Release Date: December 19, 2007
For release at 10:00 a.m. EST

On December 17, 2007, the Federal Reserve conducted an auction of $20 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 4.65 percent [Josh: Only 10bp less than discount]

Total propositions submitted: $61.553 billion [Mo Money Please!]
Total propositions accepted: $20.000 billion
Bid/cover ratio: 3.08

Number of bidders: 93

Bids at the stop-out rate were prorated at 1.96% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000).

The awarded loans will settle on December 20, 2007, and will mature on January 17, 2008. The stop-out rate shown above will apply to all awarded loans.

Institutions that submitted winning bids will be contacted by their respective Reserve Banks by Noon EST on December 19, 2007. Participants have until 3:00 p.m. EST on December 19, 2007 to inform their local Reserve Bank of any error.

Let me go out on a limb and say that the markets will be down on this. A rate of 4.65% basically confirms that institutions haven’t been willing to go to the discount window because any such action becomes public knowledge. The TAF is a silent auction and thus avoids this stigma. Interesting stuff.

The BBC at least went to some effort in trying to describe the mechanics of the current credit crunch, but they start off on the entirely wrong foot by conflating the ’sub-prime model’ with securitization. What they describe in the image above is securitization. Portfolio Magazine has a much better graphic describing the details of recent innovations in securitization.

Arguably, securitization lowered rates for all borrowers. It also re-distributed the fees from local lenders to larger investment banks who could earn commissions for writing and selling CDOs. But along the way information asymmetry increased and everyone had an incentive to keep filling the pipes with new whole loans. Mortgage brokers got a quick buck from selling a refinance to an originator. The originator made a quick buck flipping the loan to the secondary market. Banks and funds made a quick buck flipping MBSs into CDOs. And investors (usually via other banks and funds) made some money holding onto paper that was paying out a rate marginally higher than similarly rate debt.

The only problem with making so much money is that enough is never enough. And so more brokers needed to originate more loans to be repackaged into more CDOs. However, nearly everyone who could already afford a mortgage had already refinanced into a lower rate and so the only people left to be refinanced were those who couldn’t afford a mortgage. Brilliant! Mortgages for people who can’t afford them!

But they can. You see, a few years ago adjustable rate mortgages (ARMs) were invented to allow borrowers who were both financially savvy and creditworthy to structure their cash flows so that the bulk of their payments would occur a few years in the future. Perfect for up and coming hedge fund analysts who knew their bonus 2 years from now would be considerably bigger than their entire earnings to date. But as of 3 years ago, the same product became perfect Joe Trailerpark who never learned that nothing comes for free. And that a 3% rate this year means a 10% rate 2 years from now.

Now, I don’t fully blame Mssrs Trailerpark, I’m quite sure a large number of brokers glossed over the latter detail. (Did I ever tell you about the time I was sitting at John Wayne Airport, in the heart of mortgage origination land, and overheard 2 brokers talking about the finer points of faking W2s ? Maybe another time…) Either way, everyone was happy as Trailerpark & Co. provided the much needed raw materials for new CDOs.

Of course, this all goes to shit when people stop paying their mortgages. Statistical models suck when faced with a small number of observations and flawed assumptions. And humans are all too happy to ignore the fundamental problems with their risk models when they are just making so much gosh darned money.

And that’s how it all went wrong.

(PS: Did you get your bid in today? I may post some thoughts on that in 2 days when the results are released).

I, for one, whole heartedly support the writers in their strike. In fact, I hope they remain on strike. Forever. The internet has never before had such a great range of funny videos to watch. However after a while it gets a little boring to continually watch videos about the strike. So, writers, we get your point but please move on to some other topics. You have so much talent not to waste it all as one trick ponies. Or LoLcats.

