakeville, say Calhoun's outburst Saturday does not reflect well on him or the state's flagship university.
"His recent behavior was unacceptable and we request that the university take appropriate disciplinary action to reinforce the high ethical standards we have come to expect from our flagship institution," the lawmakers wrote in a letter to UConn President Michael J. Hogan...
In a statement, Hogan called Calhoun a "valued member of the UConn community" and said the reporter was also to blame for the controversy.
"The question he was asked about his salary was perfectly fair, although the reporter, as Coach Calhoun suggested, might have found a more appropriate and less provocative setting for his inquiry," Hogan said. "I am sure that we all regret the controversy, including Coach Calhoun, and I can assure you that we will continue to encourage all members of the UConn community to resist temptation and treat others in a judicious and respectful manner, no matter what the circumstances."
Calhoun won his 800th career game Wednesday when the No. 2 Huskies beat Marquette. He is the highest-paid state employee in Connecticut.
Late Thursday, Calhoun issued a statement and said his comments were "misinterpreted" as being insensitive to the current economic climate.
"I believe I have a duty, responsibility and obligation to support the state I love and the many people and organizations of Connecticut that are in need," Calhoun said. "I look forward to continuing with the same amount of passion and commitment to assist people and causes that are important to me and my family."...
Ken Krayeske, a political activist and freelance reporter, questioned Calhoun at a news conference following Saturday's 64-50 win over South Florida. He asked why the coach of a public university collects a salary of $1.6 million while the state has a budget deficit of more than $1 billion this fiscal year and up to $8.7 billion over the next two fiscal years.
Calhoun first responded with a joke, then grew angry as Krayeske continued the line of questioning.
"My best advice to you is, shut up," Calhoun said.
"Quite frankly, we bring in $12 million to the university, nothing to do with state funds," Calhoun said. "We make $12 million a year for this university. Get some facts and come back and see me ... Don't throw out salaries and other things."
Earlier this week, Connecticut Gov. M. Jodi Rell told reporters that she believed Calhoun regrets his outburst and called the tirade an "embarrassing display."I suppose Coach Calhoun could have responded with a more appropriate tone. The question about his salary, however, was not at all perfectly fair, neither in the context -- a press conference to discuss Basketball -- nor content -- Calhoun is not over paid relative to market, and he is a net earner for the State of Connecticut.
He is a Hall of Fame coach, who built that program from scratch. As a Huskies fan, I have been increasingly dis-enamored with the manner in which Calhoun treats his players and not sure his best coaching days are behind him. That said, given his popularity in-state, if he was to announce his retirement after the season due to the criticism and lack of support from the administration and politicians, they would likely bend over backwards begging him to return, and would lose their jobs if he didn't.
Babies with Candy IV
Krugman's latest Climate of Change:
Obama, it seems, after studying Clinton's failure to enact health care reform, appears to have identified the problem: Clinton made the mistake of announcing he was setting off to reform health care, with town halls and committees and negotiations. Obama has, evidently, decided fundamental change is best attempted under-the-table. Hidden in fiscal stimulus bills and buried in budgets.
He has also, apparently discovered the generally un-acknowledged reality that we already have nationalized health care. The government already -- via tools such as existing regulatory authority, Medicare policies, etc -- fundamentally controls our health system. Sweeping changes can be made without dramatic new legislation and attending political debate.
His approach may be a blessing in disguise for his political opponents in that it will make it easier for them to argue that the problems we have had with health care all along were due to too much, not too little, government control+interference.
As far as I can tell the only benefits a cap-and-trade system has over a carbon tax are political -- allowing democrats to misleadingly claim they are not creating new taxes. The costs are likely to be substantive. Government created artificial markets exist to be gamed by savvy players. All sorts of perverse economic incentives are inevitable. And from what I've read, these systems don't actually do a particularly good job of reducing emissions.
I tend to support a Carbon Tax. Conservatives, at least, are willing to acknowledge that when the government taxes an activity it discourages it. In as much as the Government needs revenue, it therefore ought be taxing activity we would benefit from discouraging. Whether or not one believes the earth will be destroyed by melting ice caps in 2012 unless we act RIGHT THIS MINUTE, its not hard to imagine that reducing our environmental footprint is a good idea. Ergo, taxes on environmentally destructive activities make sense.
