I guess there’s some competition but this to me is clearly the chart of the day:

Ha, no, not really. But actually it is pretty neat:

The Federal Reserve on Friday released blank templates showing the format of the two charts it will use on January 25 to report Federal Open Market Committee (FOMC) participants’ projections of the appropriate target federal funds rate. It also released a draft of an explanatory note that will accompany the projections.

The first chart, which will have shaded bars when released on January 25, will show FOMC participants’ projections for the timing of the initial increase in the target federal funds rate. The second chart, which will have dots representing policymakers’ individual projections when released on January 25, will show participants’ views of the appropriate path of the federal funds rate over the next several years and in the longer run.

Bars and dots! What’s not to like? The actual form, in its forlorn blankness, has the look of an exam you’re supposed to fill out,* and there’s this: Read more »

Hey, so, if you work at a bank, you may have heard about this, not sure, but your comp will be down. Just a bit. Unless you’re a junior mistmaker Chez Dimon. But otherwise, yeah. Down.

Another thing you may be less aware of is that some people are actually not so unhappy about that. A few of them even think that it’s possible that your pay should be down some more. And they think someone should really look into that:

Giant firms are expected to cut executive pay by some 30% from 2010 levels, consultants say. And since the financial crisis of 2008, firms have reduced cash bonuses, increased their use of company stock and added clauses that allow them to recoup—or “claw back”—pay in certain circumstances.

Even so, some investors want more changes. In December, the Nathan Cummings Foundation—a private charitable organization and institutional shareholder—filed proposals asking that directors at Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. address potential reputational damage that big pay packages could bring to the banks, said Laura Campos, director of shareholder activities at the foundation. The proposals also request that they study how such awards could reduce banks’ ability to spend money on other areas, and report those findings to shareholders.

Shareholder resolution activists (not to be confused with, like, real activists) are mostly pretty silly creatures and this is a pretty good example of why. The Journal tries valiantly to make the efforts of Nathan Cummings and his eponymous foundation relevant to the hot-button issue of how much bankers get paid, but it’s pretty clear that the NCF is focused on a thing called “executive pay.” Executive pay is sort of an irrelevancy for investment banks, mostly, since it makes up a relatively small fraction of comp, and since lots of people at banks get paid executive amounts of money without being a named executive officer. And as long as the Nathan Cummingseses of the world are focusing on how much the Lloyds/Jamies/James-not-Jamies of the world are getting, they will probably stay away from your now-30%-paltrier comp.

Other fearless crusaders for shareholders have noticed this, however, and are more interested in going directly after your money, though they have yet to resort to the rather infra dig expedient of shareholder resolutions. Instead they do things like complain to Andrew Ross Sorkin, who earlier this week said: Read more »

Ooh look a chart:

That’s from this quite punchy paper by Patrick Slovik of the economics department at the OECD. It shows you that, in 1992, big banks had risk-weighted assets, which determine how much capital they’re required to have, of over 65% of their total assets, which measures how much lending and investing and trading and financing-their-governments they actually do. In 2008, the ratio was under 35%. What’s special about those dates?

When the first Basel accord was implemented in 1992, risk-weighted assets represented close to 70% of bank total assets, which means that bank regulatory capital was calculated based on a large share of bank total exposures. In the years following the introduction of the Basel accord, the ratio of riskweighted assets to total assets (RWA/TA ratio) gradually decreased and reached about 35% in the immediate pre-crisis period, which means that the regulatory capital of systemically important banks was calculated based on only a small fraction of their total exposures. … [T]he drop in the RWA/TA ratio has been very smooth since the implementation of the Basel accords without any significant deviations from the trend line until the crisis. This trend suggests that innovative engineering of regulatory risks and the move to unconventional business practices by systemically important banks has been a consistent trend for almost two decades and was not limited to a few years preceding the financial crisis. The trend reached its lowest point at the onset of the financial crisis when the capital requirements of systemically important banks were determined based on the historically lowest amounts of risk-weighted assets (relative to total assets). Risk-weighted regulation leads to unintended consequences as it encourages innovation designed to bypass the regulatory regime rather than to serve non-financial enterprises and households. Strengthening capital requirements based on risk-weighted assets may further contribute to these skewed incentives and their profitability.

