Elena Kagan flip-flops

The White House Monday said that Supreme Court nominee [Kagan] won’t follow her own advice from 1995 in answering questions on specific legal cases or issues, supporting Kagan’s flip flop on the issue that she first made a year ago.

Kagan wrote in 1995 that the confirmation process had become a “charade” because nominees were not answering direct questions, and said they should have to do so.

But during a briefing with reporters in the White House, Ron Klain, a top legal adviser to Vice President Joe Biden who played a key role in helping President Obama choose Kagan, said that she no longer holds this opinion.

Image source here. Via Megan McArdle, who opines:

...I do think that David Brooks is onto something when he notes that her relentless careerism, her pitch-perfect blandness, are a little creepy. Not in themselves, but because they're a symptom of a culture that increasingly values what Brooks calls Organization Kids: the driven, hyperachieving spawn of the Ivy League meritocracy who began practicing Supreme Court nomination acceptances and CEO profile photo poses long before they took notice of the opposite sex.

What's disturbing is that this is what our nomination process now selects for: someone who appears to be in favor of nothing except self-advancement. Then we complain when the most passionate advocates for ideas are the lunatic fringe.

Eric Falkenstein spanks Nassim Taleb silly

Feel the burn:

There was a big story in the WSJ about one of Nassim Taleb-affiliated fund Universa Investments LP (he's merely an advisor, but he takes credit when it does well and it's run based on his long-Black Swan theory). Supposedly, they made a big trade around 2 pm EST on Thursday, just before the market tanked.
...
Anyway, lets look at the tape. Here's an S&P 115 June Put option from Thursday. Around 2 PM EST, it was price about $4.30. It went to about $8 (one bizarre print at $14), and is now about $2.50. Whatever he bought is probably down 50%.

I would bet that his Universa Fund will go exactly like his Empirica fund: first year, up big in year 1, then slightly negative for the next five, when it is 5 times as large. Net net, it loses dollars, and like Emprica will have a Sharpe below the Hedge Fund Mendoza line of 0.5.
...
Gee, someone should write a book about blow-hard traders who misrepresent their track records and take excessive risk with other-people's money, all due to cognitive biases they are too shallow to notice in themselves. Oh yeah, Taleb has done that! I guess his insider status gives him better insight.

Chart of the day: California is in the Top 10 government default list

Source here.

Quotes of the day

U.S. prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against, people familiar with the matter said, in a step that intensifies Washington's scrutiny of Wall Street in the wake of the financial crisis. Morgan Stanley arranged and marketed to investors pools of bond-related investments called collateralized-debt obligations, or CDOs, and its trading desk at times placed bets that their value would fall, traders said. Investigators are examining, among other things, whether Morgan Stanley made proper representations about its roles.--AMIR EFRATI, SUSAN PULLIAM, SERENA NG And AARON LUCCHETTI

Is this how Americans believe their government should act? Do they believe that all of the rules related to equity and fairness in the judicial system should be thrown aside, as the government pursues its vendetta against Wall Street through leaks to the press? Are we now in an era when government can slander and destroy reputations by attacking people with press leaks?--Dick Bove

Morgan Stanley’s overall mortgage bets resulted in multi-billion dollar mortgage-related losses in 2007 and 2008, which brought the firm to the brink of collapse. Goldman and Paulson profited handsomely from their mortgage bets. That in large part explains why Goldman, Tourre and Paulson are such targets of public and lawmaker anger, and why Morgan’s traders will likely remain footnotes in the history of the mortgage collapse.--Michael Corkery

Suppose that we misspecified the underlying probability of mortgage default and we later discover the true probability is not .05 but .06. In terms of our original mortgages the true default rate is 20 percent higher than we thought--not good but not deadly either. However, with this small error, the probability of default in the 10 tranche [of the pooled CDO] jumps from p=.0282 to p=.0775, a 175% increase. Moreover, the probability of default of the CDO jumps from p=.0005 to p=.247, a 45,000% increase!--Alex Tabarrok

The main issue is the long-term deficit. As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt. As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs). Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion. This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard. Representative Paul Ryan of Wisconsin has a plan for doing so, and it includes big cuts to Social Security and the end of Medicare for anyone now under 55 years old. Other Republicans have generally refused to endorse the Ryan plan. Until that changes or until the party becomes open to new taxes, its deficit strategy will remain unclear.--David Leonhardt

Before his arrest on corruption charges, Wang Yi was not only a powerful financial official in the Communist party but also one of China’s most celebrated modern classical music composers. ... Mr Wang is described now as someone who has trouble reading music, had no formal training and was reliant on ghost writers to produce what was once hailed by state media as “China’s answer to Mozart” and “music for rejuvenation of the nation”. Official reports suggest that most of the millions of renminbi spent on tickets to see Mr Wang’s works came from businesspeople and officials hoping to curry favor with him. The case is one example of the extraordinary influence senior party officials with few or no artistic credentials wield over the Chinese arts. Critics say these factors are the main reason China, the world’s biggest exporter of manufactured goods, has produced relatively few cultural or artistic exports in recent years – despite a multibillion-dollar global campaign and regular exhortations from leaders to develop the “cultural industries” and “soft power” of the nation. ... In the wake of the hugely successful animated film Kung Fu Panda, prominent Chinese media commentators published a string of soul-searching articles asking why such a film was made in Hollywood instead of China, even though all the themes were Chinese. Critics such as Mr Peng and Mr Ai say government control and the conditions illustrated by the Wang case are two key reasons.--Jamil Anderlini