It says a lot then about the administrations reading of public opinion that they prefer a less effective under the table policy, to a more effective above board policy.
In any case, Krugman should not be over-heartened. The administration has to project what revenue it can to project a semblance of fiscal responsibility.
Krugman notes that this years deficit is about 7 times the average deficit from 2005 to 2007 and that Obama aspires only to "reduce" the deficit to twice what it was then by 2013. Krugman describes the assumptions required to achieve even Obama's limited fiscal responsibility goals as being "Big ifs" yet somehow he lauds their plausibility.
The politics of war open a bit of a can of worms for Obama. He campaigned on the need to draw down in Iraq more to re-focus on Afganistan then to save money to spend on health care. If he does recognize substantial cost savings, he will be politically vulnerable if one or both of those wars goes poorly. On the other hand -- and this may be his calculation -- so long as the economy is awful in 2012, foreign policy will not be high amongst voter's priorities.
Which actually gets to the heart of Obama's re-election calculus. He and his advisors have to recognize that the economy is unlikely to recover by 2012. He needs to figure out, then, how to get re-elected having presided over economic catastrophe. His apparent strategy seems to be taken from FDR's playbook: create spending programs that people grow dependent on, associated with you, and which your defeat will jeopardize. The more people he can make more dependent on his programs the next four years the better his chances of re-election.
In summary then, Krugman describes a budget which, in its favor allocates $600 billion over 10 years to healthcare reform, expects to raise a similar amount from a cap and trade scheme and whose plausibility is merely highly suspect unlike those damn bush budgets which insulted the intelligence.
On the other hand it will likely require middle class tax-hikes down the road to pay for it, it doesn't address America’s really big fiscal problems, which lurk past its horizon, and it projects to stabilize public indebtedness at record levels which leave us with considerably reduced room for maneuver in facing those problems.
I think an ordinary observer, given those trade-offs, would be substantively less enthusiastic then Krugman apparently is.
...Obama’s new budget represents a huge break ... with policy trends over the past 30 years ... he will set America on a fundamentally new course.
The budget will, among other things, come as a huge relief to Democrats ... fears that Mr. Obama would sacrifice progressive priorities in his budget plans, and satisfy himself with fiddling around the edges of the tax system, have now been banished.
For this budget allocates $634 billion over the next decade for health reform. That’s not enough to pay for universal coverage, but it’s an impressive start. And Mr. Obama plans to pay for health reform, not just with higher taxes on the affluent, but by putting a halt to the creeping privatization of Medicare, eliminating overpayments to insurance companies.Obama, it seems, after studying Clinton's failure to enact health care reform, appears to have identified the problem: Clinton made the mistake of announcing he was setting off to reform health care, with town halls and committees and negotiations. Obama has, evidently, decided fundamental change is best attempted under-the-table. Hidden in fiscal stimulus bills and buried in budgets.
He has also, apparently discovered the generally un-acknowledged reality that we already have nationalized health care. The government already -- via tools such as existing regulatory authority, Medicare policies, etc -- fundamentally controls our health system. Sweeping changes can be made without dramatic new legislation and attending political debate.
His approach may be a blessing in disguise for his political opponents in that it will make it easier for them to argue that the problems we have had with health care all along were due to too much, not too little, government control+interference.
On another front, it’s also heartening to see that the budget projects $645 billion in revenues from the sale of emission allowances. After years of denial and delay by its predecessor, the Obama administration is signaling that it’s ready to take on climate change.As far as I can tell the only benefits a cap-and-trade system has over a carbon tax are political -- allowing democrats to misleadingly claim they are not creating new taxes. The costs are likely to be substantive. Government created artificial markets exist to be gamed by savvy players. All sorts of perverse economic incentives are inevitable. And from what I've read, these systems don't actually do a particularly good job of reducing emissions.
I tend to support a Carbon Tax. Conservatives, at least, are willing to acknowledge that when the government taxes an activity it discourages it. In as much as the Government needs revenue, it therefore ought be taxing activity we would benefit from discouraging. Whether or not one believes the earth will be destroyed by melting ice caps in 2012 unless we act RIGHT THIS MINUTE, its not hard to imagine that reducing our environmental footprint is a good idea. Ergo, taxes on environmentally destructive activities make sense.
