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Laundering risk: Wall Street’s mathematical money machine

07-Oct-08

Conservative think-tank dead-enders keep insisting that the blame for the market and financial crisis lays at the feet of do-gooder efforts at Fannie Mae and Freddie Mac, all the way back to the Community Reinvestment Act of 1977, to help more Americans buy homes. I have never believed in the virtue of home ownership. But the facts simply don’t support the conspiracy theory, no matter how good it might feel to blame poor people for all of our woes.

If the CRA were the main cause of this crisis, we would have a bad, but manageable, collapse of one sector of the economy. An important and big one, yes, but not the entire banking system and everything around it. The real culprit lies with Wall Street’s numerous financial “innovations” over the past decade. We are in crisis not because of some bad loans, but because those bad loans (a) were sliced into so many little pieces that to find them all would be like picking out molecules of poison from a reservoir; and (b) they were leveraged so hard, so far beyond their reasonable limits, that small disruptions would cause enormous calamities.

It is as if an entire skyscraper were built on the foundation of a single matchstick. And the matchstick has burned.

I am waiting for a responsible investigative team to tell us the real story of this meltdown: how Wall Street laundered risk through a combination of opaque derivative products and sweetheart bond ratings to turn lead into gold. The story works quite a bit like disposing of stolen goods: first you need a way to disguise your source, then you need a fence willing to “certify” them as legit. The main difference is that the criminals in this story used fancy mathematics, not slim jims, to execute this massive heist.

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Short People for Obama

06-Oct-08

The New York Times’ “The Measure of a President” provides visual proof that shorter candidates suffer a remarkable handicap in winning the Presidency. Part of the blame surely lies with the media, which regularly taints their coverage with heightist phrases like “Despite his diminutive stature…” And don’t get started with the term “scrappy.”

It is little wonder that short people are tempted to vote for John McCain, at 5′7″ the shortest major party nominee since 1900. We are outraged by the heightism and discrimination spread by the mainstream media, and we are ready to fight back.

Yet we cannot allow our own justifiable outrage cloud our vision. George W. Bush beat a taller opponent in both 2000 and 2004, and look where our country is now. The last candidate to accomplish this feat was Richard Nixon in 1968 — enough said. Presidents Bush and Nixon were an embarrassment to the short community, and John McCain’s sadly stereotypical Napoleonic tendencies will do us little good in combating societal prejudice.

We look forward to a competent and qualified candidate of shorter stature who will earn our support. Change is coming: we already have one of the shortest Speakers of the House in recent history. Until that time, I am proud to be a Short Person for Obama.

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CIO Insight on Obama technology

03-Oct-08

Ed Cone of CIO Insight has published a series, “How the Obama Campaign is Using Technology to Change Elections on the Ground.” (Big ups to Baratunde for the tip). There’s a few tidbits here and there worth repeating:

“It’s the difference between open and closed source.” — Cyrus Krohn, director of the eCampain division of the Republican National Committee. Presumably, Obama = open source. I wonder if Krohn sees that as positive, negative or neutral? Certainly, my colleagues would agree that open source is a massive positive.

“The Ground Game: Open Source vs Closed“. This article largely discusses minimally-supported local teams and my.BarackObama.com (or “MyBO” for short). Cone observes, “The Republican’s answer to the vaunted MyBarackObama.com website, known as McCainSpace, did not go live until August, and the McCain campaign is generally seen as lagging on the technology and organizational fronts.” The article confirms that the Republicans continue to equate the Internet with “microtargeting” marketing and that the Obama campaign has “leapfrogged” them.

“Local Area Networks: How the Obama Campaign Works on the Ground” describes the pyramid-shaped MyBO system: users at the base of the pyramid have relatively fewer options than those at the top, which distinguishes MyBO from, for example, Facebook. Nonetheless, local volunteers can command teams of other volunteers to undertake impressive amounts of critical work like registering, identifying, and persuading voters. For anyone familiar with GOTV campaigns (if not, here’s my GOTV primer), what’s radically new is the possibility for such teams to self-organize, with minimal supervision from the campaign. This allows the campaign to aggressively leverage its paid organizing staff. The “force multiplier” power of good technology skews even further Obama’s decided ground-game advantage.

