Valuing TBTF cont’d
February 28, 2013, 10:36 am
Filed under: Uncategorized

So after commenting on some commentary about the purported $83 billion TBTF subsidy yesterday, I noticed that the discussion had already gotten way ahead of me. This should teach me to write half-cocked before getting up to speed by reading all the material. (Note: it won’t.)

To recap, Bloomberg wrote an editorial claiming that the TBTF subsidy amounts to something like $83 billion. Matt Levine wrote a piece detailing how that $83 billion is cobbled together, which (IMHO) showed that the $83 billion result is almost-certainly incorrect. That’s because along the way he showed that by having made other reasonable choices of some parameters and things, one could have come up with a value of $3.7 billion for that subsidy. Or, negative $16 billion for that matter. 

The point, I assume, wasn’t to seriously put forth those other numbers as alternative models. The point was to show how the 83 result came from making certain arbitrary and not-entirely-defensible choices as to what to value and how to value it – other defensible choices for which, importantly, would have led to wildly different results. That means at best these numbers – 83, 3.7, -16, or 4 trillion for that matter – are all ‘correct’ up to some multiplier(s), and we just don’t know what those multipliers are. If you’re a ‘modeler’ you might think this means we’re getting somewhere. If you’re me (wait, just realized: am I a ‘modeler’ too? maybe!), you don’t have the patience for this so you just parse ‘correct up to a multiplier’ as ‘wrong’ and consider this all as symptomatic of the fact that this is a Large Calculation. (Also, if you’re me, my condolences.)

But I certainly do think that the value of TBTF is X and that X>0. My point is that I just don’t know how much value there is in all these calculations and ‘models’ whose resulting estimate of X has error bars that, if fairly accounted for, would likely turn out to be multiples of X. In the interest of illustrating this by blowing yet more smoke in the eyes of people who really want to try to answer this question and really want to put a hard estimate, any estimate, for X onto their Occupy Wall Street leaflets and placards, let me just mention some other factors that I think these models are omitting entirely.

  • Decompression. While it’s presumably true that ‘TBTF’ helps, say, JP Morgan, if only by contrast it must be hurting any and all banks that aren’t considered TBTF. Right? I mean, here’s an industry. The US Government has come in and carved out a subset of the businesses in this industry, the bigshots, and declared their implicit backstop (or actually, it’s explicit now right?) for them. Surely this makes things harder for anyone not in that special subset to compete. Just like a government tax-credit subsidy for Wal-Mart hurts Mom & Pop, a government TBTF subsidy for JP – if there is one – must be hurting SmallTown Bank. However much it lowers spreads for the TBTFers, by comparison it must be harming the relative spreads of the non-TBTFers – leading to decompression. To the latter, therefore, that is a cost not a subsidy. And if the question is “How much does the TBTF ‘subsidy’ help banks?” where by “banks” you mean, like, “banks”, as in, all banks – then surely you need to include that cost in your accounting. No one seems to be doing so. Doing so might actually show TBTF to be a net cost not a subsidy. Who knows. (After all, all else equal I certainly don’t think government distortion of markets in this way makes people wealthier overall.)
  • What about the protection value itself?  My commenter Dave reminded me of this point when he put forth his alternative ‘model’ valuing TBTF at $4 trillion. Of course, he neglects to account for the fact that such a drawdown is, let’s just say, a low-probability event. But his point is not 0% valid. All the commentary has been focused only on how TBTF affects banks’ funding cost. But surely that’s not the only effect of TBTF. Surely there is also the contingent liability itself: the fact that, while these banks can take minor day-to-day losess (or even London Whale-sized losses) without the government stepping in, if indeed such a bank had such a loss that it threatened to play a “Fail” card, the government would summon a “Too Big To!”, the tapping of which would then – in that event – tangibly cost the government $X00 billion of mana. Another way to put this is to view the government as providing senior or super-senior (super-duper-senior?) credit protection to TBTF banks on, like, all of their risky activities (loans, trading, counterparty, repos, lines of credit, legal exposure to being sued for manipulating LIBOR or hiding drug money or helping tax evaders, fat-finger trades erroneously booked backwards, whatever else). If those activities’ losses never exceed some (unknown to me and you and everyone else) threshold, the government pays nothing; but if they did, then if TBTF means anything it means the government would be on the hook for some actual cashflows. This is a credit protection or insurance the government is providing, and it is worth something by itself, independently of how it affects bank credit spreads. How much is it worth? I’m not sure where banks could source equivalent super-senior tranche protection at the moment (there’s also the fact that USG is the only credible seller of this particular super-senior protection, which presumably means they could have overcharged for it if they were to charge market prices instead of giving it away for free). Golly, this is hard to say. So I shall just buttstimate** that it is worth something like 3-55bps on, like, the sum of the notionals and implied notionals of all banks’ liabilities or possible losses on anything. Note: I don’t know what that is at all but note: whatever it is, it’s actually a lot, and probably way, way more than $83 billion.