We all looked up to John [Lennon]. He was older and he was very much the leader; he was the quickest wit and the smartest and all that kind of thing. So whenever he did praise any of us, it was great praise, indded, because he didn't dish it out much. If ever you got a speck of it, a crumb of it, you were quite grateful. ... When the four of us got together, we were definitely better than the four of us individually. One of the things we had going for us was that we'd been together a long time. It made us very tight, like family, almost, so we were able to read one another. That made us good. It was only really toward the very end, when business started to interfere. ... We were the biggest nickers in town. Plagiarists extraordinaires. ... George [Harrison] wrote [Taxman] and I played guitar on it. He wrote it in anger at finding out what the taxman did. He had never known before then what could happen to your money. ... People always thought Lucy in the Sky with Diamonds was [an LSD song], but it actually wasn't meant to say LSD. It was a drawing that John's son brought home from school. Lucy was a kid in his school. ... I wrote [Back in the USSR] as a kind of Beach Boys parody. And Back in the U.S.A. was a Chuck Berry song, so it kinda took off from there. I just liked the idea of Georgia girls and talking about places like the Ukraine as if they were California, you know? It was also hands across the water, which I'm still conscious of. 'Cause they like us out there, even though the bosses in the Krelmin may not. The kids do. And that to me is very important for the future of the race.--Paul McCartney

If God does not exist then — in light of the hidden hand that events have placed on the shoulders of these two new leaders, paving their way and staying their enemies — Nick Clegg and David Cameron may this weekend think it necessary to invent Him.--Matthew Parris

Like Robert Peel’s decision to repeal the Corn Laws, and split the Conservative Party for a generation, or Stanley Baldwin’s gentle manoeuvring to install the first Labour Government in 1924 and thus dish the Liberals, David Cameron’s generous offer to the Liberal Democrats has changed British politics for ever. Whether it succeeds or not. On Friday morning, as he surveyed the election result, Cameron was able to see that the new arithmetic of the House of Commons represented both a huge challenge and a big opportunity. And the decision he made — to treat it as an opportunity — will be the making of him or the breaking of him.--Daniel Finkelstein

I was surprised and impressed that [Gordon] Brown did not have to be stretchered out of Number 10 under heavy sedation--that he was willing to sacrifice what was left of his career, his reputation beyond redemption, to keep Labour in power. I had thought him less principled than that.--Clive Crook

The central issue is what you do when you notice many other people doing something that bothers you. If you believe that government should address the issue, then you belong to the Church of Unlimited Government. ... I think that most Americans are in that Church, and that it is the established Church in our schools and universities.--Arnold Kling

It is not the role of the ECB, IMF, or Federal Reserve to bail out banks. These measures are profoundly unpopular with voters in countries such as Germany and the United States. I think it is incumbent on the architects of these measures to communicate what is the structural defect in banking regulation that made such intervention necessary, and what reforms have been implemented to ensure that such measures won't be needed again.--James Hamilton

High social rank, as noted, has substantial instrumental value, and low social rank entails substantial concrete costs, irrespective of whether people care about rank per se. Forcing a productive person to buy more social rank than he wants is objectionable, but the alternative is to give all of society’s most productive members a valuable asset free of charge. That asset would command a high price in the libertarian’s ideal world in which purely voluntary societies could form and dissolve at will. And since its value is a direct consequence of the substantial costs associated with low social rank, a society without redistributive taxation should strike libertarians as even more objectionable.--Robert Frank

I am shocked to see an economist talking about “enough for everyone.” What do those words mean? Additional medical services would produce some benefit well past the point at which the entire GNP is spent on them. As you have just conceded, what matters is not whether I get the best care but how good the care is that I get. When my absolute real income increases but my relative income decreases, I can afford better care than before, even if other people can afford care better still. So, in the case of medical care, it is absolute not relative that matters. ... If everybody gets richer, the quality of schools can increase everywhere. You are again confusing absolute and relative. The richer people will still, on average, have better schools--but the “worse” schools can be producing education as good as, or better than, the best schools used to produce. ... Your claim is correct only with regard to the status output, not the schooling output. If you go to Harvard and I to Cornell, that may result in your winning out over me in our courtship of the woman both of us wish to marry. It may result in people who happen to know our backgrounds treating you with more deference than they treat me. I do not know if it has occurred to you, but one implication of your argument is that spending on schooling, insofar as it produces status, imposes a negative externality on others, so private individuals will tend to buy a more than optimal quantity of schooling for their children. It follows, on straightforward economic lines, that instead of subsidizing schooling, as we do on an enormous scale, we ought to tax it. If schooling is “inescapably relative,” we could cut every school’s expenditure in half and still produce the same amount of education, relatively speaking, while saving many billions of dollars. Perhaps that should be the subject of your next op-ed.--David Friedman

... let’s take a look at the $1 bill I am holding in my hand. It says right at the very top, “Federal Reserve Note.” It also says right down here, “This note is legal tender for all debts, public and private.” This is what the public ex-ante wants: the knowledge that they can turn their deposits into these Federal Reserve Notes. And if the public knows they can turn them into these notes, they don’t. With me here? If I know I can, I don’t. ... So, bottom line, [after the August 2009 run] you had the Fed step up and provide its public good to the Shadow Banking System. You had the FDIC step up and do the same thing with its public good. And as Paul Volcker was noting this afternoon, you had the Treasury step up and provide a similar public good for the money market mutual funds, using the Foreign Exchange Stabilization Fund. It was a triple-thick milk shake of socialism. And it was good. Again, I’m not being pejorative. I’m being descriptive. ... When my son turned 18, he said, “Dad, I’m now the age of majority and I can do whatever I want.” I said, “Son, that’s absolutely true. However, I still control the Bank of Dad. And if you want to have access to the Bank of Dad, there are going to be rules. If you don’t want access to the Bank of Dad, that’s fine. But if you want access to the Bank of Dad, there are going to be rules.” ... Yes, think in terms of the Federal Reserve and the FDIC and the Treasury as all providing public goods to banking. But the Federal Reserve has got to be at the top of the totem pole, because the Fed truly is the Bank of Dad. The entity that can print money has got to be the lead supervisor. To me, it’s unambiguously clear. And the fact that it’s being debated actually befuddles me. I operate on the notion that self-evident truths should be self-evident. But apparently Washington doesn’t operate on that thesis.--Paul McCulley

