The importance of being clear

A formatting fubar involving an Excel spreadsheet has left Barclays Capital with contracts involving collapsed investment bank Lehman Brothers than it never meant to acquire.

Working to a tight deadline, a junior law associate at Cleary Gottlieb Steen & Hamilton LLP converted an Excel file into a PDF format document. The doc was to be posted on a bankruptcy court's website before a midnight purchase offer deadline on 18 September, just four hours after Barclays sent the spreadsheet to the lawyers. The Excel file contained 1,000 rows of data and 24,000 cells.

Some of these details on various trading contracts were marked as hidden because they were not intended to form part of Barclays' proposed deal. However, this "hidden" distinction was ignored during the reformatting process so that Barclays ended up offering to take on an additional 179 contracts as part of its bankruptcy buyout deal, Finextra reports.

The Register has the full story. As Merv has always warned, 'horrible things happen when you hide cells in excel'.

I see this as a manifestation of a wider lack of education on the importance of communicating information efficiently. The Spartans, Tufte, Strunk and White, the Economist, Picasso and numerous econometricians have done a lot to improve things, but management-speak, TV advertising and other such phenomena show we still have a long way to go.

Bailout tidbits

In case you missed it, Friday saw a hell of a meeting:

The intense discussions reportedly saw US Treasury Secretary Henry Paulson literally down on one knee, begging Ms Pelosi to help push through the bail-out package.

It looks like economists may have had something to do with the plan bein' stalled and all:

Republican Senator Richard Shelby moments ago on CNN explaining why the tentative deal reached earlier today is bunk:

"If 200 of our economists say the plan is flawed we should listen to them."

Here's the statement by the actually 192 economists.


And last but not least, Greg Mankiw's smart friend discovers a free lunch - go no further than point 1.

Why $700 billion?

I was wondering about that. Zubin Jelveh has the answer:

[...] There are roughly $14 trillion in outstanding residential and commercial mortgages and five percent is also roughly the loss rate on those categories, he added. Five percent of $14 trillion is = $700 billion.

Nice.

"It's not science," Bernanke said.

Losing money to avoid the risk of losing money

There are two main reasons people don't want government interfering in private markets:

1. The rule of law. No-one can be referee and player at the same time, and government officials should not be allowed to use their discretion to benefit one player over another.

With the Paulson plan, not only will there be discretionary action on a vast scale, but it also looks like there will be a minimal degree of accountability. This is not specific to the current plan however: any 'solution to the crisis' requires discretionary, arbitrary actions by the Treasury and Fed.

2. Government is inefficient. It is likely to make a mess of things and waste taxpayer money, so if something can be handled by the private sector it should be.

What I find funny with the Paulson plan is that instead of doing something to address this worry, it actually guarantees that taxpayers' money will be wasted. The fund is limited to buying worthless securities, so it doesn't even allow the possibility the taxpayer might turn a profit or even minimise the loss. It boils down to preferring to lose money instead of running a risk of losing money.

And what makes this even more remarkable is that the current environment is the best possible for government to actually make money by investing in financial markets. Following standard commentary, the biggest problem right now is not that there are gigantic losses in the system, but rather a lack of liquidity and a lack of trust. Government is the unique institution right now that enjoys an abundance of both, and in any economic system whoever controls the scarce resource is amply rewarded.

A plan along those lines, albeit one which I think could be improved, is described here. The Economist blogger's reaction is telling:

I get the feeling that a bigger hurdle to the latter plan than any real concern would be a gut Congressional reaction against the government taking equity stakes in a broad array of American corporations.

The Zingales plan also has much to recommend it, although it wouldn't be my first best option.

For my take on the long-term solution to the problems in the finance industry, tune in later this week.

Many (other) serious people think the Paulson plan sucks: see Naked Capitalism, Politico, and of course Tyler Cowen and Greg Mankiw.

The destruction that Lehman wrought

Empires came crumbling down, blood flowed on the trading floors and the real economy quickly headed for the Great Depression mark II. The collapse of Lehman Brothers led to a true Black Week, as predicted by numerous self-serving bankers.

Only it didn't.

