Archive for the ‘Economy’ Category

Service of the Pulse of Christmas 2010

Monday, December 20th, 2010


Here are some observations of this holiday season:

**I passed by a silent Salvation Army bell ringer yesterday and looked to see why he was quiet and if he was OK. He was texting.

inline**An officemate, Bambe Levine, told me about her happy experience at J. Crew. She went to return some boots last week and had 20 minutes to spend before her lunch date. Her heart sank when she saw a line that, in spite of a generous number of cashiers, promised to take at least 40. She asked a manager if she might leave the boots and return to wait in line after lunch. The manager said to her, “Let me take care of it,” and did so immediately.

**Meanwhile, I tried for several days to buy a gift at a boutique in Grand Central Station. Can’t go into too much detail as 1) the recipient reads these posts and 2) I don’t bash brands here. The staff was pleasant yet clueless. I hung around for over half an hour waiting for one to bring the size I requested from basement storage. Nobody seemed to realize that people have other things to do. Eventually, I told the cashier that I had to get back to the office and she suggested I return after work, which I did. The item wasn’t upstairs yet. She promised the basement retrieval man would call me. He never did. I gave it another try on Friday and this cashier couldn’t have been nicer, more apologetic, and she repeated how responsible the man is both before and after she found the gift in the back room. To sweeten my mood [my face wasn’t happy when I had to wait at the back of the line to pay], she gave me her employee discount.

**Unforgiving sticky price labels continue to plague gifts I buy. The hairdryer trick to dry the adhesive so I can scrape off the price works although it takes forever; burns my fingers and gets glue on the appliance. This year, the heat melted some of the packaging which is annoying. Simple solutions: Barcodes on sticky labels combined with prices clearly marked on store shelves just as they are in grocery stores.

**Garish, tasteless trees are the style in office lobbies this year-minus gifts for children that have been there for as long as I can remember. What a sad turn of events. Some tinsel is better than nothing. It could be June in the lobby of my office building where there’s not the tiniest nod to the season. Menorah lights and a simple wreath–I know just the place–would cheer.

xmas2010wreathsmall2**An anemone greenhouse/tree farm outside Rhinebeck, NY has traditionally sold beautifully decorated wreaths. Normally, if you don’t go early in the season, they sell out. We dropped by yesterday on a whim. They still had quite a selection, and the wreaths were slightly discounted.

**ABC TV covered the Santa letters program in “Sad Santa Letters Tell of Economic Woes, USPS Says. New York’s Operation Santa Chief Says More Letters This Year Asking for Coats, Food.” Pete Fontana, who directs the USPS New York Operation Santa, said: “Though many considered last year to be the toughest financially since the economic downturn, it appears that more people are struggling this year, both from the letters and the decreased amount of volunteers who sign up to fulfill some of the writers’ wishes.” There’s a website of participating post offices if you want to pick up a letter and fulfill the wishes of some of the neediest writers. Wouldn’t it be great to win the lottery in time to pick up all those letters and fulfill the wishes?

 Any changes–good and bad–or observations to share about this holiday season?


Service of Risk Management: Derivative Contracts

Thursday, August 19th, 2010


We are very fortunate to have a guest post from a seasoned financial expert, Zachary. Get on your thinking caps, readers. He is addressing a crucial if complicated subject with which we need to become familiar, if we aren’t already.

Derivative Contracts as Risk Management Tools

Laymen, and even some financial professionals, can be excused for being confused by media coverage and government pronouncements about derivative contracts.  Most of this material has been prepared either by non-professionals with little actual knowledge, or by high-level professionals whose written product is replete with specialized vocabulary and statistical concepts that most people do not have the background to understand.

Contrary to the impression given by the media, derivatives are not at all a new concept.  They are contracts whose value comes from (is “derived” from) the value of a specified commodity, or risk-based financial instrument. 

farmerThe earliest contracts arose in agriculture, when farmers would attempt to protect the value of a crop that could not be sold until a later date.  They would enter into a contract today to sell all or a portion of their crop at a specified future date at a specified price, thus, in effect, insuring themselves against possible declines in market prices.