So in conclusion, if you take the above two bullets to heart, and do the same mental back-of-envelope addition of them that I’ve just done just now, I have probably helped convinced you as much as I am convinced that the TBTF subsidy is worth something between, oh let’s say, -$500 billion and +$1 trillion. I hope this knowledge helps you in your endeavors and protests.

‘Modeling’ is fun!

**buttstimate (v.): to estimate, by pulling a number out of your butt.

SeQuest 2013: The worst ‘Washington Monument’ gambit ever
February 27, 2013, 9:02 pm
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Per Kurowski links to an oh so scary detailing of the cuts that would occur in – in that case – the state of Maryland under ‘Sequestration 2013′. For which I humbly submit the following as the official logo:


Now, maybe it’s just me but it seems the powers that be are really flubbing the Closing-The-Washington-Monument gambit this time around. I mean, I don’t know about you – no seriously, I don’t – but me, I read this list and my thoughts went roughly like this:

“Great! Cool. Good. Sounds good. Awesome. Great…”

And, variations on the above.

After all, the list linked above is almost entirely a list of Money Given To Other People Who Are Not Me Or Mine. I can find virtually no exceptions. Even the stuff that is supposed to ‘benefit me’ in some (very very) diffuse way, doesn’t. IMHO, of course. You can feel free to try to convince me otherwise. You. will. fail.

So, the list of ‘scary cuts’ they’ve cobbled together just isn’t scary. In fact it’s downright amazing. It’s better than I could have ever imagined in my wildest dreams. It’s warming the cockles of my heart and brightening my day. It’s put a spring in my step and a bee in my bonnet. Is everything about life going to be so different and great from now on?

Worst. Washington Monument gambit. Ever.

The Model Has No Clothes
February 27, 2013, 2:30 pm
Filed under: Uncategorized

A while back an article was making the rounds claiming to show that the government’s implicit ‘too big to fail’ backstop amounts to subsidizing banks to the tune of $83 billion a year. I did not, let’s be clear, read that article. Moreover, I am totally against ‘too big to fail’ (N.B.: in all its forms, not just banks…) so at least superficially, I should be sympathetic to publicizing such a finding as furthering my goals. But then I read Matt Levine’s debunking of the model by which the authors claimed to derive that $83 billion number, and as far as I’m concerned it rendered the matter completely and thoroughly closed. If you don’t believe me, just read it.

He pointed out at least two huge issues with the calculation: 1) the authors looked at the rating impact of TBTF protection, turned rating moves into implied spread moves (ok fine), and then apparently averaged (!) the hi and lo spread impacts. What? Simple averaging spreads? Bzzt, sorry. 2) Worse, the spread impact they come up with relates only to 5-year spreads. Again, sorry; that’s not a good proxy for how banks actually fund themselves. Or it might be, conceivably, just with some appropriate scaling/beta/multiplier? So their “$83 billion” is, at best, correct, up to some unknown scaling? You know what else is correct up to some unknown scaling? Any other number.

From these two facts alone, unless they have been misrepresented by Levine, it should be clear to any knowledgeable reader that the study and therefore the $83 billion number was garbage.

Not to everyone though, especially since “$83 billion subsidy!” made its way into a lot of peoples’ politically-motivated talking-points. Hence mathbabe has written a rebuttal response to Levine’s piece saying – in effect – that you just can’t critique a model without proposing one of your own.

  • But since I’m a modeler, I know it’s a lot easier to push over a model by complaining about an assumption than it is to come up with a better model that doesn’t make such stupid assumptions.
  • So anyone who complains should also offer an alternative.

I’m just going to point out that that is completely and totally wrong. In my book people, whether ‘modelers’ or not, can and should feel free to critique others’ models all day long and to point out legitimate problems with them. If those objections are silly or crazy, they can be easily dismissed or ignored; but if they are serious, they should be answered. Either way, the absence of a better model doesn’t mean we are somehow compelled to pay attention to or go with the results of models that are materially flawed and whose flaws have not been satisfactorily defended. (As far as I know, Levine’s objections have not been answered – certainly not in that post.)

