Archive for the ‘finance’ Category

PDF Liberation Hackathon: January 17-19

This is a guest post by Marc Joffe, the principal consultant at Public Sector Credit Solutions, an organization that provides data and analysis related to sovereign and municipal securities. Previously, Joffe was a Senior Director at Moody’s Analytics.

As Cathy has argued, open source models can bring much needed transparency to scientific research, finance, education and other fields plagued by biased, self-serving analytics. Models often need large volumes of data, and if the model is to be run on an ongoing basis, regular data updates are required.

Unfortunately, many data sets are not ready to be loaded into your analytical tool of choice; they arrive in an unstructured form and must be organized into a consistent set of rows and columns. This cleaning process can be quite costly. Since open source modeling efforts are usually low dollar operations, the costs of data cleaning may prove to be prohibitive. Hence no open model – distortion and bias continue their reign.

Much data comes to us in the form of PDFs. Say, for example, you want to model student loan securitizations. You will be confronted with a large number of PDF servicing reports that look like this. A corporation or well funded research institution can purchase an expensive, enterprise-level ETL (Extract-Transform-Load) tool to migrate data from the PDFs into a database. But this is not much help to insurgent modelers who want to produce open source work.

Data journalists face a similar challenge. They often need to extract bulk data from PDFs to support their reporting. Examples include IRS Form 990s filed by non-profits and budgets issued by governments at all levels.

The data journalism community has responded to this challenge by developing software to harvest usable information from PDFs. Examples include Tabula, a tool written by Knight-Mozilla OpenNews Fellow Manuel Aristarán, extracts data from PDF tables in a form that can be readily imported to a spreadsheet – if the PDF was “printed” from a computer application. Introduced earlier this year, Tabula continues to evolve thanks to the volunteer efforts of Manuel, with help from OpenNews Fellow Mike Tigas and New York Times interactive developer Jeremy Merrill. Meanwhile, DocHive, a tool whose continuing development is being funded by a Knight Foundation grant, addresses PDFs that were created by scanning paper documents. DocHive is a project of Raleigh Public Record and is led by Charles and Edward Duncan.

These open source tools join a number of commercial offerings such as Able2Extract and ABBYY Fine Reader that extract data from PDFs. A more comprehensive list of open source and commercial resources is available here.

Unfortunately, the free and low cost tools available to modelers, data journalists and transparency advocates have limitations that hinder their ability to handle large scale tasks. If, like me, you want to submit hundreds of PDFs to a software tool, press “Go” and see large volumes of cleanly formatted data, you are out of luck.

It is for this reason that I am working with The Sunlight Foundation and other sponsors to stage the PDF Liberation Hackathon from January 17-19, 2014. We’ll have hack sites at Sunlight’s Washington DC office and at RallyPad in San Francisco. Developers can also join remotely because we will publish a number of clearly specified PDF extraction challenges before the hackathon.

Participants can work on one of the pre-specified challenges or choose their own PDF extraction projects. Ideally, hackathon teams will use (and hopefully improve upon) open source tools to meet the hacking challenges, but they will also be allowed to embed commercial tools into their projects as long as their licensing cost is less than $1000 and an unlimited trial is available.

Prizes of up to $500 will be awarded to winning entries. To receive a prize, a team must publish their source code on a GitHub public repository. To join the hackathon in DC or remotely, please sign up at Eventbrite; to hack with us in SF, please sign up via this Meetup. Please also complete our Google Form survey. Also, if anyone reading this is associated with an organization in New York or Chicago that would like to organize an additional hack space, please contact me.

The PDF Liberation Hackathon is going to be a great opportunity to advance the state of the art when it comes to harvesting data from public documents. I hope you can join us.

Protest JP Morgan at noon on Wednesday #OccupyJPM #OWS

I’m looking forward to protesting in front of JP Morgan with my #OWS Alt Banking group this Wednesday at noon. The exact location is 270 Park Avenue, near 48th Street.

It’s part of a “Week of Action” being put together by a broad coalition of activist and labor groups here in New York. The overall theme of the week is to try to communicate to New Yorkers, in this time of transition from Bloomberg to de Blasio, that we can effect positive change in our city. The theme of the day on Wednesday, at least for us, is to “be in the know,” which makes it a bit more positive than other protests we’ve been part of.

I think this makes sense. There’s so much widespread distrust and hatred of the big banks at this point that I feel like Occupy’s role has gone from provoking people to be outraged to provoking people to be hopeful. Hopeful about the fact that things could be a whole lot better than this, if we work together.

Anyhoo, we spent yesterday planning the action, and made some signs. Here’s one based on an idea we borrowed from Alexis Goldstein from her recent twitter war with JPMorgan:


and here’s a sign we’ll hold up while playing a “rigged game” with props:


I also made a sign that referenced the London Whale and the risk model, but someone said we might need to give people a copy of our recent book, Occupy Finance, just to understand that sign. Sigh.

The facebook page is here, please share it with people who may be able to join us Wednesday!

Categories: #OWS, finance

Cool open-source models?

I’m looking to develop my idea of open models, which I motivated here and started to describe here. I wrote the post in March 2012, but the need for such a platform has only become more obvious.

I’m lucky to be working with a super fantastic python guy on this, and the details are under wraps, but let’s just say it’s exciting.

So I’m looking to showcase a few good models to start with, preferably in python, but the critical ingredient is that they’re open source. They don’t have to be great, because the point is to see their flaws and possible to improve them.

