• Should Consumers See Their Credit Scores for Free?

    You’re entitled to one free credit report per year. But if you want to know your credit score, you’d have to pay.


    In a recent announcement, the U.S. government is urging banks to release credit scores to consumers for free.


    According to CNBC (Sullivan, 27 Feb 2014):


    The nation's top financial consumer protection regulator called on banks to give people free access to their credit scores, a move that would shake up the entire credit reporting industry.


    Richard Cordray, head of the Consumer Financial Protection Bureau, called for free sharing of credit scores after the CFPB released a report on the prevalence of errors in credit reports and scores.


    …Cordray said that disclosing credit scores to consumers would make them more likely to spend time examining their credit report, particularly if the scores are low. In a letter dated Feb. 10 and released Thursday, he called on credit card issuers to make scores available to consumers, potentially as part of monthly bills.


    For discussion:


    How do banks feel about this announcement? What are the arguments against providing free credit scores?


  • Is More Consumer Debt a Good Thing?

    A recent article from Fortune Magazine online (Matthews, 18 Feb 2014) describes the increasing household debt of Americans. The economy is recovering, and with it is the recovering appetite for consumer debt. Of course, we haven’t seen the same levels of debt we saw in 2008, but still borrowing is in the rise.


    The article describes debt as good, bad, or ugly.


    First, good debt.  From the article:


    It takes years for individuals and businesses to repair their finances following a financial crisis, so this dynamic can continue for many years, with the economy growing steadily worse all the while. That's why the recent increase in consumer debt is a good thing. It means that individuals have finally repaired their personal finances (at least in the aggregate) and feel like they can start borrowing again. In this situation, the economy can really begin to grow again.


    But not all debt is good. There’s bad debt and then there’s debt that’s downright ugly. This is the debt associated with low and middle income Americans whose credit quality and income levels have not improved sufficiently. In particular, those with low credit quality are taking on more student loan debt, and it is not clear whether they are getting jobs that allow them to repay those loans.


    Graph available at http://libertystreeteconomics.newyorkfed.org/2014/02/just-released-whos-borrowing-now-the-young-and-the-riskless.html

    For discussion:


    Why is debt necessary for a healthy economy? How might debt signal that an economy is headed for financial distress?


    According to this blog from the NY Fed, how does recent consumer credit compare with the picture before the credit crisis?


  • Richmond Fed President Lacker: Economics After the Crisis

    In a recent speech at Arizona State University’s Center for Advanced Study in Economic Efficiency, Richmond Fed President Jeffrey Lacker suggested that Fed intervention in financial markets following the 2007 credit crisis may not have been the correct response. Highlights from his speech include:


    ·        Economic models based on financial frictions were used to justify many of the Fed's interventions during the financial crisis. Such models are necessarily abstract and stylized and their applicability to the actual situation at hand might not have received enough discussion.

    ·        In August 2007, there was a significant contraction in the asset-backed commercial paper (ABCP) market. In response the Fed lowered the interest rate on discount window loans in an effort to increase liquidity in the banking system. But it's not clear that a lack of liquidity was the problem; instead, the "logjam" in the ABCP market may have been a price-discovery process.

    ·        The Term Auction Facility (TAF) was launched in December 2007 to further improve the terms on which banks could get credit from the Fed. But the design of the TAF seemed inconsistent with the financial frictions it was intended to address.

    ·        Overall, it's possible that financial system fragility is induced by poor policy, rather than being inherent to financial markets.

    ·        Policymakers would benefit from economic research focused on validating the assumptions underlying models of financial markets and comparing those assumptions to actual observations.


    (Read or download the full speech here)


  • The Winkdex Index



    Bitcoin graphic by bitboy, released under Creative Commons, available at https://bitcointalk.org/index.php?topic=1631.0




    Cameron and Tyler Winklevoss, the identical twins who fought Mark Zuckerberg over Facebook, are in the news again. They announced this week that they were releasing the Winkdex, an index to track the value of Bitcoin.


    The brothers hope to launch the first Bitcoin ETF later this year. According to the NY Times (Popper, 19 Feb 2014):


    The Winkelvoss Bitcoin Trust is set to be traded on public stock exchanges. The fund will work with other financial firms to buy and sell Bitcoin each day to remain in line with the number of outstanding shares of the E.T.F. The so-called net asset value of the fund will be adjusted at the close of trading each day, based on the value of the Winkdex.


    … The E.T.F. aims to provide an easy way for investors to bet on the future price movement of Bitcoin, which has gone through several volatile swings. Investors, though, will pay for the work that the Winklevosses’ company will do to maintain and secure the Bitcoin held by the E.T.F. The size of the management fee has not yet been specified.

    (read the full article here)


    For discussion:


    What is an index? What challenges do the creators of indices face?



