Author Archive

Wanted: Dead or Alive

November 18, 2014 2 comments

I came across an interesting poster that’s been put up on a few lampposts on my street.  It rather pathetically offers a $2,000 reward for information leading to the arrest of George Welch for operating a bucket shop in New York.

This got me thinking about the notion of vigilante justice and the failure of the Department of Justice, or pretty much anyone else, to prosecute people on Wall Street for the financial crisis.  What if more people, frustrated by the lack of prosecutorial interest in Wall Street, decided to take matters into their own hands?  What if there was an outbreak of bounties being put on the heads of wrong-doing bankers so that some street justice could be applied, as the person posting this poster appeared to be seeking?

Wikipedia has a surprisingly elegant definition of vigilante justice as:

the idea that adequate legal mechanisms for criminal punishment are either nonexistent or insufficient. Vigilantes typically see the government as ineffective in enforcing the law; such individuals often claim to justify their actions as a fulfillment of the wishes of the community.

The mood of the community I follow on Twitter and around the web certainly resonates with this definition.  A lot of ink has been spilled on how the government has failed to enforce the law with respect to the Financial Crisis and that a collection of the wrong-doers, big and small, have gotten away with it, at the expense of the rest of us. Occupy, obviously, was an expression of frustration about the lack of law enforcement, though it did not have a vigilante component.  Growing dissatisfaction with our government is manifesting itself in many places –  including the most recent anti-incumbent mid-term elections.  And despite whistleblowers, such as Alayne Fleischmann or Edward Snowden naming names and institutions, nothing seems to change.

There’s a long, (not so) proud tradition of vigilante justice in our country (and, of course dating back to societies much older than our country).  Vigilante justice stories in the American frontier were tales of how people bound together to fight back against lawlessness.  In my youth, movies like Billy Jack, Death Wish or Rambo portrayed the desperate, yet justified (?), actions of people who had had enough with lawlessness and weren’t going to take it anymore.  The real life story of Bernhard Goetz was often portrayed in a similar fashion in the tabloids.  Today, vigilante themed movies and shows, like Batman or Dexter, are everywhere.  In the hands of the right storyteller, vigilante justice has a visceral appeal.

Vigilantism also has an awful, dark history in the US and elsewhere, including the legacy of lynchings in our not too distant past.  As angry as many of us have been about the aftermath of the financial crisis and the sense that the government has been bought by Wall Street money, the notion of vigilantism is still scary.  Who will really be making decisions about right and wrong if people take law into their own hands – the downtrodden and righteous, or the powerful and corrupt?

Upon doing a little internet research into the Wanted! poster on my street, I discovered that it wasn’t exactly a call for justice from a poor aggrieved investor in some bucket shop scheme.  Perhaps the name of the firm – Hooke, Lyon and Cinquer – should have given it away. Instead, this poster seems to be a reference to a piece of strange art by a early 20th Century artist named Marcel Duchamp.  Duchamp was a mysterious man and many people had a hard time understanding what he was getting at with his art.  He made this poster, with a picture of himself as the wanted man, but critics are unclear about what he was saying with it.


Frankly, I have no idea why someone is posting them on my street now, almost 50 years after the original artist’s death.  It seems noteworthy, somehow, that Duchamp’s poster originated in the lawless, Boardwalk Empire days of the 1920s, but I’m not sure why exactly.

I realized that I had been pranked by the poster, because I was sympathetic to a story about a small investor being burned by a Wall Street con artist, and a bounty on the scammer’s head seemed like an innovative, though unlikely, solution to the failure of law enforcement.   So what was the point of this prank by Duchamp and by his new imitator on my street?

I’m not an art expert in any way (particularly not an expert on Dadaism that Duchamp helped originate), but my interpretation of today’s poster is that vigilantism is, itself, a prank.  Despite fantasies of lawless bankers being tarred and feathered, what I (and I assume others) really want is a justice system that works, not one where people have to take the law into their own hands.  In an excellent article written in response to the Ferguson troubles, Kareem Abdul Jabbar argues that we should use our rage at injustice to work to fix the system, and he has a point.  Vigilantism is an illusion of justice… but the sense that the system isn’t working is still real.  Maybe there’s an alternative interpretation of Duchamp’s prank:  Unless more people within the system actually start to enforce the law against the powerful (as folks like Judge Rakoff or Ben Lawsky have shown is possible), then justice and government will lose their authority and become an illusion.

