Saturday Must-Reads (Seriously!)

19 Feb

Bill Gross (not the Pimco one) on why Twitter suspended UberTwitter. I’m assuming the Twitter folks are just really pissed off/jealous/bitter that they didn’t have the (obvious) foresight to buy the most popular interfaces like UberTwitter and Tweetdeck (which, coincidentally, were both bought by Bill Gross’ firm UberMedia.

The other Bill Gross (the Pimco one) continues his long-running streak of rank hypocrisy, blaming the Financial Sector for its own problems, yet not taking any blame himself or for Pimco.  I really hate that guy, but you’ve gotta give him credit.  Pimco might have more influence over the Government than Citigroup or Goldman Sachs.  When you run the largest bond fund in the world, Washington HAS to listen to what you have to say, lest their policy decisions screw over the millions of Pimco fund holders.  His argument is a valid one though, even though he never, ever, ever admits to having any hand in the sort of short-sighted nasty behavior of the Financial Sector (emphasis mine):

As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital: The S&L debacle of the early 1980s, the Asian crisis, LTCM, dotcoms, subprimes, Lehman and the resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money. Hang your heads, moneychangers …
Financiers have lost their high ground and, if truth be told, we began to lose it a long time ago when we figured out that money was more than a medium of exchange or a poor substitute for a store of value. We figured out a turbocharged way to make money with money and proclaimed ourselves geniuses in the process. Well, we’re not. … the only productive invention to come out of the banking industry over the past generation was the ATM.

Stephen Wolfram on IBM, Watson, and Wolfram|Alpha. I think its all pretty neat that we’re only a few years away from Cyberdyne Systems and Skynet.  Better enjoy the party now before its too late!

Donald Van Deventer/Kamakura: ”
The Copula Approach to CDO Valuation: A Post Mortem (Updated April 27, 2009)” Not new, but by far THE BEST account of why the Copula approach to CDO valuation is so painfully wrong I’ve ever read.  EVERYONE needs to read and understand this.

Lesson 1: Senior Management Knew or Should Have Known The Copula Approach Was Flawed, but They Did Nothing

Lesson 2: The Copula Approach Assumed Away All But One Risk Factor, but Analysts Used It Anyway

Lesson 3: Lots of Correlations Matter in CDO Valuation, but Copula Users Assumed Only One Correlation Matters

Lesson 4: Default Probabilities Vary Randomly, But Copula Users Assumed Away This Randomness

Lesson 5:  Default Can Happen at Any Time, but Copula Users Assumed That Away

Lesson 6: CDO Analysts Can Be Slaves to Fashion, but At High Costs

The 29% Effect: Humans Can’t Count (Journal of Consumer Research via Paul Kedrosky)  We are stupid, but we don’t have to be!  Think people, think!

(People) just focus on the number of scale units used to express a certain difference. As a result, higher numbers seem to represent bigger quantities. This “unit effect” is the reason why consumers perceive a bigger difference between ratings 90 and 95 out of 100 than they do between a 9 or 9.5 out of 10.

Guess what? Internal Audits are only getting weaker, not stronger. I do not understand how given so many accounting scandals we’ve seen (and I guarantee a few more to come soon), how this is happening! WHAT THE HELL?!?! (Emphasis mine):

According to Characteristics of an Internal Audit Activity, the first report in the study’s five-part analysis, the major focus areas for internal auditing in the next five years will be corporate governance, enterprise risk management, strategic reviews, ethics audits, and migration to International Financial Reporting Standards. Auditors will place less emphasis on operational and compliance audits, auditing of financial risks, fraud investigations and evaluation of internal controls.

Hayman’s Kyle Bass on “The Cognitive Dissonance of It All” from his most recent investor letter.  I feel like “the bulls” blatantly and actively ignore things like this, which, eventually, will be to their detriment.  The market can’t keep going up forever.  Never has, never will…

New Fed Rule for Mortgage Broker Compensation (via NYT).  I 100% guarantee mortgage brokers/lenders will find a way to game this.  Only a matter of time…

The new rule is known as the Loan Originator Compensation amendment to Regulation Z, part of a strengthened Truth in Lending Act passed by Congress in 2008. Designed to prevent consumers from being steered into high-cost, risky loans, it covers how a loan originator — or any person or company that arranges, obtains and/or negotiates a mortgage for a client — is paid.

Under the new rule, a lender can no longer pay a loan originator a lucrative rebate known as a yield-spread premium, which is tied to the rate or terms of the mortgage. Banks and other lenders can continue to pay commissions to brokers, but these payments must now be based solely on the loan amount.


One Response to “Saturday Must-Reads (Seriously!)”

  1. kyle February 20, 2011 at 5:04 am #

    your good

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