Let’s play Russian Roulette. My rules.
I’m betting $1,000 the chamber will be empty. You hold the gun to your head and pull the trigger. Click. You owe me $1,000. Next round, same rules, you hold the gun to your head and fire. Click. Now you’re down $2,000, but why complain? You’re still alive, aren’t you? Isn’t that worth $2,000?
Next round, you’re not so lucky. Since there doesn’t seem to be anyone left to collect the bet I just lost, I take my $2,000 and go looking for the next patsy.
If my rules seem unfair, at least they’re founded on well-established precedents. Big hedge funds and investment banks have figured out how to make billions on heads-I-win, tails-you-lose games of high risks and very high but entirely one-sided rewards.
It’s a sweet deal. They take your investment money – along with that of other investors like pension funds – and make huge bets on derivatives at, say, thirty to one leverage. So two billion dollars acts like 60 billion, and a 20% gain in a currency arbitrage or a commodities play or credit default swaps earns $12 billion – of which they keep 20% on top of the big fees they charge you each year just to invest in the fund.
Or they get it wrong … blow $12 billion, and the hedge fund goes bust.
Leverage works both ways. You and the pension plan retirees may see your entire investment go up in smoke. The hedge fund manager loses maybe his desk and his fax machine, but he’s still got the billions he’s “earned” in prior quarters and years, so he skips away, somewhat chastened but ready to set up his next magic show.
Oh, and that $12 billion dollar meltdown?
There’s always the chance that it could trigger a cascade of failures in other funds and big investment banks like Bear Stearns. Then the Fed has to bail out the losers to save the system – until the day comes when the next big crisis metastasizes beyond the Fed’s powers of salvation, and the whole financial system and possibly the economy crashes, as in the 1930s.
But if the Fed does succeed, guess who pays whatever it costs? You and those pension plan participants and the rest of us taxpayers. First you lose your money, then you pay to save the people who lost the money you entrusted to them.
Call it Hedge Fund Roulette. Or Big Banker Bingo.
It’s an addictive form of gambling in which the winners always keep their winnings, but when they lose, they don’t pay.
The public pays – and for what? For the privilege of living in the presence of such brilliance? True, investment banks sometimes do contribute to the health of the economy, but not when their main energies are being devoted to bundling up worthless loans into worthless securities and rating those securities AAA to sell them off to the ignorant, the gullible, the inattentive, and the daft.
Of course people have a right to risk their own money. Some may even be trusted to risk other people’s money, in their role (and under the strictures of fiduciary responsibility) as managers of mutual funds, pension funds, public or private trusts.
But I’m not allowed to bet your house on the horses.
Why should anyone be given a license to risk the entire financial system or the economy as a whole in a scheme for personal profit?
The largely unregulated shadow banking system risks a global financial collapse or a depression that could inflict untold misery on hundreds of millions of people for many years to come. Even if all goes well, they’ve risked your wellbeing and mine for their own personal gain. If they win, they win big. If they lose, they don’t pay – you do.
It’s now clear that this is the game a great many financiers have been allowed to play. As Wall Streeters, they know that for huge gains, you have to take huge risks. Imagine how much you can make if you risk the whole country!
Presumably, that’s why there’s talk about reform, but look who’s talking. Key players in financial system reform include Senator Richard Shelby — a mega-landlord, real estate developer, and title insurance magnate in Alabama – and Treasury Secretary Henry Paulson, former chairman of Goldman Sachs, who doesn’t want to place limits on leverage or on the extremes in risk-based executive pay and bonuses that made him rich. What meager changes Paulson recommends are tantamount to requiring boldface type on the restroom signs:
“Employees much wash hands of all responsibility.”
Since you’re busy and I’m not, I try to survey the arcane world of bleeding-edge research and abstract the few key findings worth your attention. The following are sourced from Science, the publication of the National Association for the Advancement of Science, of which I am a member until one of their editors stumbles onto this website.
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Brown Mustard on Mars
Commenting on the resignation of Alan Stern from NASA in protest of that agency’s cronyism and politicized decision making favoring Mars exploration and JPL: “ ‘Stern wanted to strangle Mars to pay for other things,’ says John Mustard, a planetary scientist at Brown University.”
We attempted to contact Brown’s Mustard but were told he was in Dijon.
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Bacteria Feast on Antibiotics
During my brief stint in the military, we were issued bottles of yellowish insect repellent to use on bivouac, and one day somebody dropped his bottle and it broke. Within 15 minutes, every mosquito, ant, beetle, and hornet for miles around had converged on the puddle in a feeding frenzy.