It’s art, so I don’t know that there is a definitive interpretation, but Duchamp’s piece tricked me and challenged me and pushed me, so I like whichever of these interpretations I apply.

Categories: Uncategorized

What Happens as a Bubble Deflates?

November 17, 2014 7 comments

Having written a couple of guest posts about bubbles possibly inflating (college tuition, high end Manhattan condos), I thought it might be interesting to consider what a deflating bubble looks like.

A number of observers point to the oil markets, where the price of crude has fallen by about 30% since June of this year, to a multi-year low today of about $75.50 per barrel.   Just last spring, Bloomberg was reporting on how the drilling and exploration business in the US was heavily dependent on the issuance of junk rated debt – over $160 billion worth by some measures – to fund the shale drilling that has been so popular lately.  The junk debt had been popular because it was a source of relatively cheap funds, thanks in part to the Federal Reserve’s efforts with Quantitative Easing to drive down bond yields.   Oil and shale exploration are expensive and there are quite a few people that believe that certain types of exploration only make economic sense when the price of oil is above a certain level – say $80 a barrel (or perhaps even higher).  Now that the price of oil has plummeted, there is a possibility that a whole collection of oil drillings and mines are underwater, so to speak, and no longer profitable.

Funding a bunch of expensive exploration with junk bonds makes things complicated and speculative.  For instance, a substantial portion of these junk offerings were purchased by issuers of collateralized loan obligations (CLO) and then rated (up to the AAA level), securitized and distributed to an audience of investors who may or may not have been investing in energy related debt otherwise.  CLOs are being issued at a record pace, by the way, and 2014 is on track to be the highest issuance year ever, exceeding the pre-crisis peak in 2007 of $93 billion.  If the energy exploration companies that issued junk debt are no longer profitable and getting squeezed by the falling price of oil, will that lead to a bunch of companies defaulting and then sending shockwaves through the securitized market, via CLOs?  (Note – the CLO market is much smaller than the subprime mortgage backed collateralized debt obligation market got to be before the 2007 implosion and energy companies are only a portion of the total issuance).

One thing that happens when investable asset prices fall, is that a bunch of people think that maybe it means there’s a new buying opportunity – a chance to get a hot asset at a cheap price on the expectation that prices will spring back up again soon.  That’s what a bunch of hedge funds did a couple of weeks ago, betting that the sharp fall in oil would turn around.  And then it fell another 6 or 7% to today’s levels.   If oil prices continue to fall, as some speculate may happen, that would be called “catching a falling knife” and the investors may end up feeling rather burned by their optimism.  Once cut by the falling knife, some investors become reluctant to come back a re-test their theory on rising prices, and this can contribute to a negative spiral for the falling asset.

I learned from my father-in-law, who worked at an oil company his whole life until he retired, that the oil business is always complicated.  Up and down, supply and demand; they don’t work the way you’d think they would.  When oil prices go down, gasoline gets cheaper, so people drive more, which drives prices back up (unless people are driving less and buying fewer cars, as appears to be happening now, perhaps because of those darn millennials and their urbanization and bike riding).  Plus, there’s international politics, with Russian, OPEC, the Middle East, China the drive for energy independence, solar power, etc.  On the other hand, gasoline and home heating oil and such are getting cheaper, which is a nice bonus for consumers, particularly in more car dependent regions.  The economy benefits from the effect of extra money in the hands of consumers as that money gets spent elsewhere (other than on oil executives third or fourth homes, presumably). Oil is complicated.

But oil can and does crash.  When it does, it can have a wider adverse impact on local oil-dependent economies, like Texas in the 80’s or perhaps, North Dakota, today.  While there are a number of mysterious factors at play in the current fall in oil prices, the knock-on effects are starting to pile up.  Oil producers are cutting production, idling rigs and cutting prices to stay competitive.  The somewhat worried sounding consensus is that there is “too much oil supply” currently. The speculative portion of the oil market will be hit hardest, i.e. the junk-debt fueled shale companies.  At some point, investors in the CLOs (and regular debt) backed by this highly leveraged debt from companies that aren’t profitable anymore, are going to get nervous (yields on such debt are already quite a bit higher) and start selling.  In all likelihood, some exploration companies will fail.  I wouldn’t describe it as a fear environment yet – in many cases the junk debt from exploration companies doesn’t come due for a few years – but the seeds of worry have been planted on fertile ground.  One observer described the current environment as a “negative bubble”, with a herd mentality driving investors away from any optimistic assumptions for the market.