A perfectly scientifically valid ‘alternative’ to a bad model doesn’t have to be another model – it could just be no model, and saying “we don’t know”. It is enough, or should be enough, to just point out “That is wrong”, that the Emperor Has No Clothes. This is all a healthy way for science to be done – you know, open critique, questions asked, problems raised, critics answered, and so forth. Part of what bothers me about this ‘well then offer an alternative!’ attitude is that it represents a sort of science-guild protectionism: if no one is allowed to raise problems with existing models without ‘offering an alternative’, that obviously would help to increase the power of…folks who make models. After all, really, who has time to not only dig through such things and find/identify their problems (which is valuable enough already, and kudos to Levin for rolling up his sleeves), but to cook up complete and valid ‘alternative models’ as well? A very small percentage of people. And that’s the way the modelers like it, I suppose.

The post is titled “How much are the taxpayers subsidizing too-big-to-fail banks, if not $83 billion per year?” But if the entire ‘subsidy’ premise came from a flawed model, this is sort of like asking “Okay, if bleeding the patient doesn’t cure their disease, what DOES?”. Or, “On how many giant turtles’ backs does the Earth rest, if not 63?”

You say it’s not 63? Well, how many then, smartypants! Where’s YOUR model? You don’t have one? Ha! I win. 63 it is.

I don’t know what that is, but it’s not science.

Maybe it’s ‘modeling’.

P.S. Apologies in advance to all those who read this post’s title a different way and got their hopes up.

Did they have a Oscars?
February 26, 2013, 12:23 am
Filed under: Uncategorized

I heard they had a Oscars some night. What won? I hope Terms of Endearment won. I heard that’s a good one. Usually when I think Oscars I think Terms of Endearment. That’s your basic Oscar movie right there. (Note: never seen it.)

What is it even about? Does anyone know? The mind tries to parse, fails. How could it be explained, even in theory? “You see there’s these Terms. What sort of Terms? The kind that are of endearment. Those kind of terms. And that’s what the movie is about. Two hours of that.” And everyone loves it. Can’t get enough. Standing ovation. On the Oscars they’ll show clips of it I bet. And what are the clips? It’s like two people standing around, talking. Maybe one is crying or whatever. She has short red hair. Does something happen. Who knows? This is movies?? Also On Golden Pond. Sorry what? What about Golden Pond? Is there a waterski race or anything? Bzzt sorry. At most there’s a lot of cussing but after a while, that’s just not enough. Sorry.

See, I just don’t get Oscar taste. It’s the total opposite of something like BLUE THUNDER which is where, there’s this awesome helicopter called BLUE THUNDER which goes around solving crimes and blowing stuff up. (Plus whisper mode). With that you can totally get it. What the movie is about.

There is also Airwolf which you get them confused sometimes but Airwolf’s not as good in my book. It’s just on TV so I don’t think that qualifies. But BLUE THUNDER should be the winner if they do a Oscars but you know they’d never go for it. The whole thing’s a setup if you ask me. They never do the cool movies for Oscars. Just forget I brought it up anyways.

Brilliant health care idea: replacing fee-for-service with fee-for-no-service
February 25, 2013, 4:03 pm
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Richard Thaler writes on health care, advocating among other things:

A fee for health rather than fee for service model. Doctors and hospitals should be paid for keeping their patients well. Paying them for doing more tests and surgeries creates bad incentives.

Arnold Kling asks:

When Thaler plays chess, does he think even one move ahead?  I am sure that my readers do not need me to tell them how doctors would respond to a “fee for health” incentive system, do I?

Heh. Quick doctors/hospitals, who wants to get to administer time-consuming experimental or at least palliative care to this incurably-diseased patient on a ‘fee for health’ basis? Don’t all raise your hands at once. Meanwhile, I sense some good business opportunities for PR and advertising firms offering services to doctors helping them sign up a bunch of ‘healthy’ patients that they can almost-never-see but regularly bill for…’Dear Health Ins. Co.: I kept this 19-year-old athletic male healthy again this week. No visits/tests/treatments. Send me $370 please!’

But seriously, this raises the question: what would ‘fee for health’ even mean? Someone appears to have forgotten that actual healthy people mostly aren’t even seeing a doctor, for anything, in the first place. That’s part of the definition of ‘healthy’. Isn’t it? It’s sort of like saying supermarkets should be able to bill…(someone?)…for the length of time that…(some group of people?)…doesn’t need food. Say what?