  1. For example, I put in a FOIA request a couple of days ago to get the current teacher value-added model from New York City.
  2. A friends of mine, Marc Joffe, has an open source municipal credit rating model. It’s not in python but I’m hopeful we can work with it anyway.
  3. I’m in search of an open source credit scoring model for individuals. Does anyone know of something like that?
  4. They don’t have to be creepy! How about a Nate Silver – style weather model?
  5. Or something that relies on open government data?
  6. Can we get the Reinhart-Rogoff model?

The idea here is to get the model, not necessarily the data (although even better if it can be attached to data and updated regularly). And once we get a model, we’d build interactives with the model (like this one), or at least the tools to do so, so other people could build them.

At its core, the point of open models is this: you don’t really know what a model does until you can interact with it. You don’t know if a model is robust unless you can fiddle with its parameters and check. And finally, you don’t know if a model is best possible unless you’ve let people try to improve it.

Debunking Economic Myths #OWS

Yesterday in Alt Banking we were honored to have Suresh Naidu visit us to talk about and debunk economic myths.

The first myth, and the one we spent the most time on, is the idea that people “deserve” the money they earn because it is an accurate measure of their “added value” to society.

There are two parts of this, or actually at least two parts.

First, there’s the idea that you can even dissect the meaning of one person’s value. And if you can, it’s likely a question of a marginal value: what does our society look like without Steve Jobs, and then with him, and what’s the difference between the two worlds? As soon as you say it, you realize that such a thought experiment is complicated, considering the extent to which Steve Jobs’ journey intersected with other people’s like Steve Wozniak and a huge crowd of Chinese workers.

If you think about it some more, you might conclude that the marginal value of a single person is impossible to actually measure, at least with any precision, and not just because of the counterfactual problem, i.e. the problem that we only have one universe and can’t run two parallel universes at the same time. It’s really because any one person succeeds or fails, or more generally contributes, within a context of an entire culture. Even Mozart wrote his symphonies within a cultural context. In another context he would have been a kid who hums to himself a lot.

Second, there’s the assumption that people who earn a lot of money are actually adding value at all. This isn’t clear, and you don’t need to refer to formally criminal acts to make that case (although of course there are plenty of rich people who have committed criminal acts).

In many examples of super rich people, they got that way through not paying for negative externalities like polluting the environment, or because they had control of the legal mechanisms to reap profits off of other peoples’ work. Not technically illegal, then, but also not exactly a fair measure of their added value.

Or, of course, if they worked in finance, they might have made money by keeping stuff incredibly complicated and opaque while providing liquidity to the credit markets. It’s not clear that such work has added any value to society, or if it has, whether it’s balanced the good with the bad.

Some observations about this myth that were brought up include:

  1. There’s a deep belief in “the markets” at work here which is rather cyclical. The market values you more than other people which is why you’re paid so well for whatever it is you do. Other people who have less to offer the market are get paid less. Anyone who doesn’t have a job doesn’t deserve a job since the market isn’t offering them a job, which must mean they are adding no value.
  2. There are exceptions where people add obvious value – caretakers of our children for example – but aren’t paid well. This is because of a different mechanism called supply and demand. For whatever reason supply and demand isn’t at work at high ends of the market.
  3. Or maybe it is and there’s really only one possible person who could do what Steve Jobs did. Personally I don’t buy it. And I chose Steve Jobs because so many people love that guy, but really he’s one of the best examples of someone who might have had a unique talent. Most rich people are generically good at their job and not all that unique.
  4. It’s mostly the people that benefit from the market system that believe in it. That kind of reminds me of the marshmallow study, or rather one of the many re-interpretations of the marshmallow study. See the latest one here.
  5. It’s patently difficult to believe in the market system if you consider a lack of equality of opportunity in this country due to extreme differences in school systems and the like. I’m about to start reading this book which explains this issue in depth.
  6. For other evidence, look at Pimco’s Bill Gross’s recent confessions about being born at the right time with easy access to credit.
  7. The unequal access of opportunities in this country is becoming increasingly entrenched, and as it does so the myth of the market giving us what we deserve is becoming increasingly difficult to swallow.
Categories: #OWS, finance

#AskJPM and public shaming #OWS

I don’t usually shill for companies but this morning I’m completely into how much of a circus my Twitter feed became yesterday when JP Morgan Chase’s PR team decided to open up to the public for questions. You can see from the immediate replies how this was going to go:

Screen Shot 2013-11-14 at 6.49.22 AM

The questions asked which were tagged with #AskJPM are stunning and constitute a well-deserved public shaming of JP Morgan.

My friend and co-occupier Alexis Goldstein was absolutely killing it on Twitter, as usual. Here’s just a snippet from her feed:

Screen Shot 2013-11-14 at 6.52.57 AM

See also Dave Dayen’s choice question:

Screen Shot 2013-11-14 at 6.54.38 AM

Needless to say the Q&A was canceled, but not until the #AskJPM hashtag went viral in an amazing way. See more examples here and here.

Update: Watch #AskJPM tweets read by Stacy Keach live on CNBC!!

Categories: #OWS, finance, news

You are not a loan: Rolling Jubilee eradicates $15,000,000 worth of debt #OWS

This is super cool. Occupy Wall Street’s Strike Debt group has bought up almost $15 million dollars worth of mostly medical debt which was owned by 2,700 people across 45 states and Puerto Rico. They used donations they’ve been collecting over the last year. There’s more information about this action in this Guardian piece.

Here’s what I like about this. By freeing people of medical debt in particular, which is the biggest cause of bankruptcy filings, it emphasizes the lie of the “moral sin” often associated with crushing debt.

In other words, instead of imagining poor and debt-ridden people as lazy and glibly unable to keep their promises, the Rolling Jubilee action bestows a much-needed act of compassion for some of the millions of the unlucky people in this country caught in a dysfunctional health and credit system.