Why should we care?  For most consumers, the most likely impact of a continuing deflation in oil prices will, as I mentioned, be cheaper gas and heating costs.  When the housing market crashed, the negative impact was mostly felt by average Americans, as wealth was destroyed up and down the block, whereas the oil market seems very different and more removed.  Still, it’s fascinating and instructive to watch the dynamics of a (potential) collapse of a bubble – on exploration, shale, oil prices, international politics – and the odds are high for unexpected consequences and global volatility.  What will happen to the recent growth in solar and other renewable energies, if the price of the competing product gets much cheaper?  What about the local politics of fracking? What kind of exposure do banks have to the oil markets and will it trigger any regulatory issues?  What will happen to the international politicians, who like moving chess pieces around the Middle East map if oil-producing countries lose their political clout?  Also, it’s odd that the Fed’s efforts to fight deflation have contributed, in part, to a price collapse of a crucial commodity, via QE-fueled easy money helping to push oil producers to dig up too much oil? How will the Fed react to this challenge?

I don’t know the answer, nor do I expect anyone else does either.   But oil and energy are hugely important issues to most Americans (and the people of other countries, too, obviously) and to the national and global economies – not as big as housing, but pretty close.  What happens in the next few months may affect many of us and it bears watching how our regulators, politicians, mega-companies and generals respond to the emerging (potential) collapse.

Categories: economics, finance

Will Demographics Solve the College Tuition Problem? (A: I Don’t Know)

November 14, 2014 14 comments

I’ve got two girls in middle school. They are lovely and (in my opinion as a proud dad) smart. I wonder, on occasion, what college will they go to and what their higher education experience will be like? No matter how lovely or smart my daughters are, though, it will be hard to fork over all of that tuition money.  It sure would be nice if college somehow got cheaper by the time my daughters are ready in 6 or 8 years!

How likely is this? There has been plenty of coverage about how the cost of college has risen so dramatically over the past decades. A number of smart people have argued that the reason tuition has increased so much is because of all of the amenities that schools have built in recent years. Others are unconvinced that’s the reason, pointing out that increased spending by universities grew at a lower than the rate of tuition increases.  Perhaps schools have been buoyed by a rising demographic trend – but it’s clear tuition increases have had a great run.

One way colleges have been able to keep increasing tuitions is by competing aggressively for wealthy students who can pay the full price of tuition (which also enables the schools to offer more aid to less than wealthy students).  The children of the wealthy overseas are particularly desirable targets, apparently.  I heard a great quote yesterday about this by Brad Delong – that his school, Berkeley, and other top universities presumably had become “finishing school[s] for the superrich of Asia.”  It’s an odd sort of competition, though, where schools are competing for a particular customer (wealthy students) by raising prices.  Presumably, this suggests that colleges have had pricing power to raise tuition due to increased demand (perhaps aided by increase in student loans, but that’s an argument for another day).

Will colleges continue to have this pricing power?  For the optimistic future tuition payer, there are some signs that university pricing power may be eroding.   Tuition increased at a slower rate this year (a bit more than 3%) but still at a rate that well exceeds inflation.   And law schools are already resorting to price cutting after precipitous declines in applications – down 37% in 2014 compared to 2010!

College enrollment trends are a mixed bag and frequently obscured by studies from in-industry sources.  Clearly, the 1990s and 2000s were a time a great growth for colleges – college enrollment grew by 48% from 1990 (12 million students) to 2012 (17.7 million).  But 2010 appears to be the recent peak and enrollment fell by 2% from 2010 to 2012. In addition, overall college enrollment declined by 2.3% in 2014, although this decline is attributed to the 9.6% decline in two-year colleges while 4-year college enrollment actually increased by 1.2%.

