Friday, September 19, 2008

GS and the credit crunch

Goldman Sachs is now trading for less than book value, and has enough liquidity to take itself private...and at least a few folks inside the company are angry enough to contemplate the unthinkable.

Taleb on Risk (in less than 1,000 characters)

From the department of unintended consequences...Yahoo's recent launch of del.icio.us 2.0 expanded the notes field for bookmarks to 1,000 characters. As a result, my del.icio.us feed now includes a fair number of mini-essays. Here's the latest, summarizing Taleb's latest essay on risk and today's credit crunch:

"Great essay by Taleb on the current crisis, and the limits of statistics in general. My two favorite paragraphs:

"It appears that financial institutions earn money on transactions (say fees on your mother-in-law's checking account) and lose everything taking risks they don't understand."

"A Turkey is fed for a 1000 days—every days confirms to its statistical department that the human race cares about its welfare "with increased statistical significance". On the 1001st day, the turkey has a surprise."

Taleb argues there are two axes: Decisions can be simple or complex; Distributions can be thin- ("Mediocristan") or thick-tailed ("Extremistan"). Statistics fail when trying to make complex decisions in a thick-tailed domain...errors will occur, and the consequences are catastrophic."

If you're interested in seeing what I'm thinking in raw form, I recommend checking out my linkstream:

http://delicious.com/chrisyeh

All Hail Treadputer!



Now even the mighty New York Times is jumping on the treadputer bandwagon. Dare I dream that treadputer adoption becomes a major issue in the presidential campaign? Is Palin pro- or anti-treadputer?

Wednesday, September 17, 2008

BRK + GS?

As the financial crisis continues to spin, the unthinkable may happen. Goldman Sachs, the proudest of the investment banks, may be forced to sell.

As this post on the Freakonomics blog notes, this isn't because Goldman is poorly run, or is a bad business. It's simply that it's nearly impossible for anyone to obtain short term financing in the current market climate.

If Goldman has to sell, I think that the most logical buyer is Warren Buffett and Berkshire Hathaway.

Think about it--BRK has one of the strongest balance sheets in the world. And Buffett knows that the underlying business (and most important, the management team) is the best in the industry.

It would violate Warren's dictum to avoid investing in i-banks (a hard lesson he learned from his Salomon Brothers adventure), but Warren is certainly capable of taking such a broad stroke.

And for Goldman, it would represent the best possible option. The proud partners at Goldman don't want to sell out to some megabank and take orders from retail or commercial bankers. Buffett would let them focus on doing what they do best: minting money.

Remember, if it happens, you heard it here first!

Is Pornography Adultery?

The Atlantic Monthly explores the issue with a 1,000-word essay. I'll save you some time:

No.

Next question?

Monday, September 15, 2008

Daily Political Roundup: Credit Crunch Pandering and Democratic Dumbassery

A quick roundup of some interesting posts:

Megan McArdle of The Atlantic
tears Obama a new one for pandering to the populists by criticizing the Bush administration for the credit crunch:

What, specifically, should the Bush administration have done, Senator? Don't tell me they should have beefed up SEC enforcement, since this is not a criminal problem (aside from minor lies by Bear execs after the damage was already done). Perhaps he should not have reappointed Greenspan, or appointed Ben Bernanke? Both moves were widely hailed at the time. Moreover, to believe that a Democrat could have done better is to assert that a Democratic president would have found a Fed chair who would pay less attention to unemployment, or a bank regulator who would have tried harder to prevent low-income people from buying homes. Where is this noble creature? And why didn't Barack Obama push for him at the time?

Indeed, I ask the Senator to name one significant thing that Bush has done to create this crisis that couldn't also be laid at the feet of St. William of Little Rock. If Democratic policy is so good at protecting the little guy from asset price bubbles, how come the stock market crashed in 2000?

This kind of foolish grandstanding is not the change we need. It's just more of the same.

It drives me nuts when so-called liberals are quick to blame capitalism and free markets whenever something goes wrong. Guess what--maybe the folks who were taking out "ninja" loans should have showed some restraint. It's called judgment, people.