It says a lot then about the administrations reading of public opinion that they prefer a less effective under the table policy, to a more effective above board policy.
In any case, Krugman should not be over-heartened. The administration has to project what revenue it can to project a semblance of fiscal responsibility.
And these new priorities are laid out in a document whose clarity and plausibility seem almost incredible to those of us who grew accustomed to reading Bush-era budgets, which insulted our intelligence on every page...
Many will ask whether Mr. Obama can actually pull off the deficit reduction he promises. Can he actually reduce the red ink from $1.75 trillion this year to less than a third as much in 2013? Yes, he can.
Right now the deficit is huge thanks to temporary factors (at least we hope they’re temporary): a severe economic slump is depressing revenues and large sums have to be allocated both to fiscal stimulus and to financial rescues.
But if and when the crisis passes, the budget picture should improve dramatically. Bear in mind that from 2005 to 2007, that is, in the three years before the crisis, the federal deficit averaged only $243 billion a year. Now, during those years, revenues were inflated, to some degree, by the housing bubble. But it’s also true that we were spending more than $100 billion a year in Iraq.
So if Mr. Obama gets us out of Iraq (without bogging us down in an equally expensive Afghan quagmire) and manages to engineer a solid economic recovery — two big ifs, to be sure — getting the deficit down to around $500 billion by 2013 shouldn’t be at all difficult.Krugman notes that this years deficit is about 7 times the average deficit from 2005 to 2007 and that Obama aspires only to "reduce" the deficit to twice what it was then by 2013. Krugman describes the assumptions required to achieve even Obama's limited fiscal responsibility goals as being "Big ifs" yet somehow he lauds their plausibility.
The politics of war open a bit of a can of worms for Obama. He campaigned on the need to draw down in Iraq more to re-focus on Afganistan then to save money to spend on health care. If he does recognize substantial cost savings, he will be politically vulnerable if one or both of those wars goes poorly. On the other hand -- and this may be his calculation -- so long as the economy is awful in 2012, foreign policy will not be high amongst voter's priorities.
Which actually gets to the heart of Obama's re-election calculus. He and his advisors have to recognize that the economy is unlikely to recover by 2012. He needs to figure out, then, how to get re-elected having presided over economic catastrophe. His apparent strategy seems to be taken from FDR's playbook: create spending programs that people grow dependent on, associated with you, and which your defeat will jeopardize. The more people he can make more dependent on his programs the next four years the better his chances of re-election.
...What’s not to like about this budget? Basically, the long run outlook remains worrying.
According to the Obama administration’s budget projections, the ratio of federal debt to G.D.P., a widely used measure of the government’s financial position, will soar over the next few years, then more or less stabilize. But this stability will be achieved at a debt-to-G.D.P. ratio of around 60 percent. That wouldn’t be an extremely high debt level by international standards, but it would be the deepest in debt America has been since the years immediately following World War II. And it would leave us with considerably reduced room for maneuver if another crisis comes along.
Furthermore, the Obama budget only tells us about the next 10 years... But America’s really big fiscal problems lurk over that budget horizon...
I at least find it hard to see how the federal government can meet its long-term obligations without some tax increases on the middle class...
But I don’t blame Mr. Obama for leaving some big questions unanswered in this budget. There’s only so much long-run thinking the political system can handle in the midst of a severe crisis; he has probably taken on all he can, for now. And this budget looks very, very good.In summary then, Krugman describes a budget which, in its favor allocates $600 billion over 10 years to healthcare reform, expects to raise a similar amount from a cap and trade scheme and whose plausibility is merely highly suspect unlike those damn bush budgets which insulted the intelligence.
On the other hand it will likely require middle class tax-hikes down the road to pay for it, it doesn't address America’s really big fiscal problems, which lurk past its horizon, and it projects to stabilize public indebtedness at record levels which leave us with considerably reduced room for maneuver in facing those problems.
I think an ordinary observer, given those trade-offs, would be substantively less enthusiastic then Krugman apparently is.
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