Think of eminent domain as the bastard child of Joseph Stalin and Richard Posner. In 2005, the Supreme Court ruled in Kelo versus New London that the government could take your property and give it to a private corporation if that corporation could prove it would bring in more revenue.--Shooting War

There he was, a short, beefy guy with a goatee and a Red Sox cap and a thick Boston accent, and I suddenly learned that I didn’t have the slightest idea what to say to someone like him. So alien was his experience to me, so unguessable his values, so mysterious his very language, that I couldn’t succeed in engaging him in a few minutes of small talk before he got down to work. Fourteen years of higher education and a handful of Ivy League degrees, and there I was, stiff and stupid, struck dumb by my own dumbness. “Ivy retardation,” a friend of mine calls this. I could carry on conversations with people from other countries, in other languages, but I couldn’t talk to the man who was standing in my own house. It’s not surprising that it took me so long to discover the extent of my miseducation, because the last thing an elite education will teach you is its own inadequacy. ... because these schools tend to cultivate liberal attitudes, they leave their students in the paradoxical position of wanting to advocate on behalf of the working class while being unable to hold a simple conversation with anyone in it. Witness the last two Democratic presidential nominees, Al Gore and John Kerry: one each from Harvard and Yale, both earnest, decent, intelligent men, both utterly incapable of communicating with the larger electorate. ... Graduates of elite schools are not more valuable than stupid people, or talentless people, or even lazy people. Their pain does not hurt more. Their souls do not weigh more. If I were religious, I would say, God does not love them more. The political implications should be clear. ... The elite like to think of themselves as belonging to a meritocracy, but that’s true only up to a point. Getting through the gate is very difficult, but once you’re in, there’s almost nothing you can do to get kicked out. Not the most abject academic failure, not the most heinous act of plagiarism, not even threatening a fellow student with bodily harm—I’ve heard of all three—will get you expelled. ... For the elite, there’s always another extension—a bailout, a pardon, a stint in rehab—always plenty of contacts and special stipends—the country club, the conference, the year-end bonus, the dividend. If Al Gore and John Kerry represent one of the characteristic products of an elite education, George W. Bush represents another. It’s no coincidence that our [former] president, the apotheosis of entitled mediocrity, went to Yale. ... if you’re afraid to fail, you’re afraid to take risks, which begins to explain the final and most damning disadvantage of an elite education: that it is profoundly anti-intellectual.--William Deresiewicz

Even though I hope I have persuaded you that purely economic measures of personal well-being are not as narrow as sometimes thought, I have so far dodged the key questions: Ultimately, what makes us happy? What makes our lives satisfying in the long run? And, more subtly, how is the state of mind we call happiness, at least as social scientists define the term, related to our long-run life satisfaction? We can look inward for answers, but, at least for someone trained as a social scientist, the most direct way to tackle the question is just to go out and ask people--lots of people. ... The results of these studies are quite interesting. One finding is that most people consider themselves to be reasonably happy, despite the undeniable hardships that many people face. ... Perhaps people don't want to admit to survey-takers that they are unhappy, but the explanation preferred by most researchers is that human beings are intrinsically very adaptable and are able to find satisfaction in their lives even in very difficult circumstances. ... Ultimately, life satisfaction requires more than just happiness. Sometimes, difficult choices can open the doors to future opportunities, and the short-run pain can be worth the long-run gain. Just as importantly, life satisfaction requires an ethical framework. Everyone needs such a framework. In the short run, it is possible that doing the ethical thing will make you feel, well, unhappy. In the long run, though, it is essential for a well-balanced and satisfying life.--Ben Bernanke

I think it's better to date [in Washington, DC] if you are male. Government attracts a disproportionate share of intelligent women. I've never lived in New York, but there are so many celebrities, billionaires. If you are a guy in New York, there's always another guy that crushes you on the scale. Here, there are all these politicians but they are really out of commission for the most part -- or if they fool around, it's with interns. You don't have to compete with them. The people who are really high status are off the market. As a male in Washington, you can be high in status fairly easily without the true very high status competing. In New York or L.A., there are movie stars and directors. Even if a woman can't be with a movie star, women can still say, 'Gee, this guy or that guy is not a movie star or a director.' There's lobbyists and lawyers here, a lot of them. You can be more interesting than that. This is a great place to live.--Tyler Cowen

When nerds stop being nerds

opportunities for Revenge of Nerds arise.

Letter of the day

Source here.

Posting light today because

my baby had a fever, and I was running around downtown Manhattan last night and this morning, looking for generic infant ibuprofen drops, courtesy of the recall.

Am I tired. Hopefully no fat fingers at work today!

