Monday, January 28, 2008


Monday morning in Foster City.

The sun broke through this morning after last week's storms. We only have a few hours to get in our natural Vitamin D fix before the rains return.

The TV ads and phone calls from the political campaigns (we're not picking up, so the voicemail speaker adds to the household din) will ratchet up until Super Tuesday, Feb. 5th. However, we should be safe on Sunday afternoon; any politician who dares interrupt the Super Bowl may as well concede now.

A derivatives trader has lost €5 billion (over $7 billion) for the French bank, Société Générale. He didn't enrich himself directly; it appears that he was trying to make back his losses by means of fraud and ever-riskier bets just to protect his job.

Today's Wall Street Journal distills what happened into the following graphic:

In our rapidly changing complex world (clichés are overused because they're true) advances are so rapid that we don't have time to design and install controls that will protect against disaster without bringing the whole enterprise to a screeching halt. The bright people who can understand the system well enough to play defense are making a lot more money and glory by pushing the envelope forward, not by trying to watch the(ir) rear.

I can't wait for the same regulators that stopped future Enrons by giving us Sarbanes-Oxley to weigh in on what kinds of hedges are appropriate for which kinds of forward contracts. So I hope the banks and finance companies enjoy this interlude; if they think their audit bills are high now, they ain't seen nothing yet. © 2008 Stephen Yuen

Friday, January 25, 2008

The Hair of the Dog

The stimulus package’s tax rebate has gotten the publicity, but many in the Bay Area are eyeing another provision more intently:
the tentative package - which still has several hurdles to clear - essentially rewrites the definition of "jumbo" loan, raising the cap from its current $417,000 to as high as $729,750 in high-cost areas for one year.
Mortgages below the jumbo loan limit are guaranteed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae and Freddie Mac are quasi-government agencies, and most believe that their guarantees---although this is nowhere explicitly stated---are as good as guarantees by the U.S. Government.

If lenders don’t want to hold the paper, they can flip below-jumbo (“conforming”) mortgages to other parties easily because the buyer is comforted by the implicit government guarantee. This proposal, if it passes, should arrest or at least dramatically slow the fall in real estate prices in California.

Other Notes:

1) Government guarantees prop up prices (related post below) in stocks, alternative energy, real estate, or whatever market we’re talking about. Using more government guarantees is using the hair of the dog to get us out of some of what put us in this mess in the first place.

2) The mortgage proposal will produce a break on the interest rate, but borrowers still have to pay back the principal. Still, the benefit can be significant. If the Chron article is accurate in its statement that the savings on a $650,000 mortgage are $417 per month, the total difference over a 30-year term will be $150,120. Compared to this annuity, the 2008 one-time tax rebate is a pittance.

3) One hopes that loan application procedures will be much tighter than they have been in the past six years. As one attorney noted last month,
fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.
At least put a stop to this behavior going forward. How many got rich is enough to make an angry populist out of anyone.

4) Any time you have a significant financial boondoggle with an expiration date—in this case one year---the tax, legal, and financial experts start devising structures to extract the maximum benefit (for example, if your new, custom-built home won’t deliver until late 2009, someone will figure out how you can still get the benefit). Watch for the same people who gave us the subprime mess to start hawking products based on aspects of the stimulus package. © 2008 Stephen Yuen

Wednesday, January 23, 2008

Talking is What They Do

Tyler Cowen has a post on a phenomenon that I’ve been pondering:
As the primary elections are coming up it is interesting to note that so many of the contenders are lawyers, something that is also true of the members of Congress, where I believe half are lawyers. Why are so many US politicians lawyers?
Vis-à-vis the race for the presidency, the question should be more specific: why are the Democratic contenders all lawyers? The professions of the leading candidates before they entered politics are:

Hillary Clinton, lawyer
John Edwards, lawyer
Barack Obama, lawyer

Rudy Giuliani, lawyer
Mike Huckabee, minister
John McCain, naval officer
Mitt Romney, investment banker

This contrast between the parties’ leading candidates is not surprising. The attorneys’ bar pretends to be impartial but law is one profession, like mass media, entertainment, and academia, whose members overwhelmingly gravitate to the Democratic Party. I’m going to posit some reasons--just based on my limited experience--about why lawyers tend to be liberals and/or Democrats, but I do believe them to be true.

Lawyers have superior verbal skills and can out-debate intelligent people, such as engineers, doctors, and bankers, who’ve chosen other professions. Because they win every argument, lawyers believe deep down that they are smarter than everyone else. The reason that government hasn’t solved most problems is that too many conservatives have been in charge; conservatives are too dumb (just look at their policy positions) to run government, and besides, their heart isn’t in it anyway. (A Republican President can’t decide between managing the Department of Education or abolishing it.) Lawyers believe that through sheer force of their intelligence they will succeed where others fail.