“Connecting the Compaign: How the Democrats Built Their Network” describes the Voter Activation Network (VAN) system, headquartered not too far from where I am, that has been the data backbone of the DNC. (All of the Democratic candidates had access to VAN during the primaries, in the interest of growing the pie for everyone, thought in the heat of battle that did lead to frictions that had to be resolved by segregating the data out. So here the commons lost some ground to self-interest). Any organizer, however technology-crippled, will tell you that databases are the key to winning campaigns. (Back in the day, they would use huge stacks of index cards and the like). Some key insights about social networking:

“Facebook is great for broadcasting yourself to friends, but it’s not very action oriented. There are few features at MyBO for broadcasting yourself in the abstract–instead it’s geared to getting people to take action.” [Jascha Franklin-Hodge of Blue State Digital]. In essence, MyBO redirects the energy of social networkers to specific, campaign-oriented tasks, such as canvassing neighborhoods. Ruffini [Bush-Cheney 2004 webmaster] agrees that the system has “morphed into a very useful tool.” A killer application, he says, is the group-building feature, which allows people to create connections to potential voters in their area, rather than just talking about their personal views of the campaign as they might on Facebook.

“Going Mobile: Texting and Twittering in the New Ground Game” identifies the VP selection text-message signup as a “watershed moment” for the campaign. It was a great way to collect thousands of phone numbers that are normally very difficult to acquire. Yet the technology also appears to be immature, with many who signed up failing to get the text message, as well as expensive.

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Hypercharging traditional organizing with YouTube

03-Oct-08

Compare the YouTube pages of the McCain and Obama campaigns, and you’ll also get a glimpse of how very different their strategies are. Both feature 30- and 60-second advertisements, but Obama also offers a wide range of other pieces that include speeches and rallies, calls to action, and, increasingly, videos that support local grassroots efforts.

In other words, McCain’s 300 videos are an extension of his marketing — the “air war.” Obama’s 1,428 videos extend both his “air war” and his “ground war.” Given the Obama campaign’s relatively extensive investment and innovation in this area, we can get a glimpse of the state-of-the-art in weaving together new media and traditional organizing.

I would divvy up the Obama YouTube videos into the following categories:

  1. Advertisements. Frankly, I find these boring transplants from another medium (TV), but some are highly-watched. The long pieces are made-for-Web. Example from McCain: “Chicago documentary,” which attacks Barack Obama as complacent on Latino issues.
  2. “Raw” footage. Videos of Obama, Biden, or surrogates stumping and, in many, audience reaction. These can be quite long, and some are also (surprisingly) well-watched. Example: “A More Perfect Union” a/k/a Obama’s “race speech” (almost 5 million views).
  3. Calls to action. A direct appeal to the viewer to go and do something. Recently, this has focused on registering, voting, and volunteering. Examples: “Come to Ohio,” which invites viewers to head over to volunteer in Ohio; “Vote Early in Ohio,” which asks Ohio citizens to register and vote early.
  4. Instructional video. A simple explanation of how to do something to help the campaign. These recently started showing up. This category blurs a bit with #3, as these pieces are also persuasive. Example: “Phonebanking 101.”

(None of this includes the unofficial videos that are created outside the campaigns, the most famous of which is probably the “Yes we can” music video. More on those media here.)

For traditional grassroots organizers, videos of type 3 and 4 are worth studying. One of the key weaknesses of new media are their apparent inefficacy in getting people to do things in the real world. Or at least that’s the conventional wisdom after the collapse of the Dean campaign in 2004. Whether these videos, by themselves, convince people to go and cast an early vote in Ohio remains to be seen.

But these videos do not operate by themselves; rather, it’s pretty clear that some are intended to be wrapped into a traditional grassroots campaign. For example, the “Phonebanking 101″ video could be used to help recruit volunteers for a phonebank as well as to train them once they’ve shown up. In other words, these media work hand-in-hand with other tactics — which is quite different than mass-market advertising. Thus, while you might normally measure the effectiveness of a YouTube video by the number of hits it gets, it would be wrong to conclude that the “Color By Numbers” advertisement (11,500 views one day after it was posted) is more useful and successful than the “Come to Colorado” piece (2,964 views over the same period). “Color by Numbers,” at best, might persuade a few people to not vote for McCain (or strengthen their resolve for Obama). The “Come to Colorado” video, by contrast, might persuade people to drive over to volunteer and, in turn, reach out to hundreds, maybe thousands, of voters.

More on how these videos are made, and the significance of that production strategy for grassroots organizing, to come…

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Lydia Lowe doesn’t speak for me

02-Oct-08

I don’t live in the Second Suffolk District, where a heated battle is underway between incumbent State Senator Diane Wilkerson and challenger Sonia Chang-Diaz, the challenger who won the Democratic nomination last week. I have no standing to evaluate whether Wilkerson or Chang-Diaz is more capable of representing that District’s needs.