As international trade grew, buyers and sellers had an additional risk factor to deal with in the form of possible changes in the value of foreign currency.  They would approach their bankers to assist them with this problem, and the banks, in attempting to manage their risks with foreign currencies, developed active foreign exchange markets, and various types of derivative contracts (i.e. contracts whose value depended on foreign exchange rates) to manage that risk. 

contractOver time the tools for accurately valuing these contracts became progressively more sophisticated.    By the mid-1990s, it was possible to enter into derivative contracts covering such arcane things as ocean freight rates, and bunkers (fuel) for ships.  Various trading houses began to use derivative contracts, in combination with a variety of other financial instruments, to create the complex financial instruments that many people believe were at the heart of the financial meltdown [that many others feel is not yet over].

Historically, derivative contracts were instruments created in order to allow the parties to the contracts to manage or control various risks they faced in the economic environment. They served a bona fide economic purpose, and could generally be considered a good thing.  I would like to emphasize this point, because it was the abuse of these contracts, using self-serving risk management practices that resulted in the problems we experience today.

Risk Management for Derivatives

riskmanagementThe first step in any kind of risk management is to measure the cash flow from all the instruments in the portfolio.  In complex portfolios, the calculation is itself complex:  so complex in fact that it could not be done with the then existing technology.  

Before the advent of cheap computing power, therefore, risk managers simply made assumptions:  typically, that the risk was 15% to 20% of the face amount of the contract. This approach lacked precision, as the percentage was arbitrary.

Note: Much of the media discuss derivatives in terms of the face amounts of the contracts, known in the trade as “notional amounts.” But the actual amount at risk is, with very few exceptions, far less than the notional amounts.  This is because as long as there is an active market in the commodity or financial instrument to which the contract refers, the parties may acquire another contract taking the opposite risk direction. 

An important corollary: Notional amounts are poor, highly misleading measures of risk.  They do not take into account risk positions in the opposite direction: In fact, such offsetting risk positions are added to the total notional amount, rather than deducted from it, as would be more appropriate.

On the other hand, risk management professionals focus on the NET amount at risk, as they should, [not the face amounts].

computerpowerStatistically based Value at Risk [VAR] systems, made possible only by the availability of large amounts of cheap computing power, were the next phase in the development of risk management principles. VARs have dominated the market for quite some time.  This concept calculates the potential risk in derivative contracts on the basis of historical variations in their prices. As a general rule, bank regulators have pressed banks to use very conservative measures–three standard deviations rather than two, for example–and then require additional allowances for high stress situations.  This is referred to as “stress testing.”

As risk management principles became more and more statistically based, they were increasingly sensitive to a) the actual variation and relationship between the factors; and b) the intensity of the stress situations.   

Long Term Capital Management (LTCM), a hedge fund manager active in the early 1990s, was owned and staffed by people with expertise with complicated statistical models. They believed their models, and at times stretched the credibility of underlying relationships.  For example, a transaction based on Russian Government bonds was hedged with oil price derivatives, on the theory that Russian Government bonds would move to some degree along with certain Russian oil prices.  When the transaction failed, it turned out that the resulting losses were much larger than anticipated.  In statistical terms, the stress was way beyond what was expected. 

bottomlineThe LTCM Russian transaction was not a normal banking transaction.  However, 10 years later, bankers were still structuring transactions in which they tried to hedge risks by accepting as fact statistical relationships that had no basis in reality.  There has been little change: For example, transactions were structured to hedge the values of securities issued on the basis of underlying mortgages, without taking into account that the underlying volatility of real estate-based securities was inherently much greater than for other interest bearing securities.  This was because of the relationship between interest rates and mortgage re-financing: As interest rates decline, mortgage re-financing tends to increase as borrowers act to reduce their costs.  The faster that rates decline, the greater will be the level of re-financing. The “bottom line:” The value of these securities is highly volatile, materially impacting the risk to the parties writing credit derivatives on their value.

Derivatives can be a valuable part of any risk management strategy.  However, if they are not governed by sound risk management practices (including but not limited to conservative reserving) they can be counterproductive and dangerous. Abuse and media hype have added to both the confusion and hysteria.

Here’s your opportunity to ask an expert your questions about risk management and derivatives!