Now a team from Harvard Medical School and its Biophysics Program has at last caught up with that seminal research performed by the 304th Tank Battalion.
They tested 18 chemicals representing eight major classes of natural and synthetic antibiotics on various types of soil bacteria, some of them closely related to human pathogens. The antibiotics not only didn’t kill the microbes, most of them actually supported the growth of clonal bacteria from each of 11 diverse soils.
Resistant? The bacteria react to antibiotics much as humans react to Snickers bars.
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Space Whiskers
Studying 4.6 billion year old meteorites, formed from the solar accretion disk even before the planets, researchers from the Imperial College of London are finding graphite whiskers. This form of carbon is believed to be present in the interstellar – possibly even intergalactic – dust, where they would absorb light and possibly distort observations from earth of the most distant galaxies. Some theorists believe this could be an alternative explanation for what otherwise appears to be the accelerating expansion of the universe.
Silly Brits. After God created the universe, he showered and shaved – wouldn’t you? — and the graphite whiskers are what’s left.
Why didn’t he clean them up? He did. He washed them down the drain, which is where we live.
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Gamblers No Good at Cards
Psychiatric investigators at the University of Pisa tested groups of subjects on their ability to find the patterns in a special deck of cards – a measure of “executive function.” A group of addicted gamblers proved particularly inept. Not only were they bad, they actually got worse with practice.
Research in Pisa isn’t what it used to be.
I am a huge fan of Talking Points Memo and, in particular, TPM Election Central, so the following must be taken in the spirit of admiration and bonhomie in which it is offered:
You guys don’t know how to report on polls. Seriously. You’re utterly clueless.
All it takes is a shiny new press release to prompt the TPM guys to slap up a 48-point headline announcing the latest devastating news from the front lines of the electoral process.
The problem is that these polls do not share a common methodology and are often of uncertain provenance, so they aren’t measuring the same thing (and often, I suspect, aren’t even measuring the things they intend to), yet they are paraded across the screen to the viewer as though they represent succeeding chapters of a coherent narrative.
In the recently completed PA Primary, for example, TPM reported on poll results from no fewer than 78 polls over the course of the contest.
6 of these polls were one-time wonders. Although sometimes by a recognizable media outlet, a one time poll is as useless as a Greenpeace bumper sticker on Dick Cheney’s limo. Without a couple of attempts, you can’t even tell if the polling methodology is stable. These were:
EMILY’s List (Ed. Note: Seriously, WTF?)
Mason-Dixon
Suffolk
Temple
TIME
Times/Bloomberg
The following chart summarizes the remainder. Comparing to the final results of the contest (54.5% HRC, 45.4% BHO), the metrics you want to check are A) who got the spread about right, as close as possible to a 9.1 point spread (note to TPM: 9.1 is not 10, you can look that up), and you also want to see B) who had the smallest margin of ‘Undecideds’ … we are trying to project how people will vote, not how long they can dither. The gray semicircle on the y-axis represents the Actual finish (centers on the 9.1 point spread … Undecideds are Zero on election day).
The winners are Quinnipac, SurveyUSA, and Zogby/Newsmax. The lesson here is that whoever is covering the News Desk should consider not publishing anybody that hasn’t yet got at least a little bit of history, like this, of doing well.
The losers show a variety of problems. By 4/20, PPP had somehow determined that the race was going to Obama. In a dead heat that is an excusable mistake, but HRC won by over 9 points! Similarly, ARG’s bubble seems to be filled with helium. Muhlenberg was actually on its way to nailing it, but their last poll was on 4/2. The intern must have gone on spring break.
Mark Penn has demonstrated that numbers are more often than not a favorite weapon of flim-flam men and charlatans. Which is a shame, because basic statistics can be a great revealer of truth, but only if shared by a fourth estate that knows how to select and report on a quality product.
To deal with the looming specter of Credit Default Swaps imploding like subprime mortgages, one proposal is to centralize the clearing of these transactions through the Chicago-based Clearing Corporation. Chief operating officer of the Clearing Corporation is Kevin McClear.
The move is favored by Mr. McClear and by two of his board members, Dudley Do-Right and Mr. Goodwrench.
Anyone with some high school math realizes that the race for the Democratic nomination has been over for about six weeks at this point. Obama continues to run a fairly classy, non-negative campaign largely because he has the luxury to do so. The Sound and Fury from the Clinton camp over the last two weeks is apparently important in the weird science of Television Entertainment (although on any other reality show I can think of she’d have been voted off by now … except maybe a special edition of ‘Biggest Loser’). It’s enough to inspire some wailing and keening and gnashing of teeth on sites like TPM Cafe, but even there it is done so in half-hearted angst. The season is over. Time to rest up and get ready for the playoffs.