And while it’s true that it is making a small dent in the debt problem, in dollars and cents terms, I think the Strike Debt’s debt action, and its Debt Resistors’ Operation Manual, has made huge strides in how people think about debt in this country, which is tremendously important.


Categories: #OWS, finance, news

There is no “market solution” for ethics

We saw what happened in finance with self-regulation and ethics. Let’s prepare for the exact same thing in big data.


Remember back in the 1970’s through the 1990’s, the powers that were decided that we didn’t need to regulate banks because “they” wouldn’t put “their” best interests at risk? And then came the financial crisis, and most recently came Alan Greenspan’s recent admission that he’d got it kinda wrong but not really.

Let’s look at what the “self-regulated market” in derivatives has bestowed upon us. We’ve got a bunch of captured regulators and a huge group of bankers who insist on keeping derivatives opaque so that they can charge clients bigger fees, not to mention that they insist on not having fiduciary duties to their clients, and oh yes, they’d like to continue to bet depositors’ money on those derivatives. They wrote the regulation themselves for that one. And this is after they blew up the world and got saved by the taxpayers.

Given that the banks write the regulations, it’s arguably still kind of a self-regulated market in finance. So we can see how ethics has been and is faring in such a culture.

The answer is, not well. Just in case the last 5 years of news articles wasn’t enough to persuade you of this fact, here’s what NY Fed Chief Dudley had to say recently about big banks and the culture of ethics, from this Huffington Post article:

“Collectively, these enhancements to our current regime may not solve another important problem evident within some large financial institutions — the apparent lack of respect for law, regulation and the public trust,” he said.

“There is evidence of deep-seated cultural and ethical failures at many large financial institutions,” he continued. “Whether this is due to size and complexity, bad incentives, or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.”

Given that my beat is now more focused on the big data community and less on finance, mostly since I haven’t worked in finance for almost 2 years, this kind of stuff always makes me wonder how ethics is faring in the big data world, which is, again, largely self-regulated.

Big data

According to this ComputerWorld article, things are pretty good. I mean, there are the occasional snafus – unappreciated sensors or unreasonable zip code gathering examples – but the general idea is that, as long as you have a transparent data privacy policy, you’ll be just fine.

Examples of how awesome “transparency” is in these cases vary from letting people know what cookies are being used (BlueKai), to promising not to share certain information between vendors (Retention Science), to allowing customers a limited view into their profiling by Acxiom, the biggest consumer information warehouse. Here’s what I assume a typical reaction might be to this last one.

Wow! I know a few things Acxiom knows about me, but probably not all! How helpful. I really trust those guys now.

Not a solution

What’s great about letting customers know exactly what you’re doing with their data is that you can then turn around and complain that customers don’t understand or care about privacy policies. In any case, it’s on them to evaluate and argue their specific complaints. Which of course they don’t do, because they can’t possibly do all that work and have a life, and if they really care they just boycott the product altogether. The result in any case is a meaningless, one-sided conversation where the tech company only hears good news.

Oh, and you can also declare that customers are just really confused and don’t even know what they want:

In a recent Infosys global survey, 39% of the respondents said that they consider data mining invasive. And 72% said they don’t feel that the online promotions or emails they receive speak to their personal interests and needs.

Conclusion: people must want us to collect even more of their information so they can get really really awesome ads.

Finally, if you make the point that people shouldn’t be expected to be data mining and privacy experts to use the web, the issue of a “market solution for ethics” is raised.

“The market will provide a mechanism quicker than legislation will,” he says. “There is going to be more and more control of your data, and more clarity on what you’re getting in return. Companies that insist on not being transparent are going to look outdated.”

Back to ethics

What we’ve got here is a repeat problem. The goal of tech companies is to make money off of consumers, just as the goal of banks is to make money off of investors (and taxpayers as a last resort).

Given how much these incentives clash, the experts on the inside have figured out a way of continuing to do their thing, make money, and at the same time, keeping a facade of the consumer’s trust. It’s really well set up for that since there are so many technical terms and fancy math models. Perfect for obfuscation.

If tech companies really did care about the consumer, they’d help set up reasonable guidelines and rules on these issues, which could easily be turned into law. Instead they send lobbyists to water down any and all regulation. They’ve even recently created a new superPAC for big data (h/t Matt Stoller).

And although it’s true that policy makers are totally ignorant of the actual issues here, that might be because of the way big data professionals talk down to them and keep them ignorant. It’s obvious that tech companies are desperate for policy makers to stay out of any actual informed conversation about these issues, never mind the public.


There never has been, nor there ever will be, a market solution for ethics so long as the basic incentives between the public and an industry are so misaligned. The public needs to be represented somehow, and without rules and regulations, and without leverage of any kind, that will not happen.

Categories: data science, finance, modeling

Alan Greenspan still doesn’t get it. #OWS

Yesterday I read Alan Greenspan’s recent article in Foreign Affairs magazine (hat tip Rhoda Schermer). It is entitled “Never Saw It Coming: Why the Financial Crisis Took Economists By Surprise,” and for those of you who want to save some time, it basically goes like this:

I’ll admit it, the macroeconomic models that we used before the crisis failed, because we assumed people financial firms behaved rationally. But now there are new models that assume predictable irrational behavior, and once we add those bells and whistles onto our existing models, we’ll be all good. Y’all can start trusting economists again.