Books I have read in the past few weeks:

1. Twinkie Deconstructed. Really boring. Last time I trust Tyler Cowen for a book recommendation.
2. The Electric Kool Aid Acid Test - Great. The closest thing fiction that I have read in a while, without actually being fiction. It’s the story of Ken Kesey and his merry pranksters who suffered heavily from the burden of being some of the earliest LSD addicts. And as such weren’t enlightened by the now commonplace knowledge that _everything_ you do on acid seems really interesting and important.
3. Moneyball From the author of Liars Poker comes the story of Billy Beane and how he used refined statistical analysis to lead the Oakland A’s to a world series victory. Or at least thats what I thought until I got to the end chapter. Turns out that they don’t win, but they get close. Either way, its a good read. I walked away even more convinced of the fact that most established knowledge is right, but every now and then its very wrong.
4. The Informant. My dad left this book with me when he was over in New York last week. On the 600-odd pages of this book we learn the story of international price fixing in the lysine market and the development of a huge white collar crime case by the FBI and DoJ, centering on the Archer Daniels Midland company. I had dinner on the weekend with some FBI agents [[Why is it that a statistically significant portion of my friends work in law enforcement in America, yet most of my Australian friends are criminals?]] and they had never heard of the case. Supposedly they are making a film of this book, which doesn’t surprise me as it reads like a script. Should be a great film, very exciting story.

Book(s) I am currently reading:

1. Judgement under Uncertainty. After my disappointment with Behavioural Finance, by James Montier, I decided to go straight to the horses mouth and finally read the works of Kahnemann and Tversky. So far the book is confirming my prior belief that behavioral finance/economics is simply plain old economics with more complex utility functions than the analytically pleasing forms that are often assumed to describe rationality.

Books I probably won’t ever read:

1. The Tipping Point, by Malcolm Gladwell
2. Anything by Richard Dawkins

Machines I am currently building:

1. Soup! - I’m not quite sure what it does yet. But its fun to be building machines again. I really suck at drilling holes in a straight line. I want a drill press for Christmas. And a lab in which to use it.

Jerry just wrote an interesting post about the impact of behavioral targeting on media prices. Half of our ads work, we just don’t know which half, so the adage goes. Jerry asks:

If advertisers could put their ad only in front of the fifty people who are likely to buy the product rather than the hundred that might or might not, those other fifty ad slots go begging. Half the advertising inventory will not be bought. This 50% drop in demand should drastically cut prices.

On the other hand, if an advertiser can target better, she should be willing to spend more to get in front of that targeted audience. But how much more? Twice as much? Does the advertiser end up paying less, resulting in lower overall media revenues? Or does media benefit by being able to charge premium prices for all of their inventory?

Ceteris paribus, net revenues to the publisher should remain the same. They are selling half the units at twice the cost. And the advertiser ends up paying the same amount for the same number of customers. Of course, if this were the case, behavioral targeting companies would not exist - the industry would be indifferent as to whether to target or not. Behavioral targeting companies market their technology with the premise that there is no need to pay $50 CPM’s for premium placements when the same eyeballs also see remnant inventory at $0.50 CPM. The targeting platform makes sure that the right eyeballs see the right ad at the right time, regardless of placement. That said, as Jerry recognizes, if everyone switches to behavioral targeting, then it all works out in the wash, and pricing per placement becomes a thing of the past. But net, the cash flows remain the same.

“Nobody counts the number of ads you run;they just remember the impression you make.”
–
William Bernbach

Where things get interesting is if we allow for the possibility that premium placements really deserve higher CPM’s on the basis of placement alone. In which case, we can no longer lump together the n units of premium inventory with the N units of remnant/run of site, into a fungible (n+N) size pool. If there is anything fundamentally different about premium inventory then ceteris stops looking paribus. There are plenty of smart cookies, with more PhD’s than you can poke a University of Phoenix marketing diploma at, who continue to pay a premium for front page ad runs. I reckon they might be onto something, behavioral targeting be damned.