However, as a Chinese-American, I do feel strongly disserved by the executive director of the Chinese Progressive Association, Lydia Lowe, who is quoted in the Bay State Banner as saying, “I think progressive whites don’t care about what people of color want or who they see as their leaders.”

This is a disgraceful show of divisive 70s-style racial politics that we simply don’t need at this moment in history. Progressive (and not-so-progressive) whites — indeed people of all races — have shown that they do care about other people, of other races. I fundamentally and profoundly disagree with the sentiment that progressive whites are selling out their non-white brethren. If anything, history has repeatedly shown us that progressive whites have been essential to the advancement of so many issues of importance to minorities, whether civil rights, affirmative action, or immigration reform.

Like a certain black pastor who recently received nationwide notoriety, Lydia Lowe’s years of fighting for the interests of Chinatown and the Chinese-American community may have, at the same time, given her a sadly frozen view of race relations. Diane Wilkerson’s own preferred candidate for President chastised his former pastor: “The profound mistake of Reverend Wright’s sermons is not that he spoke about racism in our society. It’s that he spoke as if our society was static; as if no progress has been made… But what we know — what we have seen – is that America can change.”

The idea that whites in Jamaica Plain are selling out their non-white neighbors because of race is reprehensible and disgusting. Lydia Lowe and her organization may win a tactical victory if her candidate returns to the Senate. But by playing the race card — against a woman who’s mixed white, Latina, and Chinese, no less — she’ll be hurting the long-term interests of her own constituency, pushing away the very people who have been a cornerstone of political success any time minorities have tried to attain success beyond our own boundaries.

Filed in Boston, Politics | Comments (7) »

Trying to understand what is going on

01-Oct-08

Total economic meltdown sure is confusing, isn’t it?

So where to turn for helpful information? Well, the sense I’m getting is: while many experts know and agree on what’s happening (collapse of mortgages and mortgage-backed derivatives, collapse of other lines of credit, credit crunch across the board), we are in uncharted territory as far as what happens next and the consequences for our national and global economies. Here are some links to articles that might be helpful based on looking around quite a bit:

  • Post today by Dean Baker in TPM : “The main cause of the economy’s weakness is not insolvent banks and lack of credit; it’s the loss of $4 trillion to $5 trillion in housing equity as a result of the bubble’s partial deflation. Families used their equity to support their consumption in the years from 2002 to 2007, as the savings rate fell to almost zero. With much of this equity now eliminated by the collapse of the bubble, many families can no longer sustain their levels of consumption. The main reason that banks won’t lend to these families is that they no longer have home equity to serve as collateral. It wouldn’t matter how much money the banks had, they are not going to make mortgage loans to people who have no equity.”
  • Paul Krugman — particularly Crisis Endgame (”This flight to safety has cut off credit to many businesses, including major players in the financial industry — and that, in turn, is setting us up for more big failures and further panic. It’s also depressing business spending, a bad thing as signs gather that the economic slump is deepening.”).
  • Pretty serious macroeconomic analysis from Brad DeLong, concluding, “there is now no time for tolerance of the three objections to this analysis and this plan of action, roughly: (1) it’s immoral, (2) it’s unfair, and (3) it can’t work in the long run.”
  • RGE Monitor — Financial intelligence company with limited free membership during this crisis. My friend Jarrett highly recommends Nouriel Roubini’s Global EconoMonitor, e.g.

There’s much more out there, but my own conclusions, in trying to keep things simple in my own head, are that (a) we have been in a bubble since the close of the Clinton years; (b) Greenspan refused to pop the bubble, instead superinflating it; (c) exotic new financial products multiplied the force of the bubble many times greater than normal; (d) the final popping of the bubble will have real and psychological effects that will crash the economy to below where it “really” is right now.

There’s nothing that policy and leadership can do, now, about (a)-(c). We can only hope that wise leadership will steer us away from (d) if at all possible…

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Poll of new/lapsed voters confirm, reject stereotypes

01-Oct-08

New survey out from the Wall Street Journal / NBC / MySpace. Full report. The WSJ’s read on this was that new voters were less likely than the poll of all voters to vote this November (”very interested” = 49% vs. 70%). However, what I find interesting is that this question is on a 10-pt scale, and that the 10,9,8 votes 78% for new voters vs. 87% for all voters. I wonder if new voters are simply less willing to pick the most extreme possibility.