In any event, Obamacare will basically be a fee-for-health model anyway: if you’re healthy enough that you’re drawing breath, you pay. Whether you need health care or not. The way out of paying is to lose your health enough that you die. The rest is just accounting and administration, and so the distinction between that and ‘fee for health model’ is a distinction without a difference. So rest easy, Richard Thaler, you’ve gotten your wish.

Sub-full-post-level thoughts
February 25, 2013, 9:52 am
Filed under: Uncategorized

A lot of naysayers say nay when it comes to watching to Oscars. Why watch? they say. (Nay! they also say, self-consistently.) Well, I’ll tell you why I watch**. For the PAGEANTRY.  (**Ed. note: Did not actually watch the Oscars.)

I am still concerned about Loose Nukes. Is there any update to this? Perhaps I’m overthinking this but I just can’t fathom why the Loose Nuke Tracker-Downer Super Squad would have been the absolute first on the chopping block in a ‘Debt-Ceiling-Induced Prioritization’ scenario but not be in any danger whatsoever in a ‘Sequester’ scenario (are ‘Prioritization’ and ‘Sequester’ that different? I shall have to check my copy of the Constitution). Yet the Ezra Kleins – i.e., legitimate journalists who were sincerely concerned about Loose Nukes under ‘Prioritization’ (and weren’t simply letting themselves be used as conduits for White House talking-points) – have been strangely silent about Loose Nukes under ‘Sequester’. You see? It just doesn’t compute.

Of course, maybe it’s because there’s going to be a ”DEAL”. I am so looking forward to the next ”DEAL”. There should be a ”DEAL” and it should be made by a ”GANG OF” some number between 7 and 13 (inclusive). I suggest 11. So: resolved, they should make a ”GANG OF 11” and that ”GANG OF 11” should do a ”DEAL” and then everything will be fine. They can push back the Cuts to Whenever. (I think a good time to implement these cuts would be Whenever.) John McCain could be one of the ”GANG” and he could talk angrily on TV about how Honorable the ”DEAL” they make is. I love how our government works, it is a fascinating process.

February 22, 2013, 10:04 am
Filed under: Uncategorized

Stationary Waves has a plausible theory as to why $9 is a magic number when it comes to minimum-wage proposals.

I like “Thrift Shop” too and it’s great to see it become a hit, not only for the message but because I have been rooting for that guy ever since this song. I still love that song BTW.

Half Sigm THE LION OF TH’ BLOGOSPHERE predicts that Chris Christie will be the 2016 Republican Presidential nominee. You heard it there first. Pastorius, who loves Chris Christie and how fat and unmanly he is, would be ecstatic.

In Berkeley, a reported One Billion women danced to ‘celebrate women’s bodies’ – a worthy cause if there ever was one – and but also to end violence against women. I am curious to see if it worked. So far so good, as far as I can tell?

South Bend Seven, a bit uncharacteristically, doesn’t hold back on the minimum wage. Also liked John Cochrane.

I think my favorite aspect of this whole minimum wage debate has been the realization that the pro-minimum wage side is now wedded to this logic:

  1. I really really want there to be a higher minimum wage and for that to be economically non-retarded! But the arguments against it are intuitive, sort of obvious and that is discouraging and makes me feel bad.
  2. On paper/chalkboard, some blogger told me that there is a special degenerate imaginable boundary case called ‘monopsony’ in which raising wages would raise employment. Hey, that establishes that it is logically possible for rises in the minimum wage not to increase unemployment.
  3. Therefore, since it’s logically possible, and I don’t like the ramifications otherwise, we must actually be in that ‘monopsony’ situation, and are required to act accordingly! I can even call people dumb for ‘not knowing about monopsony’.

Gives me a chuckle to see this every time. I could entertain myself for an hour or two just by Google Blog-searching ‘monopsony’ and enjoying all the recent blog posts folks have littered the web with that are implicitly using logic 1-2-3 above.

I haven’t written about this stuff for a while, but it’s comforting to see that the insanity of wanting banks to somehow do banking without taking risk (which is part of the definition of modern banking) continues.

More infuriating TSA behavior. I’m pretty much at the point where my baseline assumption is that any person that takes a job going to work for the TSA in any capacity is a just plain bad human being. It is just not something that good people ought to, or would even want to, do.

Megan McArdle wrote a widely-linked piece that is basically about Smart People.

So, in case you haven’t seen this, apparently this is how you get girls’ numbers:


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