I’ve been following the 20×200 blog / store since inception. I love the idea and and many of the works. A few weeks ago Shianling and I decided to buy a print (above). Unfortunately I’m not terribly happy with the print quality. I don’t know much about printing, but am familiar with the problems of viewing art online, where the gamut of a monitor is greatly limited compared with what can be printed. However, the print we received lacks much of the vibrancy of the online picture. Oh welp. We supported an artist and have a shiny new thing to hang on our rapidly crowding walls.

Complaints about the print quality aside, I am very tempted to buy a new work that became available today (below) as I seem to have a deep emotional connection to custom bound books.

One of the best ways to improve your Page Rank is to slavishly follow other blogs and provide witty responses to the posts of more credible bloggers. In that spirit, let me one-up Felix Salmon and raise his correlation analysis with a p-value. It turns out that Felix holds annual Pinot parties. Sorry, not parties, but scientific evaluations of Pinot Noir. Eschewing issues arising from normality, rank scoring, sample size, and underrepresentation of Australian wines, I present the following confirmation of Felix’s guesstimate that Pinot rankings and price are uncorrelated. Rather than rely on the unwieldy crutch of an R-square, I prefer to look at the p-value on the regression of score against price:

 > score=c(115,196,137,146,175,212,193,184,180,167,154,143); > price=c(18,23,29,52,33,12,26,18,10,50,13,12); > l<-lm(score ~ price); > summary(l) Call: lm(formula = score ~ price) Residuals: Min 1Q Median 3Q Max -53.982 -19.423 8.385 17.913 41.085 Coefficients: Estimate Std. Error t value Pr(>|t|) (Intercept) 174.7818 17.4850 9.996 1.60e-06 *** price -0.3222 0.6200 -0.520 0.615 — Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 Residual standard error: 29.36 on 10 degrees of freedom Multiple R-Squared: 0.0263, Adjusted R-squared: -0.07107 F-statistic: 0.2701 on 1 and 10 DF, p-value: 0.6146 

The above analysis, done in my BFF language - R, demonstrates that price is not a significant predictor of wine score. With a p-value of 0.615, the null hypothesis is looking a lot like a Pinot Party. A place where we can all be comfortable.

For bonus points, I leave it to my good readers to perform a contingency table analysis.

One of the best things about being crowned a romance buff by the prestigious New York Post is that I now can get away with pretty much anything at home.

“Honey, can you do the dishes?”
“But I’m busy knitting you a scarf”
“Yes, but doing the dishes would be romantic. I declare it so.”

I now have a Frank Bruni-esque[1] power to declare anything romantic and it must be so. Anything else would be denying the Post’s role as an arbiter of New York cultural icons. Of which I am one.

—
[1]: Or whomever the NY Post’s equivalent may be.

Update: According to one of Shianling’s patients, we also made it to The Gothamist. Now I’m truly a cultural icon.

Postgres:

 think=# select 'hello' = 'hello'; ?column? ---------- t (1 row) think=# select 'hello' = 'goodbye'; ?column? ---------- f (1 row) think=# select 'hello' = 'HELLO'; ?column? ---------- f (1 row) 

MySQL:

 mysql> select 'hello' = 'hello'; +-------------------+ | 'hello' = 'hello' | +-------------------+ | 1 | +-------------------+ 1 row in set (0.00 sec) mysql> select 'hello' = 'goodbye'; +---------------------+ | 'hello' = 'goodbye' | +---------------------+ | 0 | +---------------------+ 1 row in set (0.00 sec) mysql> select 'hello' = 'HELLO'; +-------------------+ | 'hello' = 'HELLO' | +-------------------+ | 1 | +-------------------+ 1 row in set (0.00 sec) 

This is not kindergarten people, this is UNIX. Do what I say, not what you think I mean.

Since appearing on the popular section of del.icio.us, a number of people have asked me to explain how it is, in fact, possible to replicate what we see in the following video:

Whats going on here is really quite simple. All you need to do is hold the video camera with one hand and wrap the foil etc. using your free hand. It definitely helps if you have a small, hand-held video camera. If you have one of these it might be good to have a friend around while attempting the above.