Other interesting data:

  • 28% of new/lapsed voters have watched a homemade video about the election on YouTube, vs. 22% of all voters.
  • 25% have sent a text message, vs. 16%
  • 21% have joined an online social networking group for either campaign, vs. 8%
  • The spread of confidence across internet media, MSM, fed gv’t and financial industry are interesting as well. New voters have little confidence in any of these, but have the most (least least?) confidence in Internet media.
  • Despite this, they claim to get and trust the news from cable news channel above MSM and print/online newspapers. Despite stereotypes they don’t rank late night shows, social networking, or blogs very highly. (However, I tend to distrust self-reporting on whom the respondents “trust.” Peer influence, e.g. through social networks and blogs, would be very hard for someone to recognize on themselves.)
  • Despite a stereotype that young people don’t join (and these are mostly young voters, though there’s no cross-tab), 23% identify themselves as “strong Democrat,” the largest percentage of any of the other options (19% identify as “strictly independent”).
  • 65% of respondents use Internet network (MS, FB, etc.), and 35% have a cell phone but no landline.
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The risks of high-pressure negotiation tactics

01-Oct-08

A few days ago I discussed how Treasury Secretary Paulson came to the negotiation with an extreme, highly “anchored” opening move, and how negotiations research shows that anchoring works. Why, then, don’t we always use absurd opening moves when engaging in a negotiation over used cars or other purchases? The answer is that the party making the offer can lose credibility with or respect of the other party, and the chances of reaching an agreement can go down. That’s precisely what happened when the House rejected Paulson’s plan — even as modified — on Sunday.

By including unacceptable terms — most notably, non-reviewability — Paulson et.al. were perceived as overreaching. Even though the Administration quickly gave up those terms, the mistrust was already sown, especially because the proposal echoed the earlier “trust me” terms of the Iraq war authorization.

Maintaining a strong working relationship with the other party in a negotiation is critical to successful outcomes for both parties. In this case, by playing chicken with Congress, the Administration may have precipitated the worst outcome for both sides: failure to reach an agreement. Let’s hope our economy can survive the results.

Update: More (and better) analysis of this situation from a negotiations POV from my friend and colleague, Erin Ryan, at the Harvard Negotiation Law Review Blog.

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Leadership in an Obama administration

29-Sep-08

The Obama campaign has a unique opportunity to show us what leadership in his Internet-savvy administration might look like. Americans are panicking now over the crisis on Wall Street, panicking but completely at a loss as to what we should do. This is Obama’s chance to show us real leadership through running a serious of Web spots and TV ads that:

  • Explain, in simple English, what is happening on Wall Street, and how that affects Main Street;
  • Use graphics and Ross Perot charts to illustrate rather than use words;
  • Outline the options, and the pluses and minuses of each one in as non-partisan way as possible;
  • Do it in the calm, serene, and non-partisan manner in which Obama excels — and which the citizenry really need right now.

This would:

  • Assert high-minded leadership at a time when everyone else is embroiled in politics;
  • Demonstrate Obama’s belief that we are mature and intelligent;
  • Spread like wildfire — because we are all desperate for answers, and no one — including the MSM — is giving us any.

Obama has run a spectacular, Internet-infused grassroots campaign for the Presidency. I’m ready to see how that translates into leadership and governance.

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The bailout as negotiation between justice and pragmatism

29-Sep-08

This week’s Economist describes a difficult negotiation underway in Washington:

An impaired mortgage security might yield 65 cents on the dollar if held to maturity. But because the market is so illiquid and suspicion about mortgage values so high, it might fetch just 35 cents in the market today. Recapitalising banks would mean paying as close to 65 cents as possible. Those that valued them at less on their books could mark them up, boosting their capital. On the other hand, minimising taxpayer losses would dictate that the government seek to pay only 35 cents. But this would provide little benefit to the selling banks, and those that carried them at higher values on their books could see their capital further impaired.

If we want DC to drive a hard bargain and get taxpayers maximum value, we want them to lowball for $.35. But that would be self-defeating, as the economy would likely seize up. If we go for the $.65, we might be overpaying for them, rewarding Wall Street for its greedy stupidity at taxpayer expense.

There’s a spectrum here between what is “fair” and what will “work” — and what’s worse, we can’t know if/when we cross either threshold. It’s possible, as The Economist suggests, that $.65 will NOT work — AND yet still be perceived as unfair.

The thing that’s impossible for most American taxpayers to swallow with corporate welfare is exactly the same as for individual welfare: you (the taxpayer) will personally pay a certain amount of money for an uncertain and socially distributed benefit. It’s hard enough to convince Americans that we are our brother’s keeper when it comes to getting homeless people we can actually see off the streets with programs that we can understand (if not agree with). The bailout wants us to enact that same value with people who aren’t that sympathetic using mechanisms that even most economists are having a hard time articulating.

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