It makes sense that the recent college enrollment trend would be down – the number of high school graduates appears to have peaked in 2010 at 3.3 million or so and is projected to decline to about 3.1 million in 2016 and stay lowish for the next few years. The US Census reports that there was a bulge of kids that are college age now (i.e. there were 22.04 million 14-19 year olds at the 2010 Census), but there are about 1.7 million fewer kids that are my daughters’ age (i.e., 5-9 year olds in the 2010 Census).  That’s a pretty steep drop off (about 8%) in this pool of potential college students.  These demographic trends have got some people worried.  Moody’s, which rates the debt of a lot of colleges, has been downgrading a lot of smaller schools and says that this type of school has already been hit by declining enrollment and revenue. One analyst went so far as to warn of a “death spiral” at some schools due to declining enrollment.  Moody’s analysis of declining revenue is an interesting factor, in light of reports of ever-increasing tuition. Last year Moody’s reported that 40% of colleges or universities (that were rated) faced stagnant or declining net tuition revenue.

Speaking strictly, again, as a future payer of my daughters’ college tuition, falling college age population and falling enrollment would seem to point to the possibility that tuition will be lower for my kids when the time comes. Plus there are a lot of other factors that seem to be lining up against the prospects for college tuition –  like continued flat or declining wages, the enormous student loan bubble (it can’t keep growing, right?), the rise of online education…

And yet, I’m not feeling that confident.  Elite universities (and it certainly would be nice if my girls could get into such a school) seem to have found a way to collect a lot of tuition from foreign students (it’s hard to find a good data source for that though) which protects them from the adverse demographic and economic trends.  I’ve wondered if US students could get turned off by the perception that top US schools have too many foreign students and are too much, as Delong says, elite finishing schools.  But that’s hard to predict and may take many years to reach a tipping point.  Plus if tuition and enrollment drop a lot, that may cripple the schools that have taken out a lot of debt to build all of those nice amenities. A Harvard Business School professor rather bearishly projects that as many as half of the 4,000 US colleges and universities may fail in the next 15 years.  Would a sharp decrease in the number of colleges due to falling enrollment have the effect of reducing competition at the remaining schools?  If so, what impact would that have on tuition?

Both college tuition and student loans have been described as bubbles thanks to their recent rate of growth.  At some point, bubbles burst (in theory).  As someone who watched, first hand and with great discomfort, the growth of the subprime and housing bubbles before the crisis, I’ve painfully learned that bubbles can last much longer than you would rationally expect.  And despite all sorts of analysis and calculation about what should happen, the thing that triggers the bursting of the bubble is really hard to predict. As is when it will happen.  To the extent I’ve learned a lesson from mortgage land, it’s that you shouldn’t do anything stupid in anticipation of the bubble either bursting or continuing.  So, as much as I hope and even expect that the trend for increased college tuition will reverse in the coming years, I guess I’ll have to keep on trying to save for when my daughters will be heading off to college.

Categories: data science, education

Time to Short 57th Street?

November 13, 2014 2 comments

As a New Yorker, it’s hard to travel through the city these days without coming across construction sheds, scaffolding and giant cranes. New building construction is everywhere and much of it is for residential apartments. Midtown Manhattan and 57th Street in particular, sometimes referred to as “Billionaire’s Row”, seems to be overrun with giant new condo buildings going up (though the construction is hardly limited to that neighborhood). It’s not just my imagination.  An astonishing number of super high end apartments are being built – one recent report estimated that 7,000 new apartments will be coming on line in the next two years.  Sometimes, this can cause an average New Yorker like myself to get annoyed by the inconvenience of the construction sites, the altering of the city skyline, the rapid and radical changes to neighborhoods or the loss of an old, favorite haunt.  It can some cause a person to shake their fists at the sky and ask how much longer can this madness go on?  Just how many rich people in the are there in the world who don’t already have giant apartments in the city?

There are some people who are worried that the construction and development of some many high-end homes in New York might be entering a danger zone.  There are signs that the pace of expensive condos may be slowing.  London, a city similarly blessed with an influx of expensive apartments and the bankers and oligarchs who love them, has recently seen a sharp decline in high end home sales.  The fall in the prices of the Ruble and oil may start to make some overseas buyers more reticent.  The supply of high end homes may, perhaps, be exceeding demand, for now at least.

One New York City developer recently shared his concern and negative outlook for what he describes as a bubble in high end Manhattan real estate – he said he wished he could short 57th street!   In other words, this developer doesn’t see a bright future for high end New York City condos and he thinks there would be more money to make by betting on the prices of these condos falling.  Readers may recall that in 2007 a number of hedge fund managers, such as John Paulson and Magnetar,  and investment banks, such as Deutsche Bank and Goldman Sachs, made boatloads of money by using Credit Default Swaps to bet that subprime mortgage backed securities would fall in value.

