The market value of outstanding warrants held by the Treasury is around $6 billion, CBO estimates.¹⁴ Of the total, about $1 billion is from warrants issued by the 10 banks that recently repaid their TARP funds. However, those calculations are sensitive to the assumptions used in CBO’s models—particularly for treating the volatility of future stock prices (that is, how widely stock prices fluctuate over a given period).

14. CBO uses a Black-Scholes options-pricing model to price TARP warrants that relies on observed stock prices, estimated dividend yields, and historical data on volatility compiled from weekly securities returns for a period of 10 years.

Because what other methods are you gonna use?

Interestingly, the current estimate of the amount of ’subsidy’ from $700+ billion TARP (that is, the part we’re not going to get back) is $159 Billion. Cost is weird here, since there are three main sources of governmental assistance: 1) asset guarantees; 2) very cheap loans; and 3) payments not going to get paid back.

And in particular (ahem, Goldman Sachs), $35 Billion to AIG in loans and stock purchases, lots of which went directly to pay off GS and others’ credit default swaps. Another $40B lost to the auto industry, and $50B to the as-yet-established mortgage relief plan.

In fact, I would suggest that the whole article is written as a process piece meant to goad the Obama administration into a public fight with the LGBT community, because it would be fun to watch for political reporters and would allow political opponents to point to (probably real) rifts in the Democratic party. It would also allow those who would prefer to rid the world of pesky gay people to continue to oppose political change without being openly accused of being homophobic.

Sometimes a burger is just a penis.

Now, Democrats and environmentalists embrace C&T as the greenest thing around (well, other than structurally-similar carbon taxes), and Republicans deride it as a massive tax increase.

It (still) is what it is: an incremental improvement on environmental pollution, mobilized by a (probably flawed) market mechanism, that will increase costs (but not as much as if the EPA began regulating carbon by itself).

It (still) is not economic Armageddon or a serious solution to environmental degradation.

• Under then-head Jon Corzine (the soon-to-be-ex-governor of NJ), Goldman fucked over LTCM when they were going bankrupt in the late-1990s. From Roger Lowenstein’s When Genius Failed: “In Greenwich, Goldman’s sleuths, who had the run of the office, left no stone unturned…A key member of the Goldman team was Jacob Goldfield…[who] appeared to be downloading Long-Term’s positions, which the fund had so zealously guarded, from Long-Term’s own computers directly into an oversized laptop (a detail that Goldman later denied). Meanwhile, Goldman’s traders in New York sold some of the very same positions. At the end of one day, when the fund’s positions were worth a good deal less, some Goldman traders in Long-Term’s offices sauntered up to the trading desk and offered to buy them. Brazenly playing both sides of the street, Goldman represented investment banking at its mercenary ugliest. To JM and his partners, Goldman was raping Long-Term in front of their very eyes (172-173).
• They bet against their own positions during the sub-prime collapse As Michael Lewis put it, “Goldman had, in effect, an entirely separate enterprise, sitting on top of the firm, with the power to reverse the judgment of its own supposed experts in various markets. They were able to do this, apparently, without ever saying a word about it to their own traders. Instead of telling the fools trading subprime mortgages that they are wrong, and that they should unwind their positions, they simply offset their trades.”; And instead of telling the rest of as well.
• They took $12.9 billion government payouts as counter-parties to AIG’s credit default swaps. (the same M.O. they used as counterparty to LTCM, when the Fed bailed them out then as well);

And this is the stuff that comes without even digging any. I used to want to work for GS, and recommended a friend take a position there. Why? Because they’re smart, interesting, the top of their class. And I still appreciate some of the more interesting hedge funds. But honestly, reading this kind of stuff is so so so frustrating. How is this conscionable behavior? Seriously, how? I’m at the point when I just think, Fuck Them. I might as well recommend my students go into the mafia or prostitution before recommending that they go into investment banking these days. There seems to be only nuanced differences.

There was a time in our history when, in exchange for building the infrastructure of the United States, we allowed industrial robber-barons to make massive amounts of money. And in FDR’s famous ‘new deal’ speech, to the San Francisco Commonwealth Club, he called for a New Deal to remedy this.

Maybe there was a time when a similar bargain was made for Wall Street. But what are we as a society getting in return for allowing these new robber-barons? If the answer is, not enough, then where’s our New Deal?