Quotes of the day

I threw away my career. If I knew Jesus Christ was my savior at 17, I would have been one heck of a ballplayer, a near Hall of Famer. Instead, I wanted to die. I played every game high. I was addicted to anything you could possibly be addicted to. I played the out field sometimes where it looked like the stars were falling from the sky.--Bernie Carbo

Quotes of the day

Why did the exchanges cancel trades if they insist there was no glitch?--Heidi Moore

... just because something was true for 100 years, doesn't mean it will be true forever. In fact, stock prices have the odd characteristic of many financial assets: if everyone thinks that something is true, then it's no longer true.--Megan McArdle

The day they get their own plane is the day I downgrade them.--Ronny Gal

Frugality doesn’t mean doing less. It means doing as much or more with less.--William Marth

No one or no one company has a monopoly on investment or ratings expertise. Second grade intelligence and a high [Common Sense Quotient] CQ are a rare combination for an individual rating agency or an investment management firm as well. Still, the rating agencies in recent years have displayed little of either. In addition, they have brazenly sold their reputations for unbiased judgment to the very companies they were standing in judgment upon. Don’t bury them however; like vampires in the dead of the night they will outlast us all. Those looking to profit at their expense, however, will dismiss them. They no longer serve a valid purpose for investment companies free of regulatory mandates that can think with a teaspoon of IQ and a tablespoon of CQ.--Bill Gross

In my view, that issuers pay for ratings may have been necessary for the rating agencies to have done as bad a job as they did rating subprime securities, but it was not sufficient. Many other factors contributed, including, importantly, that rating agencies “drank the Kool-Aid.” They convinced themselves that the transaction structures could do what they were touted as being able to do: with only a thin cushion of support, produce a great quantity of high-quality securities. Rating agencies could take comfort, too, or so they thought, in the past - the successful, albeit short, recent history of subprime securitizations, and the longer history of successful mortgage securitizations.--Claire Hill

I've been against bail-outs from the beginning. So should have all economists. It's reasonable to debate the merits of contracyclical monetary policy. It's not reasonable to debate the merits of rewarding failure on a grand scale. ... My point: One bailout seems to lead to another, but bailouts have to stop eventually. What begins as "too big to fail" eventually becomes "too big to save."--Bryan Caplan

Many market participants are keenly focused on the solvency issue here when in fact, this is a currency crisis. The solvency issue is a byproduct of the failures within the actual currency system. As I’ve said repeatedly, a move to QE would undermine the system’s existence and the dramatic about face by the ECB leaves it with zero credibility in my opinion. The ECB is no longer independent and no longer responsible for price stability. Even with rumors of sterilization, with their bond purchases I believe they have crossed a line. Without their knowing it, they have all but admitted that the Euro is a failed currency experiment and have resorted to “last ditch” efforts to save it.--The Pragmatic Capitalist

I vividly remember taking a class on terrorism in college, in which the professor memorably pointed out, as we were knee deep in debate over The Troubles, "None of you are asking the obvious question: Why the heck do the British want to stay in Northern Ireland? Guinness?" My family hails, a long time back, from bandit country in Northern Ireland, and the question was at first incomprehensible. At the time, Northern Ireland seemed like the most valuable piece of real estate on the planet--emotionally, at least. And yet, my professor was right. It wasn't really adding much to the economic and political life of Great Britain except a big headache. This is sort of the question I had this weekend, watching this gigantic new bailout effort unfold. I understand the tactical and even the strategic value of each individual move. But the goal of all of this eludes me. Is the euro really so marvelous that it must be saved at all costs? How much do France, Germany, etc really get out of Greek euro membership?--Megan McArdle

Weakness in the euro will make a US export adjustment much more difficult, and this will increase trade tensions between China and the US. More intriguingly, the trade imbalance within Europe that is at the heart of the euro crisis is replicated globally, and is just as much at the heart of the global crisis. Both are going to be equally difficult to resolve.--Michael Pettis

The typical pattern during most recessions is for measured labor productivity to fall as good employees are kept on even though they do not have much to do, and as fixed capital is underutilized. Yet productivity continued to grow during most of this past recession. A common explanation for this improvement in productivity is that businesses tried to squeeze more out of their employees and capital because times were bad. However, times are bad during all serious recessions, yet measured productivity usually falls. The EU has had a more serious recession in GDP than did the US, yet EU countries followed the typical patter with reductions in labor productivity during the recession. This growth in labor productivity during the recession of 2007-09 suggests that unemployment may fall more slowly than is typical after a severe recession because growth in GDP will be achieved in good part through further improvements in labor productivity. Why the recovery in employment and in unemployment has been relatively slow, given the severity of the recession, is not completely clear, but I believe one factor is the uncertainty about the policies that Congress and President Obama are impatient to implement.--Gary Becker

Michael Lynn, a Cornell University professor of marketing and tourism, surveyed 374 waitresses and asked them to assess their physical characteristics, including their breast size, and evaluate whether they perceived themselves as attractive. Those with bigger breasts, slender waists and blond hair reported receiving the best tips. High-quality service, Lynn's analysis concluded, had less than a 2 percent effect on tip.--Katie Drummond

I am disappointed but not surprised to learn that female servers with larger breasts receive more generous tips.--Cornell law professor Sherry F. Colb

A law that is too burdensome to pass if it affects the majority probably shouldn't be passed if it's only targeted towards a smaller group . . . precisely because the majority apparently believes that the burden is too large in relation to the problem it solves. Conservatives weren't buying it. Which is weird, because conservatives make this argument all the time, except that it's about taxes.--Megan McArdle

Immigrant kids begin school with surprisingly good social skills, eager to engage teachers and classroom tasks, even though many are raised in poor households. This stems from tight families and tough-headed parenting. Our findings shatter the myth that immigrant or low-income parents necessarily produce troubled children.--Bruce Fuller

Did the author of the Black Swan author last week's black swan?

Shortly after 2:15 p.m. Eastern time last Thursday, hedge fund Universa Investments LP placed a big bet in the Chicago options trading pits that stocks would continue their sharp declines.

On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later. The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.