But being the leader of a large organization is a humbling experience. Brilliant speechifying or looking good on the front page of the New York Times is not sufficient to make you successful. You have to learn to delegate, motivate and monitor your employees, most of whom don’t want to work 24/7 on your pet causes. You have to balance your resources between achieving long- and short-term objectives, all the while hoping that a 9/11, a bird flu epidemic, a Hurricane Katrina, or a financial markets crisis doesn’t hit you from left field and everyone asks why you weren’t on top of it.

But all you have to do is assemble a good team, you say? But if you haven’t had a lot of experience hiring and managing, your instinct might be to hire people in your own image, i.e., other brilliant lawyers and academics. However, these people are not accustomed to subordinating their egos to work in the hierarchical executive, much less suffering the fools who will be reporting to them.

I’m not saying that a lawyer can’t manage the Executive branch or that because a President went to Harvard Business School he’ll be an effective Executive. Management experience is just another element for us to consider---albeit one that I deem important---and why I’m disappointed that New Mexico Governor Bill Richardson and former Vice President Al Gore are not in this year’s race for the Democratic nomination. © 2008 Stephen Yuen

Tuesday, January 22, 2008

Rate Cuts Don't Work this market. Despite the Federal Reserve's 3/4-percent rate cut, the highest since 1982, the Dow is more than 100 points lower as of this writing.

Prices are collapsing not because interest rates are too high but because a much higher discount for risk is being priced into financial assets. Put another way, if you were a bank lending officer, would it matter much if you charged 6%, 8%, or 10% on a loan if you thought the borrower had a good chance of defaulting? You can ask for more collateral, but those values are dropping as well.

From the comfort of my easy chair, it's obvious what the government can do to stop this market free-fall. It could prop up prices by buying assets, ignoring cries of socialism and moral hazard. Or, less directly, it can make loans on a nonrecourse basis (the lender can take the collateral but not come after the borrower for any further deficiency to the loan amount)to buyers of financial assets. The government would be (and is) the risk-absorber of last resort, but because the game would be changed permanently such steps should be taken only if we were worried about a collapse of the international financial system.

Every ten years or so there's a financial "crisis" to remind us that good times don't last. Fear, uncertainty, and doubt are good for the soul. Enjoy! © 2008 Stephen Yuen

[Addendum: Why have markets tumbled? The Economist says it appears to be an old-fashioned case of risk aversion.]

Sunday, January 20, 2008

Mature Perspective

23-year-old Honolulu Advertiser reporter Kim Fassler blogs about moving out of her parents’ house:
even if monthly rent makes a significant dent in your paycheck, you ought to weigh that cost with the cost of your sanity, and the benefits of freedom, independence and real world experience [snip]

Think also of the benefits to your relationship with your parents. Mom and Dad will want to take care of you as long as they are able. But when you still have the needs of a child, there is a tendency for parents to treat you as such, and that's not healthy for either you or them.
A mature perspective from one so young (we also were on our own at 23, but that was a different era.)

My late uncle told me he envisioned a bright future for his granddaughter, and she’s on her way with a degree from Williams and a paying gig at one of Honolulu’s two daily newspapers. We're proud of you, Kim!

Saturday, January 19, 2008


Despite the gloomy near-term prospects for the economy, one glimmer of hope is that venture capital investments in U.S. startups climbed to a six-year high of $29.4 billion in 2007. Some of the smartest investors on the planet are not pulling back but opening their wallets. The next Apple, Genentech, or Google could be gestating a few miles away.

Sunday, January 13, 2008

Remembering Linda

Yesterday the sun sparkled in Marin County when over 300 of us said goodbye to Linda Pei at Tiburon Presbyterian. I met both Linda and her future husband Jim in graduate school over 30 years ago. Her beauty attracted all the male students, but it was her kindness and inner strength that made everyone want to be her friend.

Linda’s family fled China after the war. Despite much hardship she obtained an Ivy League education and an MBA degree from a top-ten school. She founded one of the first “theme” investment funds, the Women’s Equity Fund, in 1993. Being financially successful was important, but for Linda that was secondary to having a purpose that would make the world a better place.

Linda wasn’t a Janie-come-lately to athletics, having been an avid tennis player and cyclist for as long as I’ve known her. She was in much better shape than most of the crowd that came to remember her yesterday, and that’s what made her diagnosis and death from cancer last year so unexpected and hard to accept.

