Here's my top 10 links from around the Internet over the last day or so. I welcome your suggestions below. The formula that copulated the world Fascinating financial journalism is often described as a contradiction in terms. This story from Felix Salmon writing for Wired is a fascinating piece of financial journalism. Read this please. It's long, but well worth it. Salmon explains the importance of a little known (to me at least) piece of mathematical work by David X Li called the Gaussian Copula function. This formula was used to estimate risks of owning CDOs and other toxic debt. It was used widely by investment bankers, fund managers and ratings agencies to say that the risk of them all blowing up at the same time was negligible. Then everything went boom. Here's a taste.
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels. His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched"”and was making people so much money"”that warnings about its limitations were largely ignored. Then the model fell apart.
Read the full story here. 'Recovery in 2010 if I can fix the banks' That's what Federal Reserve Chairman Ben Bernanke thinks. He is picking a rebound in the US economy in 2010 after a 'severe contraction' in 2009 as long as he can stabilise the banking system. Go for your life Ben. Let's hope you can do it. Reuters reports on Bernanke's testimony to Congress Here is the full text of his prepared remarks to Congress.
Third time lucky The world's largest insurer AIG, which has already been rescued twice in the last year by the American government, is in talks about a third bailout on the eve of posting a loss thought to be around US$60 billion. Reuters reported sources saying AIG hoped to hammer out a deal this week or look to file for bankruptcy protection, Reuters said. 'We're keeping the cash' Meanwhile JP Morgan Chase, America's second largest bank, cut its dividend to 5 cents a share from 38 cents a share to save US$5 billion in equity and help it repay a US$25 billion loan from the government. Here's the Bloomberg report.
US house prices fell 18.5% in December from a year ago and are down 26.7% from the peak in late 2006. The fall in December was the fastest on record and consumer confidence has since fallen to a record low in February. This in Bloomberg or Gloomberg has it has become known.
The Japanese government is considering directly buying shares either on market or from banks to arrest the crash in share values. It wants to help bolster the banks' capital, which is at least partly dependent on big holdings of Japanese shares. I can't help but thinking this is all desperate stuff that the Japanese have done before and failed. The FT has this story.
The Press has an interesting story about Building and Construction Minister Maurice Williamson writing to mayors nationally to say his officials were conducting a national inquiry into the leaky building problem.
Here's a taste.
Once the research was finished, the Government would decide on the best form of central government intervention to address those problems, Williamson told the mayors. Addressing the problem was a "top priority" with experts estimating between 30,000 and 80,000 leaky homes nationwide need repairs at a cost of NZ$5.4 billion to NZ$14.4b. Williamson wanted an official estimate to provide "a solid context" for action on leaky homes.
I have no idea where that NZ$14.4 billion number (which works out at NZ$180,000 per home) came from, but it scares the hell out of me? The Press gave no sourcing. Who is going to pay for this? It threatens to be a drag on growth for a long time. Resistance is futile Alan Kohler at BusinessSpectator points out that the Dow has fallen through key support levels and it's clear air downwards. Here's a taste. After 17 months the bear markets that began in 2007 and 1929 are both worth minus 53 per cent.
In 1929 the Dow Jones Average went on to fall 89.2 per cent after 34 months. Where this bear market is heading is anybody's guess of course, but there is no reason for thinking the bottom has been reached yet.
And here's the other side... Finally some opponents to bank nationalisation are rolling out their arguments. Former FDIC chairman William Isaac says the US banks are too big and too complex to nationalise without major disruption and pain. Worth a read. I still think he's wrong, but the debate needs to be had. Rents are falling fast in the United States Deflation is coming. There are signs, reported here in Calculated Risk, that rents are falling across the United States. A sign of things to come here?