Service of Ensuring Work

Friday, August 13th, 2010


A friend and reader of this blog, DB, wrote me last week and inspired a post about jobs and helping others keep theirs. The subject is spot-on in this economy when it is jobs–or lack of same–that many, including me, think is causing this economy to flounder.

She wrote: “In fast food places, I like to leave my tray on the table and full of my used food plates and wrappers rather than carry the garbage to the trash bin and the tray to the stack in a holder. I’ve noticed that people with disabilities frequently work as table clearers. I feel that my deliberate neglect allows such citizens not only to provide a service-but also to keep a job.”

fastfoodDB continued: “Am I being rude or am I more thoughtful to add to the load of the person who was hired to do this menial task? This question plagues me every time I knowingly do not clean up after myself.”

For the same reason, another friend, PE, refused to use the New York City subway/bus MetroCard when it was introduced for fear of putting token booth attendants out of business. Her prediction was accurate: Today there are few token booth people to sell MetroCards [or to guide and guard customers on subway platforms]. The option of buying tokens is gone.

atmmachinePE also refused to use ATM machines. She wanted to help ensure bank clerk’s jobs.

I believe in progress and using technology to run an efficient business. Using paper cards instead of metal tokens and computer-driven machines [when they work] instead of people fits. Paper and machines cost less.

I never thought I was endangering a person’s job by cleaning up after myself in a place that expects me to do so, but DB makes a good point. Using this train of thought we have all added to the problem because computers have removed the need for millions of office and factory workers. I don’t know what I’d do without my computer. Sure she gets sick like a person and misses days of work until the computer doctor can pay a visit, but when she works, she’s a godsend.

What do you think is the most effective way to help ensure others’ jobs? Or instead of trying to save jobs, should we be focusing on creating real, long lasting ones? Like what?  The pundits don’t seem to know.


Service of Today’s Economy

Thursday, August 5th, 2010


I’ve noticed some changes around where I live and work caused by this economy.

couponVenture outside on the streets of New York, even on the hottest days, and you can return from a short walk with a fistful of coupons and postcards enticing you to come here for a specially priced chicken wrap or there for a reading by a fortune teller. You’ll have a special offer on a haircut or a free soda with sandwich and chips. I walk a lot year ’round. It’s the number of handouts that is new. Printers, Kinkos, Staples and other copy places must be having a heyday. And there’s work for the people doing the handing out.

The once-wonderful, thick, creamy fruit smoothie-with-yogurt that I treat myself to on occasion, for which I pay a premium, had a lot more ice than yogurt last week. In addition, it didn’t fill the cup. It used to. Or maybe the smoothie maker was new at the job.

I was surprised by an article in The New York Times the other day that addressed commando tactics by citizens fighting over taxis. I avoid taxies, especially in summer. They are boiling hot and expensive so I can’t chime in here from recent experience [though I have a few nasty tales to tell from a time I did use them a lot. This mugging a fellow citizen over a taxi story is nothing new.]

In fact, until last Wednesday night, I thought that the article may have been an anachronism. We emerged from the RR station loaded with stuff, exhausted from an intense day out of town, hoping to pile into a cab and there wasn’t a single empty one. Eventually, we discovered that President Obama was in town, moving between fundraisers, and realized how lucky we were not to have found a cab only to sit still for 20+ minutes until his cortège passed by. Which begs the question as to whether the economy is experiencing an uptick, leading to people fighting for taxis, or whether there are fewer taxis on the road, causing an inadequate number and subsequent kafuffles? Who knows?

pizzaWe’ve had a 99 cent pizza shop a block from our midtown office for two+ years. As of the last month, we have two more, one, once a knickknack tourist joint turned pizza maker, is across the street and the other is a block in the other direction. I don’t think there’s an Italian among the lot. With a nod to the global economy, most of the pizza chefs seem to be Indian.

I watch the empty storefronts in the neighborhood as though I were in real estate, my heart breaking for businesses gone bust. At the same time, I rejoice when I see a business entering a place that has been empty. Half of what once was a very large card shop will house a new restaurant bakery. A spa, on another block, has “warehouse sale” signs in the window. It’s filled with cheap looking men’s clothes. I haven’t been in the store and don’t know what the suits and shirts cost. I saw a handmade sign declaring, “Three ties for $100.”

What, if any, changes have you noticed where you work and live?


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