Then, as the market fell, those declines are likely to have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market.

Trading advice for the day

Use limit orders, not market orders.

If you desire market order behavior, price your order through the bid (on a sell) or offer (on a buy) by a few percentiles.

For example, if you want to sell a stock that is trading $10.00 x $10.01, instead of sending a market order down, send a limit order to sell your shares at $9.80.

Market orders are for suckers.

Quotes of the day

Wall Street has always put its money where its interests and beliefs lie. But it is far less common that so many financial heavyweights would adopt a social cause like charter schools and advance it with a laserlike focus in the political realm. Hedge fund executives are thus emerging as perhaps the first significant political counterweight to the powerful teachers unions, which strongly oppose expanding charter schools in their current form.--Trip Gabriel and Jennifer Medina

If you appreciate the tuning so much, I hope you will enjoy the playing more.--Ravi Shankar

What is elementary, worldly wisdom? Well, the first rule is that you can't really know anything if you just remember isolated facts and try and bang 'em back. If the facts don't hang together on a latticework of theory, you don't have them in a usable form. You've got to have models in your head. And you've got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You've got to hang experience on a latticework of models in your head.--Charlie Munger

The NASDAQ OMX Group (NASDAQ OMX: NDAQ) and NYSE Euronext (NYSE:NYX) are committed to working closely with each other, the Securities and Exchange Commission, other regulators and all market participants to determine the cause of Thursday’s market plunge and to develop effective solutions promoting greater market stability, efficiency and transparency.--NASDAQ OMX and NYSE Euronext

On Friday, several large United States exchanges said that although their trading platforms functioned properly on Thursday, they were nonetheless canceling many trades made during the market’s Big Bounce. Those cancellations applied only to company stocks that were affected directly by apparent malfunctions in computer systems that feed trades into the exchanges. Bets made on the periphery of the financial universe will stand. Investors who owned gold or United States Treasuries, for example, saw big gains as global investors sought havens. But even those gains were small compared with those won by options traders who had placed bets on an index that rises in value when volatility increases in American equity markets. “The guys who probably made the most money in this were options players,” said Larry Tabb, chief executive of the Tabb Group, a financial services consulting firm. Another group of likely winners in the eye-blink rout were investors who had placed “limit orders” on certain stocks. These are orders to buy shares at a fixed price that is often well below where the stock is currently trading. As the selling accelerated Thursday in the computer-driven frenzy, those orders were filled at prices that might have once seemed implausible.--Julie Creswell

Liquidity-PROVIDING algorithms took time outs. Liquidity-TAKERS employed market orders (not limit orders that specify the price for execution) that filled their orders without consideration of how bad the execution price was.--Cav

Hey honey, did you know that Jon Stewart’s brother is a big shot Wall Street executive?--Michael Corkery

The fundamental problem with innovation was that it made investors and executives forget the need to think for themselves. The cost of all these mad-scientist endeavors can be measured in the trillions of dollars that vaporized when the housing bubble burst. But another cost has been the damage done to the whole notion of financial innovation. “The real question is how do we keep the good parts of innovation without being stuck with the bad,” Rajan says. But even a potentially useful idea like the creation of a carbon-permit market to fight global warming is already being dismissed as Wall Street’s “next big scam.” And while the Yale economist Robert Shiller has long advocated using markets to help individuals protect themselves against things like declining house prices or future unemployment, the chances of that happening now seem smaller than ever. Someday, perhaps, we’ll be in the mood to experiment again. But that will happen only when Wall Street remembers that the phrase is “Innovate or die,” not “Innovate and die.”--James Suroweicki

Except for a few short-term opportunists who’ve taken quick profits amid the market chaos, it’s fair to say every man and his dog is short the euro. Europe’s common currency is, after all, facing the biggest crisis of its eleven-year-long life, one that is now stirring fears of a fresh liquidity crisis in the world’s banks. Given the paucity of good policy options for this crisis, where is the euro’s fair value over the medium to longer term? Not surprisingly, currency analysts are calling for a bottom that’s far beneath the euro’s current value of around $1.27. Where they differ is at what level the euro eventually stabilizes and on the speed with which it will get there. ... It’s Catch-22: The only way to contain a euro weakening crisis is to do something that weakens it further.--Michael Casey

If you blinked, you might have missed the ugly first-quarter report last week from Freddie Mac, the mortgage finance giant that, along with its sister Fannie Mae, soldiers on as one of the financial world’s biggest wards of the state. Freddie — already propped up with $52 billion in taxpayer funds used to rescue the company from its own mistakes — recorded a loss of $6.7 billion and said it would require an additional $10.6 billion from taxpayers to shore up its financial position. The news caused nary a ripple in the placid Washington scene. Perhaps that’s because many lawmakers, especially those who once assured us that Fannie and Freddie would never cost taxpayers a dime, hope that their constituents don’t notice the burgeoning money pit these mortgage monsters represent. Some $130 billion in federal money had already been larded on both companies before Freddie’s latest request.--Gretchen Morgenson

Fannie Mae, the mortgage-finance company operating under federal conservatorship, said it will seek $8.4 billion in aid from the U.S. Treasury Department after reporting its 11th-straight quarterly loss. The company said it had an $11.5 billion first-quarter loss in a filing today with the Securities and Exchange Commission. Washington-based Fannie Mae had posted $136.8 billion in losses over the previous 10 quarters and taken more than $75 billion in U.S. aid since April 2009. --Lorraine Woellert

Obama appoints Supreme Court candidate with no bench experience?

I'm sure the outrage will be as vocal as Bush's appointment of Harriet Miers. Not.

I'm sure there were several worthy candidates with lower federal court experience, but their respective track records probably reflected some understanding of and respect for the Constitution.