Here’s the thing that drives me nuts about Greenspan. He is still talking about financial firms as if they are single people. He just didn’t really read Adam Smith’s Wealth of Nations, or at least didn’t understand it, because if he had, he’d have seen that Adam Smith argued against large firms in which the agendas of the individuals ran counter to the agenda of the company they worked for.

If you think about individuals inside the banks, in other words, then their individual incentives explain their behavior pretty damn well. But Greenspan ignores that and still insists on looking at the bank as a whole. Here’s a quote from the piece:

Financial firms accepted the risk that they would be unable to anticipate the onset of a crisis in time to retrench. However, they thought the risk was limited, believing that even if a crisis developed, the seemingly insatiable demand for exotic financial products would dissipate only slowly, allowing them to sell almost all their portfolios without loss. They were mistaken.

Let’s be clear. Financial firms were not “mistaken”, because legal contracts can’t think. As for the individuals working inside those firms, there was no such assumption about a slow exhale. Everyone was furiously getting their bonuses pumped up while the getting was good. People on the inside knew the market for exotic financial products would blow at some point, and that their personal risks were limited, so why not make systemic risk worse until then.

As a mathematical modeler myself, it bugs me to try to put a mathematical band-aid on an inherently failed model. We should instead build a totally new model, or even better remove the individual perverted incentives of the market using new rules (I’m using the word “rules” instead of “regulations” because people don’t hate rules as much as they hate regulations).

Wouldn’t it be nice if the agendas of the individuals inside a financial firm were more closely aligned with the financial firm? And if it was over a long period of time instead of just until the bonus day? Not impossible.

And, since I’m an occupier, I get to ask even more. Namely, wouldn’t it be even nicer if that agenda was also shared by the general public? Doable!

Mr. Greenspan, there are ways to address the mistake you economists made and continue to make, but they don’t involve fancier math models from behavioral economics. They involve really simple rule changes and, generally speaking, making finance much more boring and much less profitable.

Categories: #OWS, finance, modeling, rant

Yves Smith and Dean Baker discuss the Trans Pacific Partnership #OWS

Last night I watched this interview by Yves Smith and Dean Baker on I recommend it for everyone interested in learning about the secret “free trade” agreement currently under negotiation between the U.S. and a bunch of other countries which touch the Pacific Ocean.

The interview will explain why “free trade” is in quotes, because it’s really more about protecting corporate interests and extending patents than about reducing obstacles to trade:

As a member of Alt Banking, I’m particularly outraged by the financial regulation part of the treaty, which sound like a race to the bottom in terms of common laws between the countries. But probably the worst part of the treaty is related to pharmaceutical protectionism.

Near the end of the interview there’s an appeal, involving a monetary award, for people on the inside to come out and show the world exactly what the contents of the treaty contain. The award is sponsored by WikiLeaks and is crowdsourced: it currently stands at $61,252. So you can add to it if you want to sweeten the pot.

Categories: #OWS, finance, news

How do we fix LIBOR?

It’s kind of hard to believe, but it’s true: many of the problems that led up to the financial crisis are still with us and simply haven’t been addressed.

For example:

  1. There are too few banks, and they are too interconnected. This is still a huge problem, and it’s called “Too Big To Fail.”
  2. In fact they’re so big they can engage in criminal activity and not fear prosecution. Still true, and it’s got a name too, “Too Big To Jail.”
  3. Also, the credit rating agencies, who get paid by debt issuers for AAA ratings on crappy debt? They’re still alive, there are still only three of them, and they still rate debt.
  4. Also, remember the LIBOR rate manipulations? Still being run by asking individual traders what they’ve been paying recently, and the answers are still being taken on faith. Oh, and they’ve been asked “not be located in close proximity to traders who primarily deal in derivative products” based on Libor. That’ll work, because nobody know how to text!

I’d like to perform a thought experiment for this last one, because it seems like a solvable problem, although I will confess up front that I don’t have a solution off the top of my head. That’s where you readers come in.

Just a little background. LIBOR is (supposedly) the very short-term interest rate that banks pay each other for loans. A huge pile – hundreds of trillions of dollars worth – of derivatives in the form of futures, swaps, and loans are tied to the LIBOR, and most of them seems to reference the three-month rate. Here’s a NY Times graphic explaining how it works and explaining how the fraud played out at Barclay’s.

So what are the attributes of the benchmark that make LIBOR so important and so widely used? And how would we start using something else instead?

Let’s answer that second question first. If we could find another 3-month benchmark rate with good properties, we could start writing contracts based on the new rate from now on, while continuing to compute LIBOR until the existing contracts have played out and LIBOR would be grandfathered out of the market.

Now on to the first question, a list critical attributes of this rate.

  1. It’s supposed to reflect very short-term kinds of risk, which means you don’t want to base it on, say, long term treasuries.
  2. It should be public data, so we don’t have manipulation behind the scenes
  3. But it shouldn’t be based on a market that is so small that it is worth losing money on that small market to manipulate the new LIBOR rates. Remember, the derivatives market that uses that rate is enormous, so if we base the rate on a smallish if transparent market, that would just invite market manipulation for that small market.
  4. The point of LIBOR-based derivatives is that it’s a floating rate, which means that as credit gets tighter or looser so does the rate references in a given derivative. But of course LIBOR is a very bank-specific kind of credit. So it’s not just “as credit gets tighter or looser” but rather “as interbank credit gets tighter or looser” (and here I’m ignoring the manipulation, since when bank credit actually got tighter, it wasn’t actually reflected in LIBOR rates).
  5. So I guess my question is, do we actually want bank-specific credit rates? Isn’t it good enough to have a market-wide concept of credit tightness? For most people who own one side of those LIBOR-based derivatives, I’m sure their own access to credit matters more to them than some London bank’s access, although I’m also sure there’s a relationship between the two.