This is a theory that has been sloshing around the internet for a good long while but this is neatly expressed and – that chart! It is – pretty stark, no?

That chart is worth the price of admission, but Slovik goes on to argue that risk-weighted capital requirements lead to a decline in lending activity: “One of the main reasons why non-loan-related activities have become so important for banks is the relatively high regulatory risk weights on loans relative to other types of assets, which puts them at a comparative disadvantage in the profit-seeking strategies of banks.” The numbers look … not totally unlike the risk-weighted-to-total-assets chart: Read more »

  • 12 Oct 2011 at 6:27 PM

Today In Data Mining? Maybe?

Finance professor Jialan Wang won the Internet today with a beautiful note on Benford’s law in US accounting data (for completeness of her victory see here, here, here, here, and here).

Here’s the argument. Benford’s Law is a statistical regularity that applies to many collections of numbers of differing orders of magnitude. As Wang writes:

A second earth-shattering fact is that there are more numbers in the universe that begin with the digit 1 than 2, or 3, or 4, or 5, or 6, or 7, or 8, or 9. And more numbers that begin with 2 than 3, or 4, and so on. This relationship holds for the lengths of rivers, the populations of cities, molecular weights of chemicals, and any number of other categories.

The explanation generally seems linked with exponential growth, and the formula is P(d) = log10 (1 + 1/d). So the probability of a number starting with a 1 is log 2, or 30%; the probability of it starting with a 9 is log 1.11, or about 4.6%. Strong men have been driven mad peering into this abyss.

Benford’s law ought to hold for lots of kinds of financial data, particularly if you just take a big unsorted pile of stuff. So Wang took 50 years of various financial data (revenues, assets, and 41 other publicly reported categories) from 20,000 publicly reporting companies and just plotted the number of numbers that started with 1s, 2s, 3s … etc. And it was a pretty good match to the Benford distribution:

So far so good. Now the bad news: the relationship has been moving away from a Benford distribution over time.
Read more »

The New York Fed and the Wall Street Journal have both been studying how liquid the CDS market today and have released their conclusions today. Short answer: not that liquid. From the WSJ:

In recent years, credit-default swaps—contracts that give the buyer the right to collect a payment from the seller if a borrower defaults on its obligations—have risen from obscurity to an avidly tracked barometer of the financial health of everything from Bank of America Corp. to Greece. … Yet a Wall Street Journal analysis shows that actual trades in these widely cited derivatives are few and far between—and the quotes that market observers bandy about often aren’t based on actual trades at all.

What I liked most about the FRBNY study is that it not only looks at overall liquidity but – sort of – gives you a window into the breakdown between what you could call “initiation trades” and “closeout trades.” And this in turn tells you something about not just “liquidity” in the abstract but about how market makers go about providing that liquidity.
Read more »

Mayor Bloomberg is on record claiming that riots are caused by unemployment among college graduates. But I suspect that Occupy Wall Street is overweight degrees and underweight 9-to-5 employment, and it’s not taking down the regime so much as it is taking down a lot of pizza. So one might question Bloomie’s conclusions and seek someone with more rigorous statistical training to explain Where Do Riots Come From.

Fortunately we have that in Yaneer Bar-Yam, a physicist, complex systems theorist and general man-about-town with a pleasing CV that includes writing a book called “Making Things Work” and telling Slate that “the shortcomings of the U.N. humanitarian-response system in Haiti have a lot to do with a 50-year-old mathematical theorem known as Ashby’s Law of Requisite Variety.”

He and some friends wrote a paper, released yesterday, arguing that increases in food prices over the last few years can be explained almost entirely by two factors: financial market speculation and the growing use of corn for ethanol production rather than food.

Now these arguments have been made before, and also disputed or minimized. The new paper rejects a lot of those criticisms; more interestingly, it constructs a fairly simple four-parameter model that can pretty closely match the actual trends in food prices over the last few years:

So, neat. Also disturbing. Also also disturbing is this: Read more »

Third Point Looks Forward To The Juiced Up Future Of Yahoo

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