Cuomo Is Said to Question Banks’ Influence on Ratings - NYTimes.com

Cuomo Is Said to Question Banks’ Influence on Ratings - NYTimes.com:

"The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

Jon Stewart takes on Perfect Storms

Jon Stewart on last week's 2:45 Market Sell-off

Hilarious.  Thanks to Calculated Risk for pointing it out.  I apologize in advance for any offensive language.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
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Stock Market's Nosedive Wasn't Set Off By A Trader's Typo, 'Journal' Says - The Two-Way - Breaking News, Analysis Blog : NPR

What caused the big drop?" is dDefinitely the most asked question over the past week.

And the answer? Well "lots of things." So says the Wall Street Journal via NPR.

Stock Market's Nosedive Wasn't Set Off By A Trader's Typo, 'Journal' Says - The Two-Way - Breaking News, Analysis Blog : NPR:

"Knocking down one of the more popular theories about the brief, nearly 1,000-point plunge by the Dow Jones Industrial Average on Thursday (the theory being that some trader typed 'billions' when he or she meant 'millions'), the Journal says that:

'Instead, the picture is one of a highly rare confluence of events, some linked, some unrelated, that exposed weaknesses in the stock market large and small.'

And it all may have been triggered, the newspaper says, by a relatively common order from a firm called Universa Investments LP, which placed a $7.5 million trade for 50,000 options contracts that would pay off big if the market declined in coming months. That spurred other firms to place bets of their own, and a series of financial dominoes started to fall.

I doubt very much this is the last word on this. Stay Tuned.

How computers have transformed the stock market: Tech Ticker, Yahoo! Finance

how computers have transformed the stock market: Tech Ticker, Yahoo! Finance:

"Years ago, floor traders matched buyers and sellers. It's that old Eddie Murphy movie 'Trading Places,' where men jockeyed for floor space and used frantic hand gestures to complete transactions. But today, computers dominate much quieter trading floors. High- frequency trading -- rapid, automated buying and selling -- accounts for 50% to 75% of all daily trading volume,...."

Any discussion that includes Trading Places has to get blogged!





(seriously. It is in my contract ;) )

SSRN-Behavioralizing Finance by Hersh Shefrin

SSRN-Behavioralizing Finance by Hersh Shefrin:

"Behavioralizing finance is the process of replacing neoclassical assumptions with behavioral counterparts. This monograph surveys the literature in behavioral finance, and identifies both its strengths and weaknesses. In doing so, it identifies possible directions for behavioralizing the frameworks used to study beliefs, preferences, portfolio selection, asset pricing, corporate finance, and financial market regulation. The intent is to provide a structured approach to behavioral finance in respect to underlying psychological concepts, formal framework, testable hypotheses, and empirical findings. A key theme of this monograph is that the future of finance will combine realistic assumptions from behavioral finance and rigorous analysis from neoclassical finance."

This one is going to be required reading in next semester's Behavioral Finance class! A definite must read.

High-Speed Trading Glitch Costs Investors Billions - NYTimes.com

High-Speed Trading Glitch Costs Investors Billions - NYTimes.com

"We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,” said James Angel, a professor of finance at Georgetown University’s McDonough School of Business.

In recent years, what is known as high-frequency trading — rapid computerized buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume. At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange.

In fact, more than 60 percent of trading in stocks listed on the New York Stock Exchange takes place on other, computerized exchanges."

But in spite of all of the advantages of computerized trading, people are still a good thing ;) . From the WSJ's How Humans Save P&G Shares:

"On other exchanges...Procter & Gamble had tumbled as much as ...37%.... But because the stock fell below a key circuit-breaker level called the "liquidity replenishment point" or LRP on NYSE, the exchange stopped its own electronic trading in the stock briefly to go into "slow" mode. Under that mode, the designated market makers on the NYSE floor are given an opportunity to come in on the other side of an order at a price they have time to think about.

In this case, there was a sell order for P&G. Lou Pastina, executive vice president of floor operations for NYSE, said the auction ran for about a minute and 20 seconds, and then the trade went through at a price of $56 even though at that time the stock was trading far lower elsewhere.

"During that period other orders went to other markets and drove the price down to $39 and change. Buyers in those markets were probably very happy to buy, but the sellers weren't happy to sell," MR. Pastina said."

Wow, today is a day I wish I were teaching Financial Institutions and Markets! Will likely be talking about this one for years.