Both Jim and Linda had peripatetic exciting careers and raised two considerate, intelligent children. I’ll miss her and regret not speaking to her more often when I had the chance. Those who knew her intimately said that at the end she was more concerned about them than herself and that she had no regrets about how it all turned out. “A life well-lived” indeed. © 2008 Stephen Yuen

Monday, January 07, 2008

Growing Suspicions

on Flickr by MumbleyJoe
When the kids were small, we were members of the San Francisco Zoological Society. Our monthly visits were all-day outings—a 40-minute CalTrain trip from the Peninsula to the San Francisco station at 4th & Townsend, then a transfer to the 30 Stockton bus to Market, and finally another transfer to the L Taraval for the 45-minute ride cross-town to the Pacific Ocean. The kids enjoyed the sights, sounds, and rhythms of the City, and I enjoyed a respite from driving and fighting for a parking space.

The zoo is nestled at the west end of Golden Gate Park. Shielded by trees, the zoo is peaceful and uncrowded, especially when the fog rolls into the park in the late afternoon. Experienced Bay Area residents know that even on sunny days it was wise to bring one’s jacket if one stayed until closing. At dusk the setting is quiet, and that’s why the escaped-tiger incident on Christmas Day is incongruous and distressing to those of us who know and love the zoo.

The large cat exhibit has been the center of media attention since the Siberian tiger named Tatiana killed one man, injured two others and was itself killed by police. While the zoo could have strengthened (and is now strengthening) safety by raising the height of the enclosure walls, we never felt any danger from the cats. When we were lucky enough to see them out of their dens, they were usually lying down with their eyes closed. After a couple of minutes of gazing at a sleeping lion, the boys would grow bored and want to move on to the snake and insect displays.

Internet commenters were quick to blame the injured men for the Christmas Day tragedy, saying that they taunted and threw things at the tiger. But there have been too many well-publicized pilings-on where the initial take was completely wrong, and discretion called for letting the investigation take its course. (It’s also easy to rush to judgment when the victims are members of a cohort---young men of South Asian ancestry---whom we are ready to believe could have acted this way.)

Nearly two weeks after the incident, here is some of what we know about the injured Dhaliwal brothers.
An empty vodka bottle was found in their car.

The younger brother was intoxicated at the time of the incident, having used marijuana and consumed enough liquor to have a blood-alcohol level above the .08 limit for adult drivers. The older brother also had been drinking and using marijuana.

The Dhaliwals have hired celebrity attorney Mark Geragos to represent them and have refused to allow their cellphones to be examined by police.

Jennifer Miller, who was at the zoo with her husband and two children that ill-fated Christmas afternoon, said she saw four young men at the big-cat grottos - and three of them were teasing the lions a short time before the tiger's bloody rampage that killed 17-year-old Carlos Sousa Jr. [Who was the fourth man, and did the group then transfer its attention to the tigers?]
And now, the latest observation by way of the early responders: “Don't tell them what we did," paramedics heard 23-year-old Kulbir Dhaliwal tell his brother, Paul, 19.”

Yes, the zoo should have done a better job protecting the patrons, but if it were up to me these guys wouldn’t get a cent. Any award ought to go to the family of Carlos Sousa, who by all reports wasn’t party to the provocation and died trying to protect his friends. Now there’s a case I could get behind.
© 2008 Stephen Yuen

Tuesday, January 01, 2008

Happy New Year

At the stroke of midnight I poured a sip of “champagne” for everyone. The bottle was Costco’s Kirkland brand and cost $20. It was the thought that counted, since no one in the household drinks except for me (for medicinal reasons, of course). Nevertheless, the sparkling liquid was surprisingly crisp and light.

In a couple of days we’ll be heading north, college graduate in tow, to a year of new pathways, discoveries, and uncertainties. He and we will be leaving behind some old possessions, a sofa bed, a TV (a 22-year-old Toshiba, the best we’ve ever owned because it never required repair), some chairs, and a table. They are destined for people who can make better use of these things south of the border.

How little in fact is different from January 1, 2007. The post from one year ago:
It has been another good year. A few mild infirmities are nagging for attention, but as of today we have no unmanageable health worries.

We bade farewell to some dear friends, again reminding ourselves that life is short and that we should make the most of the time we have.

We earned more than we spent; still, we’re a long way from being free of monetary worries.

Our children are progressing fitfully toward the day they will be self-sufficient, although the precise day and time no man can know.

From one year ago :

We have our home, our health, each other, and hope for the future. That’s a lot to be grateful for.

Happy New Year!
© 2008 Stephen Yuen