21 Dec

Posted at 11:06h in NRSRO

President and CEO of the Philadelphia FRB Charles Plosser hits the nail on the head in his column in Mortgage Orb when he points out that Fed policy is weakening the U.S. economy. He runs through the litany of measures, "liquidity" provision, quantitative easing, asset...

21 Dec

Posted at 10:16h in NRSRO
Widespread confusion appears to exist among the investing public as to the potential distinction between ratings and valuations. Are they the same? If not, how exactly are they different, and is one more “useful” than the other as a financial measure? Even the SEC is now confused, something quite surprising in light of the fact that they are supposedly regulating rating agencies. Given the importance of this practical distinction, it’s worth spending a few minutes dispelling rumors, lies and innuendos. At a fundamental level, both ideas are identical and the issue of their supposed kinship or difference makes no sense at all. It is equivalent to asking about the difference between degrees Fahrenheit and degrees Centigrade: both are temperature-measurement systems. The only difference is that one system is used in America while the other one is used in Europe and elsewhere. (Should we call this “l’exception Américaine?”) If someone now living in Paris suddenly woke up in New York, confusion would reign only until he learned the new system, which would take less than a day, or even faster if he headed to the beach when the thermometer read “30 degrees.” The point is that a self-consistent system is always usable but only makes sense within its own context. No harm will be done by using either system as long as it is used appropriately. Since a simple transformation function exists between them, any confusion on the part of a user can be cleared up immediately with a mapping function.

19 Dec

Posted at 15:23h in Outside Looking In
After deciding that I was tired of being a financial ignoramus, I spent some time looking for books and articles that would explain the vocabulary and the rudiments of the world of finance. The global economy had essentially imploded in 2008 and I didn’t understand why. Once I finished a couple of books, such as John Lanchester’s I.O.U., which laid out difficult concepts in simple terms to explain the financial crash, and Ron Suskind’s Confidence Men: Wall Street, Washington and the Education of a President, which detailed much of the politics behind national economic strategy since 2008, I felt as though I finally had at least a grip of the overarching story behind the crisis. But it wasn’t until I picked up Michael Lewis’ Liar’s Poker that I really understood how far back the roots of the crisis stretched.

18 Dec

Posted at 20:52h in Credit Spectrum

I am responding to Susan Saulny's article about homelessness and joblessness, a topic very close to my heart. R&R Consulting is willing to teach any jobless college graduate how to do structured finance the right way (ie, to grow jobs and avoid another Crisis) who is...

17 Dec

Posted at 16:58h in Film Fundamentals
We are already well into the second decade of the 21st century and I still don't have my own personal jet-pack or robot. Heck, I don't even have a lousy iPhone. But 2013 is almost here, and everyone is beginning to peek ahead at a coming year of changes within the film industry. Of course that means looking back at the immediate past in hopes of second-guessing the imminent future. It's a tough call. 2012 feels a bit like the year when many of us were run over by a truck and we hadn't even left the house.

12 Dec

Posted at 11:21h in China
For 11 years between 1976 and 1998, I worked in Chinese-speaking Asia. Many of my deeper insights into the dark side of human nature came from my experiences there. Not because Chinese society (in its many forms) is darker than American society, but because the darkness is in plain view. It is not a taboo. Chinese matter-of-factness also makes some conversations easier. In the most awkward of moments one can always agree that things are indeed 很复杂, very complicated, and gloss over the unspeakable. One need not parse exactly who or what is complicated. Last Thursday morning (2012 1206) I was asked to talk to senior-level officials from the PRC Ministry of Industry and Information (MIIT) about whether our post-Crisis financial reforms can power up the real economy. With responsibility for regulating and developing telecommunications and the digital economy and promoting the national knowledge economy, these delegates came with a fairly well-developed point of view about the efficacy of our reforms (negative). They came to hear the thinking of U.S. academics. Nominally I am an academic, an Adjunct Associate Professor of Finance at Hong Kong University of Science and Technology. But that is not why I was on their agenda. In the '80s and '90s, I worked with Chinese economic reformists; knowledge of the long and winding road to marketizing the Chinese economy gives my presentations a certain caché. Here were my thoughts:
  1. The main point of our reforms is a renewed focus on financial system design. It may work out all right but in the short run, most measures are weak.
  2. A solid debt capital market architecture has three interlocked cornerstones:
    1. Well-articulated market infrastructure, where information parallels the flow of capital
    2. A consensus theory of value that allows people to debate risk and value with the same set of meanings without stifling independent thought
    3. A public, unified, consistent set of benchmarks on which to convert valuation to wholesale quality grades, also known as a credit rating scale.
  3. Our fractured financial regulatory systems--the de jure ones to be sure but also the de facto system that keeps credit ratings separate from pricing, and from benchmarks of intrinsic cash value separate--gave rise to the Credit Crisis.

11 Dec

Posted at 13:27h in Credit Spectrum
Our title is but a thinly veiled allusion to the hero of the namesake novel [Герой нашего времени] by the illustrious Russian novelist and poet Mikhail Lermontov who, on the death of the legendary Alexander Pushkin, assumed the role of Russia’s leading poet. The hero in question (Pechorin) is not the kind of heart-throbbing, virile, impeccable stud personified by a fictitious character, like James Bond. On the contrary, Pechorin is a deeply flawed, some would even say amoral, man. It may surprise you that the quintessential hero of 19th Century Russian literature is not someone we would want as Santa Claus.

11 Dec

Posted at 13:15h in Credit Spectrum
When an airplane crashes, people always die, which is not normally the case when a car crashes. Compare these outcomes to what happens when a structured deal crashes, a now unremarkable event during which no one has ever died. The point is this. The average intellectual ability that can be reasonably expected of senior executives in any industry is directly proportional to the severity of the empirical consequences of a crash in that industry. The aerospace industry is arguably the most demanding, sophisticated and rigorous of all simply because amateurishness cannot be tolerated there for the same reason it is so commonplace in finance. A case in point is the fate and fiscal health of Ford Motor Company, which of course makes cars. As a CEO, Mulally professes expertise only on the left side of Ford’s balance sheet. By contrast, most of us in attendance that evening claim expertise on the right side. Thanks to his relentless work, Ford’s asset side now seems to be in great shape, but what can be said of its liabilities? According to Wall Street, not much except the perennial and naïve buy recommendation. Much more could be done by research analysts to benefit Ford directly and significantly, at literally no expense to Ford or the investor public.

10 Dec

Posted at 15:13h in Film Fundamentals
Question: What does a producer do? Answer: 5 to 10 if he's caught. Putting bad jokes to one side, it ought to be a pretty simple question. After all, everybody knows that a director directs and a screenwriter writes. But credits for producers are often stretched out in various – and often confusing – ways. For example, take my title (used occasionally) here at R&R Consulting. I am sometimes referred to as a Production Consultant. What does this mean? Got me. I have performed

05 Dec

Posted at 16:12h in Outside Looking In
There Is (Almost) No Such Thing as a Free Lunch The other day, a French acquaintance of mine realized she was suffering from culture shock. She lives and works in Paris; the clash of cultures was coming at work, where she deals with large numbers of international students, including many North Americans. “They come to my office between noon and 1, and when I’m not there, they complain. It’s lunchtime! Where do they expect me to be?” But it makes sense that they would come up then, I replied, because that’s when they’re not in class. Why didn’t she just take her lunch break a little later? She stared at me like I’d just suggested selling her kidney on the black market.