Updating the chart of the vanishing superdelegate gap though Saturday (from the data in Politico’s logbook) the trend continues to illustrate this reality. Reconstructing the data day by day since Feb. 25th, I come up with a gap today of 24 delegates. Politico has it at 19 on another summary page, so things are close to an end from my data, but possibly closer in reality.
Although the polynomial trend (projecting when the gap vanishes) is still more satisfying, it is now coming in only a week earlier than the straight line forecast, and both before the end of May. (The exponential trend provides HRC with a margin +10 into June).
Dr. Steve, our best and bravest battlefield reporter, filed this report on Monday.
I am glad you are in Pennsylvania to hear constant hilaryobamabill stuff and i know you will help obama carry pa and end hilary’s agony. How could they have 106 million dollars. LBJ also made a lot of money during and after his presidency.
We were birding in Texas and went to a bat cave and at dusk saw 13 million bats leave. Give or take a few. The guides told us that as bats leave the cave, they pee. It smelled like urine. It never occurred to me–why would it–that bats and people have the same smelling pee.
These bats are all female and eat moths, not mosquitos. And they are Mexican bats, here with no documentation. Hence, the pee. That very cave served as a source of gunpowder during the civil war, as the guano was boiled and made into nitrites, etc. The people who went into the cave to shovel the guano had one thing in common. They were all black and were digging for the confederancy.
We did see a lot of birds including the black capped vireo. And the golden cheek warbler. You would have to be there.
In the 1960s the CEO of an average Fortune 100 company made about 60 times as much money as his average employee. His pre-evasion income tax rate was 91% until 1964, when it was reduced to 77%.
By 2001, I thought the end times must be at hand because the CEO was now making 600 times as much as the average employee, and we were back to the extremes in wealth concentration that the U.S. had last seen during the gilded age of the robber barons.
It took Teddy Roosevelt, trust-busting, two world wars, the Great Depression, the rise of the labor movement, 90% tax brackets, and the G.I. bill to tame those excesses. But there it was again in 2000 – ostentatious avarice, back in fashion.
And where are we now?
Jenny Anderson in the Wednesday edition of the New York Times reports on the incomes of the top 25 hedge fund managers. Three of them are at or above the $3 billion level, led by John Paulson at $3.7 billion. When I was a kid, the U. S. defense budget was less than that.
The median American household now has an income of $60,500.
That means the leading hedge fund manager’s income now equals the median family income SQUARED.
The highest earners have gone from making 60 times a typical household income in the 1960s (which was bad enough) to 600 times a normal income in 2001 to 60,000 times the median household income in 2008. One person makes more than everybody in Providence, RI combined, or Brownsville, TX, or Worcester, MA, or Huntsville, AL. One person makes much more than everyone in Dayton, O, Tallahassee, FL, or Salem, OR.
Actually, it’s even worse than that. The average family has to pay income taxes on their wages. The hedge fund manager enjoys a tax loophole that allows him to count most of his income as capital gains and pay only 15% of it in taxes – or whatever paltry fraction of 15% his all-star team of lawyers and accountants decides to let the government have as a token ceremonial civic and public relations gesture.
Does the gentleman work 60,000 times as hard as you do? Is he 60,000 times smarter or more earnest or more virtuous than you are? Are his children 60,000 times more deserving of the advantages money can bestow?
Just for the record, God makes $350,000 a year and doesn’t take a tax deduction for charitable contributions.
An update on the vanishing gap in superdelegate endorsements between HRC and BHO.
When we last checked in (data through April 2), the superdel endorsement gap had fallen to 33. Since then Barack is up another 10 endorsements, and Hillary is net +2, so the gap has shrunk by 8, and now stands at 25.
In the chart, the exponential trend line show HRC holding on to a 10 Superdel endorsement lead after the last primaries. The linear trend shows the gap vanishing around May 21st. and a third order polynomial trend (which I include for no other reason than I love the result) shows the gap vanishing by the end of April.
Gail Collins on the ironies of the first black and the first woman presidential candidates trying to woo white males, the swing voters in Pennsylvania:
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“Courting them is extremely tricky. It’s not like you can promise that under your presidency, more white men would be appointed to the Supreme Court.”
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“I once tried to make a list of specifically guy things that no woman was ever going to want to trespass upon. All I came up with were The Three Stooges and lawn care.”
New York Times Op-Ed Saturday 4/5/08