So, Iran is now making ‘reluctant concessions’ with regard to the farce of election they just held.

I wouldn’t push too hard on this point, but it’s the reason why neo-insitutional folks push back against the myth-versus-real construction. Here, the myth actually makes changes to the real more viable.

That we’re willing to set pay at 7 firms but not others is an absurd Kabuki theater exercise in pretending that the administration gives a damn about it. It is only a way to inoculate the administration against the inevitable public outcry when (still absurd) Wall Street pay gets reported. It is shameful, shameful, shameful.

On the contrary, their ability to bring in profits over the past quarter are almost certainly the result of near-zero federal funds rates and an alphabet soup of government support programs.

The FDIC has been providing a Temporary Liquidity Guarantee Program (.pdf) since November 2008 (guaranteeing unsecured senior debt of eligible banks); the Federal Reserve’s Commercial Paper Funding Facility (CPFF) purchases three-month unsecured and asset-backed commercial paper from banking institutions; the Fed’s Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility and the Money Market Investor Funding Facility (MMIFF) buy asset-backed debt to support money market funds; the Fed’s Term Asset-Backed Securities Loan Facility (TALF) supports “the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).”

There are two effects here, one practical and one theoretical. The practical effect is to make money cheap and relatively risk-free, or at least to transfer the risk to the federal government and the profits to the private sector. So think about what this means, not for the 10 banks whose free money is putting them above the ’stress test’ line, but the rest of the banks (Citi!!!) whose free money isn’t.

The second effect, which is more interesting from the point of view of economic sociology, is that the federal guarantee of almost any risky asset held by a private financial institution effectively alters the information contained in the market price of these institutions and assets. I would almost but not quite suggest that the state has effectively transformed the toxic assets held by banks into US Treasury bonds, but it’s not not doing that.

More specifically, you might ask: what the price of an asset is that is guaranteed by the federal government? How valuable is it? How much risk does it embody? These questions are unanswerable, and in this sense, the alphabet soup of programs and supports have significantly reduced the signal-to-noise ratio of credit market prices. This is a momentous shift in the financial system.

My thoughts are braketed by two (good) books: John Wood’s Leaving Microsoft to Change the World and Tracy Kidder’s Mountains Beyond Mountains (which I was reminded about when David Purcell recommended it – thank you, Dave). I should add up front that if this discussion leads you to believe that you shouldn’t give money or respect the work of these non-profits, this makes you a kinda bad person. I’m speaking of relative value rather than absolute value.

John Wood founded Room to Read, a non-profit that donates books, builds libraries, and encourages girls’ education across the developing world. The memoir tells Wood’s story about how he got involved in, among other things, bringing books via yak to communities in Nepal. He was an up-and-comer at Microsoft during its heyday, working in Australia and East Asian markets. And during a trip to Nepal, he had a kind of epiphany, which led at age 35 or so to a total reorientation towards literacy in the developing world.

The Room to Read (R2R) model is straightforward and audacious:

We partner with local communities throughout the developing world to provide quality educational opportunities by establishing libraries, creating local language children’s literature, constructing schools, and providing education to girls. We seek to intervene early in the lives of children in the belief that education empowers people to improve socioeconomic conditions for their families, communities, countries and future generations. Through the opportunities that only education can provide, we strive to break the cycle of poverty, one child at a time.

Wood is a compelling figure in this story, in two main ways. First, he really has no particular expertise in literacy or education. His interest comes from identifying an obvious and heartbreaking lack of resources in schools around the developing world and from his own experiences loving books as a child. Second, his transition from the go-go-go for-profit world of Microsoft to the non-profit world was a change in goals but not process. His self-purported aim is to bring the aggressive, results-oriented culture of Microsoft to the delivery of books and resources to schools and libraries.

My partner has an MBA, and she has worked in for-profit and non-profit sectors. For her, Wood’s model is wholly compelling. His madman’s life of fundraising, strategic planning, and execution are the reason people go through the social entrepreneurship programs at management schools. Why not direct formidable amounts of energy and action towards the eradication of illiteracy in the developing world? As opposed to, say, making another iteration of an operating system or enterprise software.