Color me cynical.

Here is the Intrade contract for Elena Kagan:


She was the front runner, although Merrick Garland and Diane Wood also drew interest when the contracts were first listed back in April. The contracts have not expired, pending Senate confirmation.

UPDATE: William Easterly is much more sanguine. I like his observation:

One interesting aside relevant for today’s previous post. If Kagan is confirmed, the Supreme Court will consist of 6 Catholics and 3 Jews, none of whom would have been considered to fit the core definition of “white” before the mid-19th century in America.

My theory on yesterday's trading

Several people have been asking me about what happened yesterday. Here is the main cause (on which I would put some serious prediction money):

Whatever triggered the initial selling (manual error, European fear, etc), the liquidity-TAKING algorithms kicked into higher and higher gears. Liquidity-PROVIDING algorithms took time outs.

The Takers employed market orders (not limit orders that specify the price for execution) that filled their orders without consideration of how bad the execution price was. (For some stocks, e.g. ACN = Accenture, a $40 name, that price got as low as a penny).

These algorithms-gone-wild will get people fired and will also close down trading shops. Unwinding trades will only keep the risky actors around longer, betting that they will get bailed out down the road.

Darwin Awards should not be returnable. If an idiotic robot offered to sell you AAPL for $200 so you could turn around and sell it for $240, you should do it until the cows come home.

UPDATE: Kid Dynamite rounds up some respectable voices who agree with me.

UPDATE: Evan Newmark wants more regulation? Not his usual modus operandi:

As a believer in free markets, I think it is both useless and harmful to constrict computerized trading. But on days like today, it really puts that belief to the test.

The purpose of a stock market is to provide an orderly and efficient market for the free exchange of equity securities. At the core of the market, there must be a belief that the market is trustworthy, that it can match buyers and sellers, bids and asks.

Today’s market was neither orderly nor efficient nor trustworthy. It was just a bunch of computers making ugly, messy love with each other . And your money hung in the balance.

UPDATE: SEC is on the case. I wonder if we will hear their report in 2010, never mind before Memorial Day.

UPDATE: Randall Lane conjures up the Terminator series.

Photo link here.

Quotes of the day

You can't put more than 2,000 e-mini contracts into the machine.--Rick Santelli

... if the market is going bananas, stand back. Retail traders get screwed in these environments, but only the impatient ones. Don't think you will get out first, the institutions are way ahead of you.--Eric Falkenstein

We were told Thursday night that Bear [Stearns] was going to file for bankruptcy Friday morning if we didn’t act. So how does a solvent company file for bankruptcy?--Hank Paulson testimony to the Financial Crisis Inquiry Commission

The 15 Wall Street employees—20- and 30-something bankers, traders, and former Goldman employees—whom NEWSWEEK interviewed for this piece say they admire the way Tourre foresaw the collapse in the housing market and structured a lucrative deal for his client, hedge-fund impresario John Paulson. Goldman Sachs refused to comment or to pass along Tourre's contact information. "Everyone thinks he has a bit of swagger," says former investment banker and Columbia Business School professor David Beim. "Everyone is cheering for him."--Nancy Cook

I understand that predictions are fun, and it’s only human to want to anticipate what will happen next. I’m all for making conditional predictions based on various public policy options. And I’m all for drawing inferences regarding the implied predictions embedded in asset prices. But the sort of unconditional predictions discussed in the Bloomberg article should be placed in the astrology section of the newspaper. Fun to talk about, but not to be taken seriously. Most economists obviously disagree with me. The top economists are constantly making predictions that violate the EMH. OK, then why not set up a new journal, the Journal of Economic Predictions. Each month they would publish 25 to 30 short predictions about the economy or asset prices. After 30 years we’d have 10,000 predictions, a pretty good track record of whether economists actually had the ability to make useful predictions. --Scott Sumner

... the paper finds high inequality to independently be a large and statistically significant barrier to prosperity, good quality institutions, and high schooling.--William Easterly

Exactly which side was Obama on? He couldn't score any domestic political points with the climate issue. The general consensus was that he was unwilling to make any legally binding commitments, because they would be used against him in the US Congress. Was he merely interested in leaving Copenhagen looking like an assertive statesman? It was now clear that Obama and the Chinese were in fact in the same boat, and that the Europeans were about to drown.--Tobias Rapp, Christian Schwägerl and Gerald Traufetter

On the environmental score there is some good news. The immediate carnage that an oil spill can wreak does not normally lead to lasting environmental damage, though that may not hold for delicate wetlands already under lots of other stress.--The Economist

As I wrote [in 1998], Americans saw “no contradiction in holding down day jobs in the unfettered global marketplace…and spending weekends immersed in a moral and cultural universe shaped by the Sixties.” Democrats were day-trading, Republicans were divorcing. We were all individualists now. What happened?--Mark Lilla