I’m asking you readers to put up suggestions or explain how we can do without LIBOR altogether.

Categories: finance

Someone explain to me how accountants think about Capital Appreciation Bonds (#OWS)

Book Club

Yesterday we had a great discussion in our Alternative Banking Book Club about municipal financing, based on the sixth chapter in our book Occupy Finance called A Civics Lesson: Wall Street Feasts on the Commons. The conversation was kindly led by Tom Sgouros, a policy analyst and author from Rhode Island, which seems to be a hotbed of super terrible muni financing.

It was explained that shady deals in muni finance is all over the map, from price fixing in municipal bond deals, which is corruption strictly on the side of the big banks who finance the town’s deals to accounting tricks, where it takes the collusion of town officials to enter into shady and inappropriate contracts.

The thing I’d never really understood until yesterday was how people used Capital Appreciation Bonds to play tricks with their accounting, and specifically with their town’s debt limits.

Context around muni financing

A little more context, although I’m no expert (experts, please add details or correct me if I’ve misrepresented anything). Please also read the chapter, which is excellent and much broader.

First of all, by “municipalities” we mean towns and cities (actually, states and counties, too, not to mention water authorities, economic development agencies, school departments, and all the rest of the “not-federal-not-corporate”). So a town needs to borrow money for something, maybe to pay its workers, maybe to build something or maintain its roads. It borrows money from investors by issuing a muni bond, and the big banks help set that up. Investors invest in these bonds because they have special tax treatment, because they rarely default, and because they want to support their local communities.

But as you can imagine, the big banks have much more expertise on what kind of prices to expect and the level of sophistication it requires to do due diligence, and then if you add into that mix the fact that local town officials are often temporary, ignorant, and desperate, we get a toxic environment. There are lots of examples of this problem, and often they are covered up by the local towns because of associated embarrassment, complicity, and shame. Seriously, it’s awful, and we only hear about some of them like in Detroit and Stockton, when things are incredibly awful. Matt Taibbi has done an amazing job chronicling this stuff.

Anyhoo, with that backdrop, you can imagine that there are bad situations handed to town officials when they enter office, and they are confronted with a major league problem: they need to come up with money now to pay something basic like school teachers or firemen, but there’s no cash. And plus there’s a debt limit which they’re already pushing up against.

Zero coupon

Enter the Capital Appreciation Bond (CAB). It’s a zero-coupon bond, which is already weird. For most muni bonds, towns regularly – quarterly or annually – pay interest or so-called amortizing sums, very much as an individual homeowner might pay monthly for their mortgages, where most of it goes to interest but every month a little bit of the principal is paid off too.

But for CABs, you get some money now and you pay nothing at all until it’s due, at which point you pay it all back at once.

Very very long term debt

You may have even forgotten about it by then, though, because the second weird thing about CABs is that the loans are often very very long term – as in 30 or 40 years. So, given the nature of the set-up and the nature of compound interest, you can end up paying something like 7 times the original amount after that much time.

For example, we see a school district like San Mateo in California borrowing $190 million recently that, when the bond comes due, will owe $1 billion. And it’s widespread in California: according to this article, 200 California school and community college districts issuing these bonds will end up paying 10 to 20 times more than they borrowed.

Accounting practices and CABs

That brings me to the third weirdest property of CABs, namely how they look on balance sheets for accounting purposes.

Namely, and here I need to confess that I’ve been a very bad accounting student, the towns only have to write the original loan down on the balance sheet as a liability, not the eventual pay-out. This is in contrast with other kinds of very similar zero-coupon bonds where you have to write down the eventual payment you will owe, not the amount you start with.

Someone please explain this discrepancy in the field of accounting!! It makes no sense to me. If the cash flows are the same for two different kinds of bonds, how do you get to account for them differently?


In any case, the consequences of this accounting trick are real. In particular it means that, for desperate town officials trying to pay their workers, or even shady town officials trying to get away with stuff, CABs are very attractive indeed, because it looks kind of innocuous and their overall debt limits don’t get breached even though they’ve essentially sold the future of the town to a big Wall Street bank. Plus they won’t be in office when that bill comes due, and they might well be dead.

Some California officials are trying to make CABs illegal or at least restricted, and some states like Michigan and Ohio have already passed laws against them. But given how much money they make for big banks, there are serious headwinds for reasonable rules.

Categories: #OWS, finance

Disorderly Conduct with Alexis and Jesse #OWS


So there’s a new podcast called Disorderly Conduct which “explores finance without a permit” and is hosted by Alexis Goldstein, whom I met through her work on Occupy the SEC, and Jesse Myerson, and activist and a writer.

I was recently a very brief guest on their “In the Weeds” feature, where I was asked to answer the question, “What is the single best way to rein in the power of Wall Street?” in three minutes. The answers given by:

  1. me,
  2. The Other 98% organizer Nicole Carty (@nacarty),
  3. contributing writer David Dayen (@ddayen),
  4. Americans for Financial Reform Policy Director Marcus Stanley (@MarcusMStanley), and
  5. Marxist militant José Martín (@sabokitty)

can be found here or you can download the episode here.

Occupy Finance video series

We’ve been having our Occupy Finance book club meetings every Sunday, and although our group has decided not to record them, a friend of our group and a videographer in her own right, Donatella Barbarella, has started to interview the authors and post them on YouTube. The first few interviews have made their way to the interwebs:

  1. Linda talking about Chapter 1: Financialization and the 99%.
  2. Me talking about Chapter 2: the Bailout
  3. Tamir talking about Chapter 3: How banks work

Doing Data Science now out!