But this is not without some considerable problems, stemming from the very same sources as the successes of these organizations. I want to focus on a specific piece of Wood’s book, where he was discussing a “failed” fundraiser in Cambridge, MA (’such failures that I found myself going back and forth on whether this chapter structure was worth the investment of my time’). It’s 159-163 in the book. After giving his spiel about how R2R was giving books to kids in Nepal, he began to feel uneasy:

[I] felt that I had nailed the presentation. Yet at the end not a single person clapped. Odd. Our work had always drawn vocal and positive feedback.

Staring out at a sea of skeptical faces, I paused, wondering what was going on. I filled the void by asking if anyone had questions.

“Yes, I have one.” A young woman in horn-rimmed glasses, short-cropped hair, and a blue Patagonia fleece threw me a zinger. “Can you explain your pedagogical theory?”

Ped-a-gog-i-cal theory. Do I have one? “Uh, sure. Kids need to grow up learning, reading, and going to school, and in the developing world a lot of them currently don’t. We help to fill that void with new schools, teachers, libraries and books.”

She pointed out that this was not really a unified pedagogical theory. I could not argue with her on this one. I made a mental note to ask someone smarter than me whether Room to Read had a UPT.

And there’s the rub. Wood’s organization is good at getting books to kids, but it has nothing to say at all about the kinds of things kids would get from reading those books, or whether this is a worthy educational mission to begin with. Believe me, I think it is. But Wood doesn’t have much to say about it.

In fact…this is quite common among a certain breed of social entrepreneurship. Take the justly-famed One Laptop per Child program, designed to bring the internet to the developing world. Started by Nicholas Negroponte and many of the core folks at the MIT Media Laboratory, their justification is:

to provide a means for learning, self-expression, and exploration to the nearly two billion children of the developing world with little or no access to education. While children are by nature eager for knowledge, many countries have insufficient resources to devote to education—sometimes less than $20 per year per child (compared to an average of $7,500 in the United States). By giving children their very own connected XO laptop, we are giving them a window to the outside world, access to vast amounts of information, a way to connect with each other, and a springboard into their future. And we’re also helping these countries develop an essential resource—educated, empowered children.

Like Room to Read, OLPC has nothing to say about what exactly, children will be learning ‘online’. What resources, websites, information, connections will be made? Or should we just assume that children+technology=education?

The list goes on. The immensely successful Kiva provides micro-loans to entrepreneurs in the developing world. But for what? Kiva is agnostic. Help someone get out of poverty by lending money for a bingo business, a butcher shop, or ‘goods distribution’ (whatever that means).

Kiva has nothing to say about the content of entrepreneurship, just as OLPC has nothing to say about the content of technology, just as Room to Read has nothing to say about the content of education.

At least in some cases, the application of business acumen to complex social problems makes sense. For instance, in the case of Malaria No More:

We have the tools (mosquito nets, medicine, spraying) to eliminate malaria deaths, but we need to dramatically scale up efforts to deliver them to the people who need them most. The challenge is principally operational, not scientific, and therefore amenable to business-style problem solving. Malaria No More was established in December 2006 by two widely respected business leaders—News Corporation President and COO Peter Chernin and Wall Street pioneer Ray Chambers—who are applying their private-sector experience and considerable networks to tackle this problem.

And finally I can make the question explicit: What kinds of challenges are principally operational versus scientific (or, more broadly, requiring content expertise)? What kinds of problems are amenable to business-style problem solving, and which require more than just private-sector methods applied to non-profit goals?

I take this up more in the discussion of Paul Farmer’s organization, Partners in Health.

The trip to the doctor, in our Plymouth station wagon, started out with Jon asking if I was going to get a shot this visit. Speculation, trepidation, and discussion about shots loomed large in my household. Jon, two years older than me, used to get massive doses of allergy shots. Jeff, five years senior, was largely out of the vaccination woods. For me, it was the tetanus booster.

Jeff: Oooh, the tetanus shot. That’s the worst one!
Jon: You’re gonna cry.
Me: Come on, it isn’t that bad, is it?
Jeff: Sometimes they use a shot that is so big that it goes all the way through your arm.
Jon: You’re gonna cry.

Immunizations and vaccinations have become a thing nowadays. For the tetanus vaccine, side effects include headaches, body aches, tiredness. Oh, and “crying for three hours or more (up to about one child out of 1,000).” Yeah. Crying.