My last book -- not counting a collection, but my last beginning-to-end book -- was a history of Rockefeller Center. I wrote a chapter about how the Rockefeller agents assembled the property, the three square blocks to build it on. And it turned out that those were the three blocks that were the center of the speakeasy belt in Manhattan, and to acquire the ground leases to 228 separate brownstones, the Rockefeller agents had to go place by place by place. I went to the city records to find out how they did it, and I kept on running into speakeasy owners who had more political clout than the Rockefeller family, who were able to stop them at various stages. I said, "Holy cow. How did that happen?" That's always the best way to start a book: how did that happen? Then it became a question of getting interested in Prohibition, and then wondering how did Prohibition happen. That's how Last Call was born. ... The amount of drunkenness -- particularly at the edge of the frontier, in the Midwest, in the rural areas -- was terrifying. Women had no legal rights at the time, and husbands were off getting drunk, drinking away the family money, not doing their work, coming home, hitting their wives, treating the kids badly, sometimes bringing home venereal disease from the prostitutes connected to the taverns. It was a real, real problem. ... These people had a real reason for doing it, and the suffrage movement benefitted from their resolve. The two amendments go into the Constitution within one year of another; they are really siblings, the right for women to vote and the limitation of people's ability to get alcohol. ... So the Populists, who were the primary movers behind the income tax movement, say, "Look, if we can get income tax, that will enable the Prohibitionists to get their Prohibition in, because the government won't need that excise money any longer." The Prohibitionists realize the same thing, and the two groups make an alliance, just as the Prohibitionists and the suffragists did. ... When you move outside of the existing order of law, all sorts of things happen, including women and men drinking together. ... Women and men drink together in a bar? Well, then, you have to have bathrooms for the women. That's the invention of the powder room. That's a phrase that actually comes from Prohibition. They could tuck a tiny little room with a toilet and a sink underneath a stairwell or in a corner. Table service in bars can also be traced to Prohibition, because men and women together, they're not bellying up the bar, but sitting at a table. And the dance band: if you have only men in a bar, you're never going to have a five-piece jazz band there; but you are going to if you have men and women who might dance together. Speedboat design is one of the great examples of Prohibition's inspirational effect. ... By the end of Prohibition, we have a truly national [crime] syndicate rather than a bunch of small-time operators in each city. That's an especially ugly consequence of Prohibition. ... Walgreen's is the excellent example in Chicago; it went from a small handful of stores before 1920 to becoming a gigantic chain -- partly, if not largely, on their business selling liquor legally.--Daniel Okrent

We started out by banning the things. And people kept taking them. So we made the punishments more draconian. But people kept selling them. So we pushed the markets deep into black market territory, and got the predictable violence . . . and then we upped our game, turning drug squads into quasi-paramilitary raiders. Somewhere along the way, we got so focused on enforcing the law that we lost sight of the purpose of the law, which is to make life in America better. I don't know how anyone can watch that video, and think to themselves, "Yes, this is definitely worth it to rid the world of the scourge of excess pizza consumption and dopey, giggly conversations about cartoons." Short of multiple homicide, I'm having trouble coming up with anything that justifies that kind of police action. And you know, I doubt the police could either. But they weren't busy trying to figure out if they were maximizing the welfare of their larger society. They were, in that most terrifying of phrases, just doing their jobs. And in the end, that is our shame, not theirs.--Megan McArdle

The United States in the 19th century had a common currency, but it did not have a large, centralized fiscal authority. The federal government was much smaller than it is today. In some ways, the U.S. then looks like Europe today. Yet the common currency among the states worked out fine.--Greg Mankiw

Congress was incapable of regulating [over-the-counter derivatives].--Christopher Cox, former SEC chairman and congressman

When it comes to Fannie Mae and Freddie Mac, there is a word that regulators and politicians dare not speak. They like to hint at the need to “overhaul” Fannie and Freddie. Or to “reform” it. Or even to “clean it up. But nobody seems willing to say emphatically that the government chartered mortgage giants should be “privatized,” which means that they would function as purely private companies that can rise and fall without government support.--Michael Corkery

Come on! How could you NOT trust a man with a fake tan and a dyed comb-over toupee?--zebrachick83

If [sex] is all you’re after (shame on you) you’d need to value sex at $1,515 for [dating] to be a worthwhile gamble.--Ian Stanczyk

And because it has been around for such a long time, [prostitution] has been optimized so much that you can actually learn a few things from it.--Neil Patel

... an international team of researchers presents their first detailed analysis of the draft sequence of the Neandertal genome, which now includes more than 3 billion nucleotides collected from the bones of three female Neandertals who lived in Croatia more than 38,000 years ago. By comparing this composite Neandertal genome with the complete genomes of five living humans from different parts of the world, the researchers found that both Europeans and Asians share 1% to 4% of their nuclear DNA with Neandertals. But Africans do not. This suggests that early modern humans interbred with Neandertals after moderns left Africa, but before they spread into Asia and Europe.--Ann Gibbons

Overall it seems that women are today more certain about the utility value of their alternatives to a surprise marriage proposal and that means they turn them down. The proposals may seem like harmless "cheap talk" (propose to lots of women above your station in life and thus the custom persists, even if it rarely succeeds), but Google-savvy, credential-savvy women can evaluate men better than ever before and the lower status guys don't get close enough to them to try a shock proposal, much less make it stick.--Tyler Cowen

... if you ask “is Facebook going to last?” Then the answer is no; it’s already dying.--Thomas Baekdal

Teachers are supposed to monitor for cheating. But what if they are the cheaters?

Sol Stern reports:

In plain English: when school districts, prompted by systems like NCLB, offer teachers and administrators substantial incentives to raise students’ test scores, the teachers and administrators will be tempted to find extraordinary means—but not always ethical ones—to get the test scores up.

That’s exactly what seems to have happened. The best evidence of test-score inflation is the growing gap between the number of students that states deem proficient on their own tests—those they administer under the terms of NCLB—and the number deemed proficient by the National Assessment of Educational Progress (NAEP), often referred to as the “nation’s report card.” One reason the federal NAEP tests are the gold standard in student assessment is that they can’t be gamed by teachers or administrators. Every two years, NAEP math and reading tests are given to a statistically valid sample of all fourth- and eighth-grade students in each state; teachers aren’t able to teach to the test, and school districts can’t offer students practice tests because no one knows ahead of time which students will be tested. And in nearly every state in the union, the NAEP exams deem far fewer students proficient than the state’s own exams do.