O’Reilly is releasing the book today. I can’t wait to see a hard copy!! And when I say “hard copy,” keep in mind that all of O’Reilly’s books are soft cover.

Categories: #OWS, data science, finance

Occupy the SEC, Dodd-Frank, and who has standing in financial regulation #OWS

A bit more than a week ago Akshat Tewery came to my Occupy group to discuss his chapter in the book we wrote called Occupy Finance [1].

Akshat is a member of Occupy the SEC [2] and came to talk to us about a short history of financial regulation, and how impressively well things worked in the middle of the last century, when Glass-Steagall was in effect and before it was gamed.

One thing he mentioned in his fascinating hour-long lecture was this lawsuit which I hadn’t heard about. Namely, Occupy the SEC sued the Federal Reserve, SEC, CFTC, OCC, FDIC and U.S. Treasury over not doing their jobs, specifically for the delay in finishing and implementing the Volcker Rule.

You see, Dodd-Frank is a law, and the Volcker Rule, which is supposed to be something like a modern Glass-Steagall act, is part of it. But the law just outlines the rules, and the regulators are supposed to actually turn that law into regulations which they then implement.

There was a deadline for that, and it has passed. So Occupy the SEC sued to make those guys get the job done.

And guess what? The judge found that they didn’t have standing to sue. I’m no lawyer but from what I can understand this means they were deemed not sufficiently relevant to the implementation of Dodd-Frank. They didn’t have enough skin in the game, in other words. Because they’re just, you know, citizens who care about having a functional regulatory environment. Not to mention taxpayers who have bailed out the banks and want to avoid continuing doing that.

That begs the question, who has skin in the regulation game? Answer: banks being regulated. So only those guys can complain to the courts about the regulation. And obviously their complaints will be different from Occupy the SEC’s complaints.

It seems like whenever I look around I see examples like this, where there are people getting away with crappy policies or even crappier deeds because it has a negative effect, but that negative effect is so dispersed that most people don’t have enough “standing” to sue or to even effectively quantify how they’ve been affected.

And I guess this is the land of class-action lawsuits, but that doesn’t seem sufficient. It really seems like there needs to be legal representation for taxpayers somehow. Who is looking out for the average non-insider? Who is keeping tabs on overall systemic risk? In an ideal world that would exist inside the regulators themselves, but we all know it’s not that ideal.

1. We’re out of copies, but if you don’t have a copy of Occupy Finance but you want one, go to our IndieGogo campaign and donate $10 and you’ll get a copy of the book as a thank you.

2.  Which, if you don’t know, consists of an amazing and wonky group of occupiers who write public commenting letters on financial regulation. Their Volcker Rule comments have made quite an impression on regulators, but they’ve also written numerous amicus briefs on various issues as well. Keep an eye on their work on their webpage.

Categories: #OWS, finance

Are PayDay lenders better than banks? #OWS

Sometimes my plan of getting up super early to write on my blog fails, and this is one of those days. But I’m still going to ask you to read this article from the New Yorker written by Lisa Servon and entitled, “The High Cost, For The Poor, Of Using A Bank.” Here’s a key passage, but the whole thing is amazing, and yes, I’ve invited her to my Occupy group already:

To understand why, consider loans of small amounts. People criticize payday loans for their high annual percentage rates (APR), which range from three hundred per cent to six hundred per cent. Payday lenders argue that APR is the wrong measure: the loans, they say, are designed to be repaid in as little as two weeks. Consumer advocates counter that borrowers typically take out nine of these loans each year, and end up indebted for more than half of each year.

But what alternative do low-income borrowers have? Banks have retreated from small-dollar credit, and many payday borrowers do not qualify anyway. It happens that banks offer a de-facto short-term, high-interest loan. It’s called an overdraft fee. An overdraft is essentially a short-term loan, and if it had a repayment period of seven days, the APR for a typical incident would be over five thousand per cent.

It makes me wonder whether, if someone did a careful analysis with all-in costs including time and travel, whether PayDay Lenders are not actually a totally rational choice for the poor.

Categories: #OWS, finance, modeling, news

Data Skeptic post

I wrote a blog post for O’Reilly’s website to accompany my essay, On Being a Data Skeptic. Here’s an excerpt:

I left finance pretty disgusted with the whole thing, and because I needed to make money and because I’m a nerd, I pretty quickly realized I could rebrand myself a “data scientist” and get a pretty cool job, and that’s what I did. Once I started working in the field, though, I was kind of shocked by how positive everyone was about the “big data revolution” and the “power of data science.”

Not to underestimate the power of data––it’s clearly powerful! And big data has the potential to really revolutionize the way we live our lives for the better––or sometimes not. It really depends.

From my perspective, this was, in tenor if not in the details, the same stuff we’d been doing in finance for a couple of decades and that fields like advertising were slow to pick up on. And, also from my perspective, people needed to be way more careful and skeptical of their powers than they currently seem to be. Because whereas in finance we need to worry about models manipulating the market, in data science we need to worry about models manipulating people, which is in fact scarier. Modelers, if anything, have a bigger responsibility now than ever before.

Categories: data science, finance, modeling

Make Rich People Read Chekhov

There have been two articles in the New York Times very recently concerning empathy.

First, there was this Opinionator piece about how rich people have less empathy. Second, there was this Well blogpost which reports on a study that implies you can improve your empathy skills, at least in the short term, by reading literary fiction like Chekhov.

Empathy means understanding and sharing the feelings of other people. So what do these two columns actually refer to?