Don't Pay Your Fare On The Subway? There's Insurance For That - Planet Money Blog : NPR

Don't Pay Your Fare On The Subway? There's Insurance For That - Planet Money Blog : NPR

"Groups of free riders on the Paris Metro have created informal insurance pools that pay the fine when riders get caught. The groups call themselves mutuelles des fraudeurs -- fraudster mutuals.

The fraudsters pay into a into a central fund. Then, whoever gets caught riding for free can draw from the fund to pay the fine, which starts at about $75.

Insurance costs about $10 a month...."

Quite funny but a great example of insurance. Will likely be used in class next year! lol...

Tearing down, building up homes in Buffalo : City Hall : The Buffalo News

While this may not be of interest everywhere since it is generally a local issue, the same idea takes place in most government supported/subsidized programs. Good intentions do not mean good results.

Tearing down, building up homes in Buffalo : City Hall : The Buffalo News:

"....Buffalo's 1,500 subsidized homes are now assessed 12 percent below their initial $123 million price tag, and that houses that went back on the market sold for an average 24 percent below their original price.

The series also disclosed that subsidized homes built in recent years cost upwards of $200,000 per house, with subsidies going to developers as well as homeowners — totaling as much as $100,000."

So in essence taxpayers are overpaying by up to $100,000 per house. Wow. Crazy.

YouTube - CEO of ToysRUs speaking at St. Bonaventure

I was told to delete all of this..so no longer available.

sorry...

United-Continental merger

United.com - Press release detail:

"Continental (NYSE: CAL) and United (NASDAQ: UAUA) today announced a definitive merger agreement, creating the world's leading airline with superior service to customers, expanded access to an unparalleled global network serving 370 destinations around the world, enhanced long-term career prospects for employees, and a platform for improved profitability and sustainable long-term value for shareholders.

In class we talk about mergers and acquisitions and try to identify where the gains and losses are coming from. In other words, who are the winners and losers. Typically we find that bondholders, shareholders, or even customers (in case of competition reducing deals) are the losers.

That said, to read the United-Continental press release it appears that this deal is the exception to those rules: all is good and everyone is a winner. Well at least for the day. That said it should be said that the stock price reaction has been a definite Ho-Hum even allowing for information leakage over the past few weeks.

So what could go wrong?

Moreover we regularly talk about the findings that suggest that when a deal is done for shares, it is sometimes the case that it signals overvaluation and the long run performance is negative.

And finally as in any horizontal takeover, there are at least potential anti-trust issues. The NY Times reports these are likely minor in this case, but must still be dealt with as do potentially cranky unions.

"The deal has some major hurdles to clear. The airlines must win approval from the Justice Department’s antitrust division, a challenge given the renewed regulatory zeal in Washington. The merger also needs the backing of employee unions, whose opposition to mergers in the past has undone many of the proposed savings. "

If I were guessing (which I clearly am), my biggest worry would be how the two firms can "get along" operationally. For instance, will managing such a large airline be difficult? Will integration problems cause problems? Time will tell.





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Goldman Sachs Shares, Bonds Slide On Criminal Probe - WSJ.com

First the disclosure: SIMM, the student run fund that I oversee owns Goldman.

That said it is troubling that not only the equity of falling in value, but the debt as well.

3rd UPDATE: Goldman Sachs Shares, Bonds Slide On Criminal Probe - WSJ.com:

"In the credit default swap markets, the cost of buying protection on Goldman Sachs debt rose sharply; for $10 million of Goldman Sachs bonds, 5 years of insurance protection cost an annual amount of $165,000 Friday afternoon, according to Phoenix Partners, a New York broker, compared with $130,000 on Thursday.

Goldman's bonds were among the most active, with the 5.375% notes due 2020 trading at volumes more than sixtimes greater than the next-highest traded note. The risk premium on the bonds widened 20 basis points to 204 basis points, or 2 percentage points, over comparable Treasury yields"

Why Executive Pay Is So High - Forbes.com

Granted this is just one side, but there is much truth in it.

Why Executive Pay Is So High - Forbes.com:

"... the boards supposedly overseeing management are instead packed with lackeys with appalling frequency. It's a familiar complaint but one that he believes is responsible for out-of-control pay, the short-term greed that helped spawn the recent financial meltdown and a staggering waste of resources. Wilson's solution: Abolish the joint role of chief executive and chairman and install independent bosses to oversee boards.

'From what I've seen, managers are interested in what goes into their pockets and willing to use lots of leverage to add short-term profits, boost the stock price and sell their options,' says Wilson, 70. 'Long-term shareholders risk getting screwed.'

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