Matthew Yglesias also jumps on the panderwagon by blasting the Fed for intervening in the markets:

If you happen to have some financial problem in your life, the Federal Reserve doesn’t care. At all. No matter how bad the problem is. Your personal desires and interests will have absolutely no bearing on the Fed’s thinking about interest rates or anything else. If you’re an extremely rich executive at a financial services firm, however, things look different. Even in circumstances where a taxpayer funded bailout isn’t undertaken — as with Lehman Brothers — the Fed still steps in in a variety of ways to ease the pain. Lehman will be given some time to unwind its assets in a patient way so as to try to minimize the extent to which it needs to sell at firesale prices in a way that undermines the portfolios of other firms. Needless to say, if bad economic times strike your town a very similar type of problem could emerge — it’s hard to sell your house for anything if half your neighbors are also selling — but Ben Bernanke’s not going to step in and save you.

I was going to despair that a seemingly intelligent young fellow actually believes this tripe, but the quality of the comments pointing out Matt's mistakes restored my faith in humanity. I particularly like this one:

Matt has a little bit of a valid point here, but the way he expresses it is likely to tarnish the image of progressives among economically sophisticated centrists.

The reasons to minimize the financial consequences of cataclysmic events like the Lehman failure have nothing to do with the rich people who benefit directly from that safety net. When the financial system collapses, it hurts everybody, and it tends to hurt poorer people more, because they have the least resources to cushion the blow. If the Fed had provided a “safety net…for [m]illionaires” (since there were no billionaires yet) in the early 1930s, it would have made things a lot better for poor people in the subsequent years.

It’s also true that a stronger safety net for the poor and middle class has some benefits for the economy generally. That’s where Matt has a valid point. A wise set of policies should include protection for the non-rich.

But I would say there is somewhat less urgency about that. A safety net for ordinary people would help, but the economy can get by without it — “get by” in the sense of avoiding a disaster like the 1930s. If the financial system collapses, on the other hand, the safety net for ordinary people will cushion the severity of the resulting disaster, but it probably won’t be enough to prevent it. Much of the New Deal was an attempt at a safety net for ordinary people, but the New Deal had only limited success in bringing about a recovery. By most accounts the Great Depression was still going on during the late 1930s.

Finally, Clive Crook, who is fast becoming one of my favorite bloggers, rips into the Democrats for once again trying to snatch defeat from the jaws of victory. Crook, who is an Obama supporter, just brutalizes the Democrats (who deserve the rough treatment):

For Mr McCain to win the election against the odds that faced him pre-Palin - with the economy in the tank and the incumbent Republican president setting records for unpopularity - would be sensational enough. For this to happen because of his vice-presidential pick, a decision that is usually of next to no consequence, beggars belief. The Democrats had to bring all their resources to getting themselves into this fix. They proved equal to the task.

As I argued last week, Mr Obama's own initial reaction to the Palin nomination was exactly right. All the party had to do was follow his lead. Mr Obama, in effect, would give her enough rope; her inadequacies would reveal themselves in due course; it cost nothing, in the meantime, to be courteous, and to keep pressing on the issues, where the Democrats still enjoy an advantage with most voters. Ms Palin's first television interview last week, an adequate but far from stellar performance, affirmed the wisdom of that course.

But the Democratic talking-heads had to exult in their disdain for Ms Palin and all she represents - namely, a good part of the electorate whose support Mr Obama needs. In the space of a few days, they irreversibly damaged Mr Obama's candidacy and transformed this election.

As a capitalist, I instinctively distrust the Democrats. One some level, their constant blundering should be reassuring to me, given the socialist tendencies of their left wing. But the practitioner in me simply can't abide the incredible incompetence and inability for them to play the game with a modicum of skill and common sense.

MTV Hits Home Run With Backchannel

It's seldom I have anything good to say about MTV, but their latest move is sheer genius.

Here's the scoop from NewTeeVee:

Launching today, MTV’s Backchannel is a very cool-looking social game synergizing a very silly product— specifically, the network’s “reality” show The Hills. As the title suggests, Backchannel’s a chat interface that runs live online while a Hills episode airs on TV; players quickly post their witty commentary and smacktalk into a shared chat window as the show progresses. (Sounds like playing a multiplayer game of Halo, where the targets are ditzy chicks, and the weapon of choice is snark.)