For rich people, it’s mostly about attention rather than empathy. The idea is that researchers study how people pay attention to people (answer: they pay attention to high status people more), and found that rich people don’t do it much at all. They claim attention is a prerequisite for empathy, and that there’s a negative feedback loop going on with the rich, a lack of empathy, and increasing inequality.

As for the literary fiction column, it cites a study in which what they measure is something a little bit different, namely the “theory of mind” of a person after reading Checkhov versus something else. The concept of the theory of mind is that we have internal models of other people’s mindset, and actually they claim to be able to separate this into two parts, cognitive and affective. So if I have a realistic impression of what you’re feeling, we say that my affective theory of mind is good, whereas if I have a realistic impression of how you’re planning to act, that’s called nailing a cognitive theory of mind.

A few comments:

  1. I’m not so sure about the attention-leads-to-empathy assumption. Sometimes I am on a subway and I start sensing people’s emotions around me whether I like it or not, even when I’m trying not to pay attention to them. For me empathy is like smell, and some people are incredibly smelly, especially on the subway.
  2. On the other hand it resonates with me that rich people have less empathy. Certainly this seemed to be the case when I worked at D.E. Shaw, although it might have been a self-selection thing: maybe people who are not empathetic are attracted to working at a hedge fund.
  3. In any case, there’s a tremendous disconnect between regular people and the attitude of finance people, along the lines of “I’m smarter than those people so I deserve to be rich”, and I ascribe much of this disconnect to a lack of empathy.
  4. In both of these columns, though, the question was how well do you pay attention to, and read, people in the same room with you. Unfortunately that’s not a good enough question, at least if you’re worried about that negative feedback loop, if you think about the real world. In the real world, even in New York, rich people don’t spend lots of time in the same room with anyone except other rich people. So it’s a bigger problem to address than what you might at first think.
  5. Having said that, I don’t claim that if everyone just had more empathy all our problems would be solved. Even so I do think it might help. Certainly my sensitivity to other people’s emotions deeply affects me and my actions and goals, but of course that’s too little evidence to go by.
  6. In any case it’s an interesting thought experiment to imagine a world of increased empathy. I like that it’s being considered as a basic attribute of interest, and that it seems tweakable.
  7. Conclusion: before talking to someone I perceive as unempathetic, I will bust out a Checkov short story (this one) and demand they read it on the spot. That should really help.
Categories: finance, musing, news

A.F.R. Transparency Panel coming up on Friday in D.C.

I’m preparing for a short trip to D.C. this week to take part in a day-long event held by Americans for Financial Reform. You can get the announcement here online, but I’m not sure what the finalized schedule of the day is going to be. Also, I believe it will be recorded, but I don’t know the details yet.

In any case, I’m psyched to be joining this, and the AFR are great guys doing important work in the realm of financial reform.


 Opening Wall Street’s Black Box: Pathways to Improved Financial Transparency 

Sponsored By Americans for Financial Reform and Georgetown University Law Center

Keynote Speaker: Gary Gensler Chair, Commodity Futures Trading Commission

October 11, 2013 10 AM – 3 PM

Georgetown Law Center, Gewirz Student Center, 12th Floor

120 F Street NW, Washington, DC (Judiciary Square Metro) (Space is limited. Please RSVP to

The 2008 financial crisis revealed that regulators and many sophisticated market participants were in the dark about major risks and exposures in our financial system. The lack of financial transparency enabled large-scale fraud and deception of investors, weakened the stability of the financial system, and contributed to the market failure after the collapse of Lehman Brothers. Five years later, despite regulatory efforts, it’s not clear how much the situation has improved.

Join regulators, market participants, and academic experts for an exploration of the progress made – and the work that remains to be done – toward meaningful transparency on Wall Street. How can better information and disclosure make the financial system both fairer and safer?

Panelists include:

Jesse Eisinger, Pulitzer Prize-winning reporter for the New York Times and Pro Publica
Zach Gast, Head of financial sector research, Center on Financial Research and Analysis
Amias Gerety, Deputy Assistant Secretary for the FSOC, United States Treasury
Henry Hu, Alan Shivers Chair in the Law of Banking and Finance, University of Texas Law School
Albert “Pete” Kyle, Charles E. Smith Professor of Finance, University of Maryland
Adam Levitan, Professor of Law, Georgetown University Law Center
Antoine Martin, Vice President, New York Federal Reserve Bank
Brad Miller, Former Representative from North Carolina; Of Counsel, Grais & Ellsworth
Cathy O’Neil, Senior Data Scientist, Johnson Research Labs; Occupy Alternative Banking
Gene Phillips, Director, PF2 Securities Evaluation
Greg Smith, Author of “Why I Left Goldman Sachs”; former Goldman Sachs Executive Director

Sir Andrew Wiles smacks down unethical use of mathematics for profit

My buddy Jordan Ellenberg sent me this link to an article which covered Sir Andrew Wiles’ comments at a the opening of the Andrew Wiles Building, a housing complex for math nerds in Oxford. From the article:

Wiles claimed that the abuse of mathematics during the global financial meltdown in 2009, particularly by banks’ manipulation of complex derivatives, had tarnished his chosen subject’s reputation.

He explained that scientists used to worry about the ethical repercussions of their work and that mathematics research, which used to be removed from day-to-day life, has diverged “towards goals that you might not believe in”.

At one point Wiles said the following, which is music to my ears coming from a powerful mathematician:

One has to be aware now that mathematics can be misused and that we have to protect its good name.

Two things.

First, maybe I should invite Wiles to be on my panel of mathematicians for investigating public math models. I originally thought this should be run under the auspices of a society such as the AMS but after talking to some people I’ve given up on that and just want it to be independent.