  • The Decline of the Quant Fund

    source: Bloomberg http://www.bloomberg.com/markets/commodities/futures/




    Investors vote with their cash flows, and the latest news is that they’re voting against quant hedge funds. According to Bloomberg (Larson, 18 Feb 2014):


    Investors are losing patience with hedge-fund managers who rely on computers to follow global market trends after three years of underperformance.


    Quantitative hedge funds run by companies such as Man Group Plc (EMG) and Michael Platt’s BlueCrest Capital Management LLP saw investors pull $4.9 billion in the last three months of 2013, the most in five years, according to Chicago-based data provider Hedge Fund Research Inc. That followed outflows of $1.1 billion in the second quarter and $668 million in the third, HFR said.


    For discussion:


    What are quant funds and how do they differ from traditional investment portfolios?



  • Why the Jobless Recovery?

    Employment has not been part of the economic recovery over the last four years. The unemployment rate has been falling, but that doesn’t describe the full picture, according to Robert Moffitt, Johns Hopkins University Professor of Economics who is interviewed on this CNBC video.


    Professor Moffitt points out that the reason the unemployment rate is falling is that fewer people are looking for jobs—that is, they’re dropping out of the labor force.

    Civilian labor force participation rate

    Source: Bureau of Labor Statistics, 19 Feb 2014

    available at http://data.bls.gov/timeseries/LNS11300000



    For discussion:


    What are some possible reasons for this “jobless recovery?” In other words, what might explain why GDP is rising but true employment is not?




  • A Hedge Fund or a Family Office?

    What should a hedge fund do when it can no longer operate business as usual? In the case of SAC Capital Advisors, the wisest course of action is to convert from a hedge fund into a less transparent business model: the family office.


    According to the NY Times (Sullivan, 14 Feb 2014):


    Steven A. Cohen, the billionaire hedge fund manager, has been in the news for a string of insider trading convictions of current or former portfolio managers at his SAC Capital Advisors. But less attention has been given to his decision to convert his hedge fund into a family office to free himself from Securities and Exchange Commission regulations.


    To do so, he has to return all the money that does not belong to him or to key employees — although many of those outside investors have already asked for it back. He’ll be left with about $9 billion and 800 employees to pay without the revenue from hefty management fees from outside investors.


    For discussion:


    • What is a family office and what kind of work do they do for wealthy clients?

    • What is the difference between a hedge fund and a family office?


  • Is Wall Street Full of Wolves?

    photo by JSquish courtesy of creative commons available from Wikipedia.




    The excesses of Wall Street make great movies, but according to this NY Times opinion piece (Cohan, 15 Feb 2014), they’re not entirely accurate.


    According to Cohan:


    My Wall Street was an endless-seeming succession of late nights, ruled by the demands of clients and bosses. An investment banking crisis, in my world, was when a surly senior banker would finally deign to look at a client presentation the night before it was due. The ensuing tirade would require me and my team to pull all-nighters to make the changes she or he demanded.


    Mine, too, was the glamour of a red-eye flight to a European capital to meet with the executives of a large corporation. There was no time for sleep because of the inevitable fiddling with the presentation. I remember biting the inside of my lip to stay awake in those late-afternoon meetings.


    For discussion:


    What beneficial purpose does Wall Street serve?


    What Wall Street behaviors need to change?


  • Olympic Gold: What's It Worth?

    With gold trading north of $1,300 per ounce, a gold medal is quite valuable. However, the value is driven by much more than the price of the precious metal.


    According to CNBC (Rosenbaum, 15 Feb 2014), “It's easy enough to look past the precious metals chart and get a sense for how to value an Olympic medal as collectible, in addition to the scarcity value.”




    For discussion:


    What factors would you consider to determine the value of an Olympic gold medal?

  • How To Invest In Gold


    (Watch this Bloomberg video here)


    If you want to take advantage of expected changes in the gold market, then this video offers some ways to get into the gold market:


    1.     ETFS Physical Precious Metals Basket (ticker: GLTR) which is 50% gold and the remainder in silver, platinum, and palladium.


    2.    Gold Shares Covered Call ETN (ticker: GLDI) which tracks physical gold and sells out of the money call options on gold to provide added revenue.


    3.    AdvisorShares Gartman Gold/Yen ETF (ticker: GYEN) which is long gold and short the currency.



    For discussion:


    What are the benefits and risks associated with each of these investment options? Which would you choose and why?




  • Are Subprime Mortgages Back?

    This CNBC video reports that last year Ben Bernanke said that mortgage credit had tightened too far. Today, banks are reconsidering how strict they want to be with borrowers. Wells Fargo is starting to lend money to borrowers with high loan to value ratios or low FICO scores. Though banks have not reentered the subprime lending market in a big way, this may be a signal that credit is becoming a little less restricted.