The Dow fell from 11260 four days ago to 11060 yesterday - that's 200 points, or 1.8%. When future dictionaries define 'disaster', they will not be displaying this picture by means of example:

(Source: Yahoo finance)

Now, the worse is not necessarily over, and markets might yet crash as a direct result of this week's events. There is still a not-so-reassuringly-low probability this blogger will have to eat his words in the not so distant future. But so far it looks like Lehman's demise caused no more than a shrug.

It really is impressive how quickly the lessons of Bear Stearns were not only understood but also put to action by the bankers (be sinister and wait long enough, and the Treasury will give you a bank for free.) Yet, it is even more impressive how the government put an end to the emerging orthodoxy.

A proud week for everyone fighting on the taxpayer's side. Public officials, I salute you!

In the long run it's only redistribution, and redistribution is a good thing: Thoughts on the subprime crisis, part 1

Assume house prices fall by 50%. Heck, assume stock prices also fall by 50%. As Tyler Cowen notes, no houses are dynamited. No factories are burned to the ground. No people are shot. In short, no resources are used up. We, as a society, have exactly as much material wealth as we did before.

At the end of the day, a massive fall in asset prices is nothing more than a transfer of resources from people that hold a lot of assets to people that hold few assets.

In fact, it is very difficult to argue that a fall in asset prices is not in fact a good thing. Asset-heavy individuals tend to be rich(er) than asset-light individuals. We, society, value redistribution. In fact, we value it so much that we impose highly distortionary taxes to achieve it. A massive fall in asset prices means that we now get a lot of redistribution with none of the distortionary effects.

One more thing: Tyler says 'Most of the costs of overinvestment in housing already have been borne in the form of lower living standards, namely we have fewer non-housing goods and services.' Of course, this implies that as P went up, Q supplied went up as well - but the housing market is a bit different to regular markets. In crowded European cities at least, Q is constained by the planning system, which responds to price changes very slowly and not necessarily in the direction a profit maximising supplier would. Given that the opportunity cost of utilising your land for housing is extremely low (how much do you think agricultural land is worth?) if you can get permission to build you do so as long as construction costs are less than the price the house will command (a near certainty for any development reasonably near to civilization).

In other words, high house prices are unlikely to have had a massive effect on building activity, thus driving a misallocation of resources on a grand scale. Strictly speaking, it is the land price bubble that burst; not the housing bubble.

You can't get more politically incorrect if you try

Israel's deputy defence minister has said Israel will have "no choice" but to invade Gaza if Palestinian militants step up rocket attacks.

Matan Vilnai said Palestinians risked a "shoah", the Hebrew word for a big disaster - and for the Nazi Holocaust.

"We're getting close to using our full strength. Until now, we've used a small percentage of the army's power because of the nature of the territory," he added.

From BBC News. And the follow-up:

[...] many of Mr Vilnai's colleagues have quickly distanced themselves from his comments and also tried to downplay, them saying he did not mean genocide.

Jerome Kerviel

FRIENDS of rogue trader Jerome Kerviel last night blamed his $7 billion losses on unbearable levels of stress brought on by a punishing 30 hour week.

Kerviel was known to start work as early as nine in the morning and still be at his desk at five or even five-thirty, often with just an hour and a half for lunch.

One colleague said: "He was, how you say, une workaholique. I have a family and a mistress so I would leave the office at around 2pm at the latest, if I wasn't on strike.

"But Jerome was tied to that desk. One day I came back to the office at 3pm because I had forgotten my stupid little hat, and there he was, fast asleep on the photocopier.

"At first I assumed he had been having sex with it, but then I remembered he'd been working for almost six hours."

As the losses mounted, Kerviel tried to conceal his bad trades by covering them with an intense red wine sauce, later switching to delicate pastry horns.

Well, that should finally be enough proof that the whole 'lump of labour fallacy' thing is an evil Anglo-Saxon conspiracy to destroy ze vorld. All credit to the Daily Mash for the scoop.

Datacharmer explains the ongoing Anglo-Russian spat

They started it!

A nation mourns

Looks like the worst is past now, and we can finally breath a collective sigh of relief.

There's much to be said, but I will keep this short. I am sad about the state of Greek journalism; however the resilience exhibited by the country's young political institutions a mere three weeks before a general election can only fill me with pride. There lies hope in the ashes.