Of course, a lot of people already group chat about TV shows in standard instant messaging software, but here’s the cool twist:

Players get to rate other’s comments, with the highest-rated lines moving up the screen, while the least favored disappear. Players get points for good ratings, with the quickest wits ascending atop the site’s leaderboard. (I wouldn’t be surprised if the very best Backchannel players become almost as popular as The Hill’s actual stars.)

This is brilliant--taking advantage of the medium to make broadcasts interactive. It's this kind of interactivity that makes Ustream so addictive.

Now if MTV really had balls, it would figure broadcast "The Hills" with the live Backchannel feed as well!

Capitalism Has Helped Far More Indians Than Mother Teresa

In my recent "Ask The Harvard MBA" post on "Ahead of the Curve," I made the following statement:

"Capitalism has helped more people in India than Mother Teresa, and I see no reason to be ashamed of it."

One commenter asked me to explain, saying, "It is a little shocking to hear this from a HBS grad.

Here is what I wrote:

Here’s a simple thought experiment to explain why capitalism has helped more people in India than Mother Teresa:

Assume that Mother Teresa and her outfit were able to help 100 people per day, every day, for 40 years. That’s some 14.6 million people (and that’s assuming that it was a different 100 people every day).

That’s 1.5% of the population. What percentage of the population of India is better off because of capitalism today? According to Wikipedia, the Indian middle class numbers anywhere from 200-300 million people, all of whose lives are substantively better because of capitalism.

The cars we drive, the food we eat, the computers we write posts and comments on would not exist without capitalism. Sure seems like a noble pursuit to me.

Sunday, September 14, 2008

What Obama Must Do To Win

After a disastrous two weeks following the Palin announcement, Obama's campaign finally seems to be recovering from the shock, and fully recognizes the value Sarah Palin brings to the McCain campaign.

As I've mentioned before, Obama's strengths in the "ground war" of voter turnout make a McCain victory in November unlikely. But McCain could still win the "air war"; here's what Obama needs to do to prevent that from happening.

First, he needs to shift away from what has been his primary line of attack: That John McCain represents a continuation of George W. Bush. Try as his aides and Andrew Sullivan might, America is not going to equate Sarah Palin with Dick Cheney.

Second, he needs to open up a new line of attack (which his campaign seems to be doing): That John McCain is willing to lie to America to win the election. It wouldn't hurt if his own campaign would cease their own dirty tricks, such as trying to attack McCain for joking that $5 million represented "middle class" when he was clearly speaking ironically.

Third, he needs to get the electorate to look past election day and consider which candidate will make a better president. Here, Obama should focus relentlessly on things that are 100% true--that he cuts taxes by more than McCain for every group other than those making over $250,000 per year, that John McCain doesn't know or care much about the economy, and that John McCain is more likely to lead America into other wars with potentially disastrous consequences.

"John McCain likes to talk a lot about putting country first. He loves America. But simple patriotism isn't enough to fix our economy or our foreign policy.

My opponent has good intentions, but I have a plan that will help America become stronger and more prosperous.

I'll provide bigger tax cuts for anyone making less than $250,000 per year. I'll focus our government on fixing the bad policies that led to this financial crisis and on improving our economy, rather than on fighting wars that don't keep America safer. I won't hesitate to use military force when necessary, but only when it is the best option, and only when the stakes justify putting our brave soldiers in harm's way."

Finally, the Obama campaign should avoid attacking Sarah Palin's qualifications (since his own are pretty thin) and instead underline how her beliefs and values seem extreme to much of the electorate. They need to emphasize that Palin doesn't believe that women who are raped or are the victims of incest should be allowed to have abortions, and that intelligent design should be taught in school.

While this might turn off those with ardent pro-life or anti-Darwinian beliefs, Obama had no chance of winning those votes anyways. What this would do is make sure that independent voters, especially women, realize that voting for McCain means supporting both the pro-life movement and intelligent design.