    For discussion:


    What is a subprime loan?


    According to this video, how do the subprime loans today differ from subprime loans before the credit crisis?


  • Are Reverse Mortgages a Wise Choice?

    Retirees living on fixed incomes can use reverse mortgages to increase their monthly cash flow. According to the U.S. Department of Housing and Urban Development (HUD):


    A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. 


    But reverse mortgages carry risk. CNNMoney reports (Christie, 7 Feb 2014):


    Many borrowers have run into problems because they took their payment as a lump sum and spent the cash too freely. They didn't have enough cash to pay their property taxes, insurance and homeowner's association bills and were forced to default. As of September, nearly 10% of reverse mortgage borrowers had defaulted on their loans and had lost or were in danger of losing their homes, according to the FHA.


    For discussion:


    How does a reverse mortgage compare with a traditional mortgage? Under what circumstances is a reverse mortgage a wise choice? Under what circumstances is it a dangerous choice?

    What recent changes have improved the safety of reverse mortgages for borrowers?


  • What's The Value of The Firm?

    The balance sheet tells us the value of the assets at their purchase dates less any accumulated depreciation. If we subtract the book value of the debt, we’ll determine the book value of the equity. However, this value does not properly answer our question: what’s a company worth?


    A better answer, perhaps, is the market value of the equity, not the book value. And this week saw Google’s market value rising to become the second largest company in America, if only briefly.


    According to Bloomberg (Womack, 7 Feb 2014):


    Google, which became the world’s largest online advertiser through its dominant search engine, had a higher market capitalization during intraday trading today before falling back at the close in New York to a value of $395.4 billion compared to Exxon’s $395.7 billion, according to data compiled by Bloomberg. Apple had a market value of $463.5 billion. Software company Microsoft Corp. is No. 4 with $303.5 billion.


    Technology companies are establishing themselves as key players worldwide as they disrupt industries from retail to finance. Google, which went public in 2004 -- 84 years after Exxon -- has benefited from consumers moving to online services and content, a trend that’s being accelerated by the growing popularity of smartphones and tablets.


    “It’s the sign of the times,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. “Out with the old and in with the new.”


    For discussion:

    • How is the market value of the firm calculated?
    • What could cause the market value of the equity to differ from the book value of the equity?
    • Which measure is a better indicator of value—book value or market value? Why?


  • What About Puerto Rico's Debt?

    What drives the value of financial assets—that is, stocks and bonds? Is it news of profits, market shares, new product lines, CEO missteps? Yes and no.


    News is only important if it wasn’t already anticipated by investors. In the case of Puerto Rico’s credit downgrade by S&P, investors saw it coming and therefore didn’t react when the announcement was released. According to the NY Times (Corkery, 5 Feb 2015):


    Analysts and traders said prices of some Puerto Rico bonds traded lower on Wednesday, but there was no mass selling that might indicate a panic. The spread between Puerto Rico’s 30-year general obligation bonds and a benchmark of highly rated municipal bonds was unchanged from Tuesday, when S&P. issued its downgrade, according to Thomson Reuters Municipal Market Data.


    Many investors shrugged off the downgrade, saying they had anticipated it months ago, while others said the possibility of a default remained remote.


    “I think the market for Puerto Rico bonds has been oversold,” said James Colby, senior strategist for Van Eck’s municipal exchange-traded funds, which have exposure to Puerto Rico bonds. “Is there a possibility for further downgrades? Yes. Does it mean they are not going to pay? No.”


    This video published Feb 7, 2014 by S&P explains the credit downgrade action:


    For discussion:


    ·       What are “general obligation (GO)” bonds compared with “revenue” bonds?


    ·       Why did S&P downgrade Puerto Rican bonds?


    ·       What could cause the credit rating to decline even further?


    ·       What could cause an improvement in the credit rating?



  • The Challenge of Life After Civil Service

    A recent NY Times article (Eisinger, 5 Feb 2014) reported on the career choices facing Sheila Bair and Mary L. Shapiro. Ms. Bair was the head of the Federal Deposit Insurance Corporation (FDIC), and Ms. Shapiro was the chairwoman of the Securities and Exchange Commission (SEC). Both women faced decisions when their time at their respective regulatory bodies came to a close. Sheila Bair took a job as a director for Santander, the Spanish Bank. Mary L. Schapiro joined Promontory, a financial services consulting firm, but has since decided that it wasn’t right for her.


    From the article:


    Post-regulatory life is perilous, especially if you try to have standards. Both Ms. Bair and Ms. Schapiro grappled with the issues raised by moving from regulator to regulated. Each created a set of personal principles to avoid conflicts, ones that are much stronger than the current law.