Is this possible? Is there a market for betting on individual apartment buildings or neighborhoods falling in value?  Sort of?  Yale Professor Robert Shiller helped create something known as the Case Shiller Home Price Futures Exchange, which trades on the CME.  This exchange does let a person who might be inclined to make bets on the future price movements of Case Shiller’s national home price index, including either shorting (betting on a decline in price of homes underlying the index) or going long (betting on an increase in the prices of homes underlying the index).  However, it is still a relatively new concept and is relatively thinly traded.  In any event, the index is based on the home prices of the whole country (or at least the top ten regions of the country), so it really isn’t narrowly focused enough to get at the issue of over-priced billionaire condos in New York.

Alternatively, if you were a billionaire thinking about buying a $20 million pied-à-terre overlooking Central Park but worried that prices might go down, you could just decide not to buy right now.  Unfortunately, this might not be very satisfying until condo prices did eventually fall and you got to tell everyone “I told you so.”

Why would someone want to be able to short this segment of the market?  Is it just because they’re jealous of the rich and hope that they lose some (paper) wealth?  In the stock market, short sellers sometimes get attacked for being bad for the market or harming otherwise nice companies.  Defenders of short sellers (and there have been many similar defenses in recent years), however, argue that shorting stocks is good for market liquidity and price discovery.  Short sellers expose fraud and correct mis-pricing in the market.  Likewise, the hedge fund guys and bankers who shorted the subprime market argued in books like Michael Lewis’s The Big Short that they did provide a service (as well as make themselves wealthy) by helping to expose the shoddy mortgage underwriting practices and national housing bubble that dominated the early 2000s.

If there really is a bubble in multi-million dollar apartments in New York City, would New Yorkers benefit from having the bubble deflated or fraudulent apartment buyers or sellers exposed?  Potentially.  If this market is a bubble, it may have the effect of driving up land values throughout the neighborhood, or cause landlords to warehouse empty buildings in anticipation of future paydays.  Pricking the bubble might prevent the speculative construction of buildings that don’t, subsequently, find enough apartment buyers and then end up in bankruptcy, sitting vacant and neglected for many years.  If there really is a bubble, shouldn’t the speculative excesses of the billionaire condo market be exposed to price discovery and negative bets the way the subprime market was back in 2007?

Unfortunately, no such market really exists at this time.  Until Professor Shiller decides to narrow his index and futures exchange down to just Manhattan’s 57th Street, or some clever trader comes up with a new way to trade property values, we may be stuck having to wave our fists angrily at the skyscrapers blotting out the sun.  But it is interesting to think about.

Categories: economics

My annoying neighbor (and the banality of political corruption)

November 12, 2014 1 comment

Greetings! Thanks so much to Cathy for having me in to guest blog for her while she visits Haiti! While neither a math pro nor a babe, I do, on occasion confer with Cathy about her posts and contribute a few thoughts of my own about the world on Twitter at @advisoryA. And I also play bluegrass with her most Tuesday nights – so I guess that qualifies me as a substitute.

To start, I thought I’d share some observations about my new neighbor. West 22nd Street, where my family and I live, is a lovely, tree-lined area with a mix of modest townhouses, apartments and an occasional upscale single-family home mixed in.

In early October my street was lined with pink “No Parking Tuesday” signs. Through neighborhood scuttlebutt I learned the reason: President Obama was attending a fundraiser at a home across the street from me. The location of the fundraiser was at what had been, until recently, a modest townhouse owned by an old Chelsea family for decades. In 2012 the building was bought for $4.6 million. It received a lavish renovation and was put on the market a couple of weeks ago for …. $16.5 million (yes, nearly four times the price paid less than 18 months earlier). It’s being marketed by some real estate broker guy who is a regular on a TV show called Million Dollar Listing – i.e. a home flipping show. For fun, check out the comments on (which note that a more “reasonable” flip might be $7 or $8 million, the layout of the narrow home is awkward because the dining room is on a different floor from the kitchen and the master bath that is down the hall from the master bedroom.  Plus, there’s a playground pretty much in the backyard and it’s in flood zone A – this area was hit during Hurricane Sandy).