Second, the Andrew Wiles building was evidently paid for primarily by Landon Clay, who also founded the Clay Institute and was the CEO of Eaton Vance, which an investment management firm which provides its clients with wealth management tools and advice. I’m wondering if that kind of mathematical tool was in Wiles’ mind when he made his speech, and if so, how it went over. Certainly in my experience, wealth management tools are definitely in the “weapons of math destruction” toolbox.

Categories: finance, math

I think I understand the revolving door problem

I was reading this Bloomberg article about the internal risk models at JP Morgan versus Goldman Sachs, and it hit me: I too had an urge for the SEC to hire the insiders at Goldman Sachs to help them “understand risk” at every level. Why not hire a small team of Goldman Sachs experts to help the SEC combat bullshit like what happened with the London Whale?

After all, Goldman people know risk. They probably knew risk even better before 1999, when they went IPO and the partners stopped being personally liable for losses. But even now, of all the big players on the street, Goldman is known for being a few steps ahead of everyone else when it comes to a losing trade.

So it’s natural to want someone from deeply within that culture to come spread their technical risk wisdom to the other side, the regulators.

Unfortunately that’s never what actually happens. Instead of getting the technical knowledge of how to think about risk, how to model a portfolio to squirrel out black holes of mystery, the revolving door instead keeps outputting crazy freaks like Jon Corzine, who blow up firms through, ironically, taking ridiculous risks at the first opportunity.

So, why does this happen? Some possibilities:

  1. Goldman Sachs promotes crazy freaks because they make great leaders while constrained inside a disciplined culture of calculated risks, but when they get outside they go nuts. This is kind of the model of Mormon children who are finally allowed out into the world and engage in tons of sex and drugs.
  2. On the flip side, perhaps Goldman Sachs keeps the people who actually understand the technical part of risk very deep in the machine and these guys never get leave the building at all.
  3. Or maybe, people who understand risk sometimes do go through the revolving door, but they don’t share their knowledge with the other side, because their incentives have changed once they’re outside.
  4. In other words, they don’t help the regulators understand how banks lie and cheat to regulators, because they’re too busy watering down regulation so their buddies can continuously lie and cheat to regulators.

Whatever the case, for whatever reason we keep using the revolving door in hopes that someone will eventually tell us the magic that Goldman Sachs knows, but we never quite get anyone like that, and that means the the SEC and other regulators are woefully unprepared for the kind of tricks that banks have up their sleeves.

Categories: finance, modeling, musing

“The only thing we really learned from the S&L scandal was how CEO’s should lawyer up”

The title of today’s piece is a quote from economist Chris Thornberg in a Reuters interview I found a couple of days ago.

It’s almost 15 minutes long, and the first couple of minutes are concerned with the housing market, which he has strong opinions on and I don’t, but then he moves on to financial regulation, the question of accountability, municipal bankruptcies, and whether economists suck at their jobs, subjects I care about a lot.

It’s a super interesting interview, and I’m planning to mail Thornberg a copy of Occupy Finance soon. Even though he serves on the advisory board of hedge fund Paulson & Co, he agrees with lots of people who come to Alternative Banking on many issues.

A few examples of what he’s talking about for those of you without 15 minutes to spend on him.


He talks about how Dodd-Frank is collapsing in on itself through extensive watering-down and lobbying, and how negotiations over how much “skin in the game” is required around securitization is the death knell of that process.

He talks about how the overall system is under-regulated and not being made accountable. He claims that, instead of trying to draw lines in the sand, we should try to attack the skewed incentives. A lot of people got very rich doing very bad things, he says, and the continued existence of those messed-up incentives will encourage a whole new generation to do the same.

For example, bonuses shouldn’t be given on how many loans you push out into the market but how they perform. We should be able to clawback money, which is to say pull back money from someone who’s done something bad. After all, he points out, Dick Fuld and Angelo Mozilo as men who became filthy rich from doing bad things and are now “untouchable”.


He also points out that D.C. never went through a recession because of money coming in through lobbying. His top two priorities to improve our system would be:

  1. To simplify the tax code, both corporate and personal. There too many special interests. Get rid of complexity and make it more progressive.
  2. Political reform. We like to say the Chinese are “one-party state”. But are we really two-party? We have very little “choice” especially if you take into account the gerrymandering. California is doing a good job reforming here.

Municipal Bankruptcies

Next, he moves onto municipal emergencies in Detroit, Stockton, and San Bernadino. All three city bankruptcies pose the fundamental decisions: what is the sanctity of public pensions? State laws generally insist that pensions be paid.

The issue here is, says Thornberg, that federal bankruptcy laws trump, not state law. So the relevant federal judge can say “too bad” to the contract, and the pensioners will be forced to take a cut like all the other debtholders.

Lawyers in the know think pensions are gonna go, and that precedent for this kind of thing is being established in these three cities in the very near future.


The Reuters interviewer addressed the issue that, generally speaking, economists missed the oncoming crisis. Does that mean there’s something wrong with economics?

Thornberg: “Professors don’t get published writing papers about the current economy – nobody cares about that.”

He claims that, yes, economists should be more on top of day-to-day stuff, but he claims that the critique misses the broader point, which is that everyone needs to be a better economist. He claims it is a social science which tries to address why people do what they do. And although economists would like to think of it as a mathematical science, they’re wrong to do so.

His advice: don’t listen to economists on TV. Educate yourself and know your source. It’s amazing how much stock we put into economists working for, say, the National Association of Realtors who get paid to say good things like, “it’s a good time to buy and sell a house!”

Categories: #OWS, finance

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