    From the outset, Ms. Bair decided not to work for a financial services firm in the United States. She had been approached by American financial institutions and by institutional investors and reform groups to see if they could entice her to join bank boards. She declined.


    “I wanted to stay away from the U.S. because of the revolving-door concerns,” Ms. Bair told me in an interview. When she gives a speech to a bank that the F.D.I.C. oversaw in any fashion, her fee goes to charity.


    As for Ms. Schapiro, she had set up much stricter personal rules for herself than the Obama administration has, which are in fact stricter than the rules for civil servants. The former S.E.C. chief decided that she would never lobby regulators on behalf of any clients.


    “We all went through hell together for four years, seven days a week,” she told me, referring to the financial crisis and the herculean rule-making that followed. “I never wanted to go back to the team that I led through all of that to ask them for anything.”


    For discussion:


    What ethical dilemmas did both of these women face? In your opinion, are they making the right decisions? Why or why not? 



  • Protect Your Retirement: Don't Borrow Against It Now

    This CNBC video warns against using 401k money to pay off bills. It may be tempting to use that nest egg to get caught up on bills when times are tough, but the penalty may be higher than you are willing to bear.


    For discussion:


    Based on this video, what are the specific reasons that borrowing against your 401k to pay some bills is a bad idea?


  • Rental Income Transformed

    Photo by respres courtesy of creative commons, available on Wikimedia


    Many investors are familiar with mortgage backed securities—pools of mortgages that have been transformed into a single bond issue and sold to investors. And many are familiar with asset backed securities, where pools of other types of loans—home equity loans, car loans, credit card loans—are pooled and sold to investors.


    But you may not be familiar with a new breed of securitized product: rental securitization. These are bonds backed by rental income rather than loan payments. These new bonds were born out of the credit crisis where foreclosure properties created opportunities for big investors like Blackstone Group to buy single family homes and rent them out.


    According to the NY Times (Corkery, 29 Jan 2014):


    In just the last two years, large investors have bought as many as 200,000 single-family houses and are now renting them out, according to the K.B.W. report.


    The private equity giant Blackstone Group sold the first single-family rental securitization of its kind last fall, a $479 million bond, attracting six times as many investors as the private equity firm could accept, a person involved in the deal said.


    For discussion:


    Describe the two major risks associated with rental securitizations identified in this Washington Post article.


  • Is Google's Sale To Lenovo a Winner?

    According to this Bloomberg interview, the Google purchase of Motorola Mobility for $12.5 billion and the subsequent sale to Lenovo for $2.9 billion is profitable. Take a look at the “back of the envelope” math shown here. Given that Google keeps the patents and benefits from tax losses carried forward, the net to Google is $7 billion to the good.

    Click HERE to watch this video


    For discussion:

    How did the market for Google shares react to the announced sale? How about the market for Lenovo shares? What explanations can you offer for the changes in the respective share prices?


  • What's Happening to the Russian Ruble?

    Image courtesy of Wikipedia



    The Russian Ruble has fallen, and no one seems to be able to stop it.


    From the Moscow Times (31 Jan 2014):


    Despite the Central Bank pouring more than $1 billion a day into propping it up, the Russian currency fell 3 percent against the dollar — contributing to a 6 percent slide since the beginning of the year — and reached an all-time low against the euro.


    Banks reported a surge in customers clamoring for hard currency, while commentators fretted about how far the slide could go. Battling to restore confidence, Economic Development Minister Alexei Ulyukayev on Tuesday backpedaled on plans to free float the ruble by 2015, and the Central Bank on Thursday pledged unlimited interventions to keep the ruble firm.


    (read the full article here)


    For discussion:


    Based on this Forbes article, how would a weaker currency help Russia?


  • Bernanke's Legacy

    This week, Bloomberg recounted Ben Bernanke’s eight-year term as Chairman of the Federal Reserve Board of Governors.


    The outgoing Fed Chairman’s term is characterized by his (1) willingness to try unconventional policies, (2) outrage over AIG, and (3) work ethic among others.


    From the article (Kearns, 31 Jan 2014):


    Bernanke returned to Princeton University last June and offered advice to graduating seniors in a speech that quoted Saint Luke, Lily Tomlin and Forrest Gump.


    He urged graduates not to be overly focused on money, which is “a means, not an end.” He endorsed public service as a “worthy and challenging pursuit” and said most politicians mean well. And he said choosing the right spouse was crucial, advising his audience to look beyond “beauty, romance and sexual attraction.”


    Bernanke, an economics professor at Princeton from 1985 until 2002, also offered a blunt assessment of his profession.


    “Economics is a highly sophisticated field of thought that is superb at explaining to policy makers precisely why the choices they made in the past were wrong,” he said. “About the future, not so much.”