UPDATE: Sarah Palin never advocated the teaching of intelligent design in school. This is an out-and-out slander. My apologies for mistakenly including it in a post.

What McCain Must Do To Win

Two weeks after the Sarah Palin nomination shook up the presidential race, we seem to be settling into a new campaign narrative, one which should deeply concern John McCain and his advisors.

Below is a screen capture of the most popular stories on the New York Times website. I grabbed it today, September 14:



Nine of the ten most popular stories concern the election. All of them are critical of the McCain campaign.

You can find a similar narrative playing out on McCain's favorite network, MSNBC, which ran this article entitled, "Wheels Come Off Straight Talk Express?" The article cites a series of embarassing stories about the McCain campaign, including Story #10 above, McCain's disastrous appearance on "The View" where he was scolded by Joy Behar, Barbara Walters, and Whoopi Goldberg, and the Washington Post, Boston Globe, and FactCheck.org all criticizing the McCain campaign for deceptive statements and advertisements.

It may be tempting for McCain's campaign to dismiss this latest turn of events as part of the standard anti-Republican bias of the mainstream media. In fact, McCain spokesperson Brian Rogers actually said, "We’re running a campaign to win. And we’re not too concerned about what the media filter tries to say about it."

This is a terrible mistake.

John McCain's greatest strength (historically at least) has been his reputation as a straight-talking man of honor. When the entire MSM universe loads up and calls you a liar, that strikes at the heart of that advantage.

McCain has to be careful not to take for granted his historically cozy relationship with the press ("My base," as he referred to the fourth estate during happier times). McCain rose to prominence because he granted the media unprecedented access and charmed them with his authentic personality; now he has cut off media access and is taking his cues from the same (devastatingly effective) campaign team that George W. Bush used to destroy McCain in 2000.

Moreover, keeping the support of the media is exceptionally important in this election. The Palin pick has energized the Republican base, but that base has been eroded by an unpopular presidency and an unpopular war. If McCain and Obama both retain their base and split independent voters, Obama wins in a landslide. McCain has to attract independent voters, and he's unlikely to do so when the New York Times and Washington Post are calling him a liar.

Americans don't like or trust most politicians; the candidates who most successfully maintain an aura of authenticity tend to win. Just ask Hillary Clinton how being perceived as being willing to say or do anything to get elected worked out for her.

Or, as the famous saying goes, "The secret of success is sincerity. Once you can fake that you've got it made."

So what should McCain do?

First, he should stop overplaying his hand. The McCain campaign has staked its success on the narrative of McCain and Palin as being reformers who will bring needed change to America. Part of its strategy has been to respond aggressively when the Obama campaign or other Democrats point out how McCain and Palin fall short of this ideal (e.g. the fact that Palin keeps saying she didn't support the "Bridge to Nowhere" despite video of her giving speeches in support of it).

McCain has to stop falling prey to the Nixon Maxim: The cover-up is always more dangerous than the crime.

When Obama's campaign catches McCain or Palin in a contradiction, McCain should say, "My opponent is right. I haven't always done the right thing. But both Governor Palin and I are committed to reform, and I'll stack my credentials as a reformer against anyone, especially my opponent."

Second, McCain should focus on strengths that are unassailable because they are true, backed up by facts, and resonate with the American people. While some commentators (e.g. Andrew Sullivan) rip into McCain for constantly relying on his heroism and suffering as a POW in Vietnam, McCain needs to keep up the drumbeat. "I have served my country for decades, and sacrificed everything for it, including my health and my freedom. I have no doubt that my opponent wants to serve his country, but he hasn't demonstrated his commitment in the same way."

Finally, the McCain should stop trying to prove that Palin has the foreign policy experience to be President of the United States. In the best case scenario, talking points like Alaska's proximity to Russia, or touting the governor as an energy expert seem laughable; worst case, they seem desperate and cynical. Instead, Palin should focus attention on her biography and ability to understand the average American. "Like most Americans, I haven't had time to memorize the names of the world's leaders. In between governing my state and raising my family, I haven't had the opportunities to travel the world in private jets and have my picture taken on five continents. But I do understand the concerns of hard-working Americans who want to make sure they can keep their jobs and afford their homes."