In the doctor’s office, I freaked out. I started crying and squirming some before the doctor unwrapped the needle, so they called in my dad to help calm me down. I kept wiggling and began bawling loudly , so they called in a couple of other nurses to hold me down. Then the screaming. In the end it took the doctor, my father, and 5 nurses to hold me down while they gave me the obviously largest, most painful shot in the whole world.

I have been unreasonably afraid of needles ever since. I didn’t get blood drawn via a needle until college, preferring instead to have someone draw it by pricking my fingertip. The lure of sex and the fear of HIV pushed me into regular screenings. I’ve never given blood, though I know that it could save lives.

This is also one of my earliest, most vivid memories. I can hazily recall the house I grew up in, we used to have cats, but I don’t remember much about them. Faces, events, things all swim around in a soup of affect and snapshot. But the trip to to the doctor for my tetanus shot, that I remember.

Thing One: my mom died when I was 6 years old.

For years and years, I used to say that my mom died when I was seven years old. But I recently noticed that I was six. Here’s the obituary, from the February 25th, 1978, Chicago Tribune:

It’s interesting how 80 words sums up a situation: died at 35, leaving a husband and three boys. She died of cancer I’m told. Initially lung cancer, maybe doctors or parents telling me they discovered a brain tumor when they prepped her for surgery on her lungs. She didn’t smoke much. Although I could be wrong about this, I think it was less than a year from initial diagnosis to death.

My father, faced with the prospects of raising three boys aged 6 to 11 by himself, kind of freaked out. I think we ate a lot of hamburgers and pancakes, the only things he really knew how to cook. I began slipping a bit in my school behavior, to the extent one can do this in first grade. My father wrote a note on my report card that it was a trying time and my talking too much in class was not something he thought he needed to worry about, thank you very much. My brothers and I went to overnight camp that summer, for 8 weeks. In North Carolina.

The “I’m told,” “I think,” and “maybe” are all very much in keeping with my lack of memories of her. I poked around a bit and learned that episodic memory before the age of 4 or 5 is pretty unusual (for what brain people know, which isn’t as much as you might think). It’s known as Childhood amnesia, with explanations ranging from Freud’s belief that we suppress childhood trauma to biological-developmental explanations. Maybe we get emotions, but it’s unclear that we have episodic memory.

I have almost no memories of my biological mother that are unconnected to a photograph, a film, or a story told to me by someone else. I think of her as unfashionable, but that’s because of a particular set of photographs. It’s a little unfair to get branded by the 70s. An earlier set of photos from her junior high school prom shows her and my dad as the high school sweethearts they were.

My father re-married a few years later, to a woman I have called ‘mom’ for almost three decades. I love her. She, my two brothers, and I adopted each other pretty early on, both socially and legally. But I think surprisingly often about often about Ilene. I’m older than she was when she died, and she had three children by then. I’m not sad, truly, it’s been too long and my life has been too good to be sad about it. But my fundamental worldview is shaped by fragility in a way that is often hard to explain.

My dad told me a story not too long ago about her. It was winter in Chicago. He was in the Caribbean islands, as a young tax lawyer, at a conference of some sort, when she called him up:

Ilene: Oh my god, are you ok?
Bob: Um, yeah. Why?
Ilene: I’m looking at the news, and it says there is a massive hurricane over the Caribbean. It’s right on top of you!
Bob (looking out the window at impeccably blue skies): I don’t see anything. It looks completely beautiful outside, no rain in sight.
Ilene: Well, it’s 10 below zero here, and freezing rain, you jerk!

And then she hung up on him. My kind of woman.

A couple of interesting data points here. The first is a chart from EHnet (in a well-cited article:

What happened between 1970 and 2002?

As you can see, the total amount of produced grain trends upwards, but the amount of speculation trends exponentially. More data points would help, of course. But I can provide an educated guess that in the mid-1970s the modal speculator in futures was a rich, risk-taking individual; by the 1990s it was corporate and financial institutions; and in the 2000s it’s been financial firms big and small.

And why might rich folks have taken note of futures trading through the 1970s and into the 1980s? Taxes, baby.

There are numerous ways that uses of futures markets for tax avoidance purposes are practiced by people who have income from “unrelated sources,” such as real estate, stock transactions, etc. Brokerage houses and advisory services have promoted these tax avoidance ideas among high income persons. And such uses have been growing.