As far as I can tell, the new owners have never lived there – I watched the renovation over the past several months and, since it was put on the market, the only people I’ve noticed inside have come from a stream of of black cars delivering their passengers to apartment viewings.

It didn’t take much effort to discover who was the mastermind behind this audacious exercise in house-flipping: the owners of this lovely home are Bill White and Bryan Eure. White manages to get his name in the paper with some regularity. He’s basically a professional fundraiser. His wiki is…interesting. His big claim to fame is raising funds for, and subsequently managing, the Intrepid Museum. In 2010 he also formed a consulting company called Constellation Group for advice on charitable contributions, etc., and, within no time, he somehow got tangled up in the pay-to-play scandals. He was subpoenaed by then-Attorney General Andrew Cuomo (hmmm?) and ended up paying $1 million to resolve the mess. A million dollars sounds like a pretty big check and it came with some loss of status, including a “Disgraced” headline from the Daily News (“disgraced ex-head of the Intrepid” ). The New York pay-to-play scandal was pretty ugly and a few notables, including former New York City Comptroller Alan Hevisi, were convicted and sent to prison. White, however, was undeterred and instead, went about ramping up his political mover-and-shaker career. Within a year, his “disgrace” was fully rehabilitated.

Not one to let a romantic occasion go to waste, in 2011 White threw an elaborate, 700 guest wedding extravaganza at the Plaza to commemorate his wedding Bryan Eure. It wasn’t just any wedding – David Boies officiated! And it was filled with luminaries and politicians, including Bill Clinton, both George Bushes, David Patterson, Scott Stringer, Christine Quinn, and, remarkably, White’s former Javert, Andrew Cuomo. Nothing like a wedding to help bury old grudges.

For some reason, White appears to be a bit fickle when it comes to his political affiliation. Despite supposedly being considered for senior military positions in the Obama Administration during Obama’s first term, White presented himself as a Romney supporter in 2012. He was back in the news for withdrawing support, and requesting his contributions back, from Romney in 2012 over Romney’s gay marriage stance

White also calls on his political friends to help out the neighborhood sometimes, too. Even though he doesn’t spend much time at his 22nd Street home, White still has strong opinions on the neighborhood. He angrily petitioned Mayor Bloomberg over the CitiBikes station that would be a few feet from his front door. In an email to his old buddy, he argued that it was just plain unfair that the ugly bike rack would mess up the character of “his” block.

I’d estimate roughly 200 police officers and at least 50 Secret Service officers arrived on Tuesday, October 7th to prepare for the President’s arrival. Security gates were all over the place, the street was closed off to traffic and eventually the police and Secret Service required ID for anyone entering the block (the NY Times had a little commentary about the visit At one point, the Secret Service came to my door to ask about the open window in the upstairs apartment – apparently it made the snipers (!!) uncomfortable (since my upstairs neighbor was out at the time, I’m not sure how this was resolved). Many thousands of dollars were spent securing this visit. The President showed up, hung out for about an hour and headed out to Greenwich, Connecticut for fundraiser part II. But the good news is Bill White can now say that the President (who he may or may not support, depending on the current tides) broke bread in his house, which should certainly help boost resale value – I bet they don’t have that happen every day on Million Dollar Listing!

The President’s visit was, for me, a rather sad window into the fundraising machine of rich guys and the politicians who need them. As a coda, investigative reporter Roddy Boyd provided an additional glimpse into my millionaire-next-door. As part of his many efforts to help Veterans, White worked as a fundraiser for New York City’s Veteran’s Day parade. Sadly, due to rising costs of throwing a parade, it almost didn’t happen this year.  But thanks to the fundraiser with Obama at White’s house, he managed to scrape enough money together to save the parade. As Roddy notes, there’s a little more to this story. Just ten years ago, the NY Veteran’s Day parade cost about $35,000 to run. Now, a much more elaborate, televised parade costs more than a million dollars to run each year, in part due to the $570,000 fund-raising contract for our old friend Bill White. Roddy has much more on the ugly sausage-making of charitable fund raising and I highly recommend you check out his article. I eagerly await the arrival of the Russian oligarch or Chinese official who’ll buy White’s house and help make the neighborhood a little more respectable.

Categories: Uncategorized