An even more disturbing phenomenon: states reporting huge gains on their own tests while their NAEP results don’t budge.

Read the whole thing. New York State looks particularly shady.

Gail Heriot talks about the top down approach these days:

After more than a year in office, the Obama Administration has amassed a record not of reform, but of culpable misdirection. Three recent actions tell the story: At the behest of teachers’ unions, Obama himself has signed the death warrant for a cherished Washington, D.C. school choice program. His Department of Education is currently implementing a much-trumpeted civil rights enforcement plan that will make it more difficult for inner city schools to maintain safe and orderly classrooms. Meanwhile, his Department of Justice is arguing in federal court not for the elimination of race-based admissions policies, but for their expansion. None of these is going to do anything to close the racial achievement gap or indeed to improve education for anyone.
...
Consider first the tiny but beloved D.C. Opportunity Scholarship Program. By killing off this education success story, the Obama Administration has proven it can toady up to the teachers’ unions with the best of them.

The D.C. Opportunity Scholarship Program is or was the District of Columbia’s federally-funded school voucher program, providing $7500 in tuition per year to low-income students to attend private schools. The overwhelming majority of its beneficiaries are African Americans or Hispanics. At the height of the program, it allowed over 1,700 students to escape the grasp of D.C.’s dysfunctional public school system and attend quality private schools.

Chart of the decade: S&P 500 from 2-4pm today

The House of Representatives may no longer have large majority

of either party:

Quotes of the day

To a world that denies the God-sparked soul, however, man must remain inscrutable, and so therefore must the world be to man, and God to man, and man to himself. This is the great alienation, not man from his labor, or man from Nature, or man from his mother. But newspapers can’t speak this way, nor can professors or philosophers, and increasingly neither can preachers, which presents to us a future in which we all know something is desperately wrong, but where we no longer have words to name it.--Tony Woodlief

But does all this sexual imagery in the air mean that sex has been liberated—or is it the case that the relationship between the multi-billion-dollar porn industry, compulsiveness, and sexual appetite has become like the relationship between agribusiness, processed foods, supersize portions, and obesity? If your appetite is stimulated and fed by poor-quality material, it takes more junk to fill you up. People are not closer because of porn but further apart; people are not more turned on in their daily lives but less so. ...I will never forget a visit I made to Ilana, an old friend who had become an Orthodox Jew in Jerusalem. When I saw her again, she had abandoned her jeans and T-shirts for long skirts and a head scarf. I could not get over it. Ilana has waist-length, wild and curly golden-blonde hair. “Can’t I even see your hair?” I asked, trying to find my old friend in there. “No,” she demurred quietly. “Only my husband,” she said with a calm sexual confidence, “ever gets to see my hair.” ... She must feel, I thought, so hot.--Naomi Wolf

... pediatricians who had not raised kids themselves were somewhat more likely to subscribe to old wives' tales.--The Canadian Press

... nearly all of the tax-exempt bonds that 251 colleges and universities issued in 2003 would be classified as earning profits from tax arbitrage. --Douglas Elmendorf

We are on the same fiscal path as Greece, but we have more time.--Mohamed El-Erian

Can a Greek bailout work? If by work, we mean prevent the country from defaulting when it's time to roll over its debt this month, then yes, it can and will work. But over the long run? I don't see how it can, barring some sort of miraculous global boom in olives and Greek cruises. As others have pointed out, Greece has a primary deficit of over 8%. Which is to say that even if you make the debt payments go away, the country is only taking in enough tax revenue to cover 91% of its spending. Given how poor Greek tax compliance is, this means that austerity plans will literally have to be on the table no matter what happens: if they default, they won't be able to borrow any more money, and will have to run at least neutral; and if they don't default, they will have to cut deeply in order to make their debt payments. And the Greek population is, to put it mildly, not down with that.--Megan McArdle

It is entertaining that [European Union’s financial services commissioner Michael] Barnier is annoyed at the ratings agencies for being too negative, given all the criticism they have received over the past few years for being too positive on sub-prime debt and related assets.--Jeffrey Miron

Financial salaries, and salaries that are arguably linked to the growth of the financial sector (such as stock options), are one of the most noticeable drivers of rising inequality over the last thirty years. (Although I should note that this doesn't mean they are the largest driver; I went looking for evidence of this thesis back when I was writing about financial sector pay, and couldn't find any. Salaries at the top of almost every profession, from consulting to professional sports, have also been inflating wildly). I am in broad sympathy with this hand-wringing. The large part of investment banking that essentially performs regulatory and tax arbitrage seems to me to be an enormous waste of social resources--though my solution to this problem would mostly be simpler taxes and less regulation. ... Don't worry about poor America, having to struggle along without its Ivy League talent. Worry about what that Ivy League talent just did to our banking system.--Megan McArdle

Any proposal to impose new fiduciary duties on investment banking firms, and
particularly one for criminal penalties for breach of any such duties, is very likely to be ill advised, and should be adopted only after extensive study that takes into account the significant potential costs and risks discussed above. Such new duties and penalties almost certainly will have little or no effect in decreasing the level of fraud in the investment banking industry or reducing systemic risk in securities markets. On the contrary, these penalties may even increase risk and fraud by deterring efficient practices in the securities industry and reducing effective discipline of fraudulent behavior. Clearly in light of these potential dangers, new fiduciary duties and penalties require the most careful and extensive deliberation.--Larry Ribstein

Apparently the man who tried to blow up Times Square is a Pakistani immigrant, rather than one of those violent Tea Party activists as so many of us initially suspected. Who could have known?--Jonathan

Obama vs. Reagan?

The source here.