A common method is the “tax straddle” and its many variants. Essentially, these are spread positions in pairs of futures delivery contracts that fluctuate closely together – most commonly in pairs of delivery months for the same commodity – handled in such a way as to create paper losses in the current tax year, with offsetting gains deferred until the next tax year (and repeatable in the following tax year). Also, it enables short-term capital gains to be converted to long-term capital gains.

The precious metals futures markets have become rife with such transactions, as well as other types of tax avoidance maneuvers, but so have interest-rate futures markets and perhaps some agricultural commodity markets, like soybeans. All futures markets are subject to tax avoidance transactions and many have been used for that purpose by traders in such markets.

The Treasury estimates that in 1981, about $1.3 billion will have been lost by taxpayers’ use of futures markets to defer taxes and to convert tax obligations from ordinary income and short-term capital gains rates to long-term capital gains rates. The IRS has been challenging such taxpayer claims in the courts and believes it will win most cases but wants to plug the loopholes now through legislation (see “Statement of the Honorable John E. Chapoton, Assistant Secretary for Tax Policy Before the Committee on Ways and Means, House of Representatives,” U.S. Congress, House, 97 Cong. 1 sess., given 30 April 1981, unpublished transcript).

There seems to be general agreement that futures markets should not exist for tax avoidance purposes but there is apprehension in agricultural circles that the liquidity of agricultural commodity markets would suffer if the successful speculator in futures could no longer count on sheltering income from speculating in futures from high tax rates. They argue for exclusion from any modifications in the tax laws.

- pg. 301, fn 8 in Paul, Allen B. 1982. “The Past and Future of the Commodities Exchanges.” Agricultural History 56(1): 287-305.

Interesting, no?

Probably the greatest difficulty the exchange forces faced was the task of differentiating between a simple option and a futures contract. Options permitting fulfillment by settlement of differences alone were regarded by the courts as gambling contracts and hence unenforceable, so it was vital that the brokers draw a careful distinction between futures contracts, their principal form of business, and these illegal options. In theory the difference was that a simple option could always be settled by cash, whereas the purchaser of a futures contract could demand delivery of the actual product. In practice, however, the distinction was meaningless, because futures contracts were settled just as simple options – by the payment of differences. In only 3 per cent of the futures trades was there actual delivery; in fact, to demand delivery was to brand oneself a miscreant and led to ostracism by the brokers.

This distinction might have seemed tenuous to the layman, but it was fundamental according to prevailing legal thought. The right to require delivery, contained in the futures contract, made it possible to say that the seller at the time of the sale intended to make delivery and therefore, his intent being legitimate, the contract was legal and binding. The simple option, on the other hand, was inescapably a wagering contract because the purchaser could offer no intent other than a desire to profit by a price change. The intent to profit, where no goods were exchanged, was held to be socially unjustifiable. Thus it was only the delivery provision in the futures contract that enabled traders to refer to themselves as brokers and speculators rather than gamblers, and decided whether – at least in the legal mind – they were assets or liabilities to society.

Two things are important here. The first is that it was necessary to create a fiction that allowed early exchanges to distinguish speculation from gambling. Because the public found ‘risk transfer’ (or rank market speculation) unconvincing. And second, a failure of economics as a discipline was (here at least) its imposition of ‘market efficiency’ as a socially desirable end in and of itself. By late 20th century, speculation as a form of risk transfer was promoted as a way to make markets more efficient. And market efficiency obviated the need for some kind of ‘real economy’ justification.

A work of art seems to be a hardier breed; it can be sold in the market and still emerge a work of art. but if it is true that in the essential commerce of art a gift is carried by the work from the artist to his audience, if I am right to say that where there is no gift there is no art, then it may be possible to destroy a work of art by converting it into a pure commodity. Such, at any rate, is my position. I do not maintain that art cannot be bought and sold; I do maintain that the gift portion of the work places a constraint upon our merchandising.

- Lewis Hyde, The Gift, pg. xviii

Sadly, I’m squarely in the uncanny valley.

from the New York Times: American Express to Cut 4,000 Jobs, Saving $175 Million

This song is from this album, incidentally. If you don’t feel like dancing, you can always relax and let Buddha take you away.

Highlights: at the 2:54 mark, you can see the highest guy in the place in the lower right corner. And at 4:05, the song just becomes brilliant.