Worldly Philosophy

Unpaid Internships = Exploitation?

Ravi — Mon, 04 Apr 2011 01:09:06 +0000

In the following New York Times op-ed, Ross Perlin reveals the murky world of unpaid internships:

http://www.nytimes.com/2011/04/03/opinion/03perlin.html?_r=1&src=tp&pagewanted=all

Here is an excerpt:

The uncritical internship fever on college campuses — not to mention the exploitation of graduate student instructors, adjunct faculty members and support staff — is symptomatic of a broader malaise. Far from being the liberal, pro-labor bastions of popular image, universities are often blind to the realities of work in contemporary America.

Over the years, the labor laws have grown increasingly stronger for the workers in the organized sector. Hence, corporations, including colleges and universities, seem to have found their prey in the students eager to make their first foray into the professional world. This article focuses on unpaid internships. However, the plight of underpaid graduate students and adjunct faculty deserve equal attention. Also, one needs to consider the impact of the ever increasing burden of student loans. Consequently, one should not be surprised when the so-called generation-Y turns out to be increasingly self-centered, disillusioned and seemingly lacking in civic participation.

As a counterpoint to our over-worked culture, the following insight by W.H.Davies is especially relevant:

Leisure

WHAT is this life if, full of care,
We have no time to stand and stare?—

No time to stand beneath the boughs,
And stare as long as sheep and cows:

No time to see, when woods we pass,
Where squirrels hide their nuts in grass:

No time to see, in broad daylight,
Streams full of stars, like skies at night:

No time to turn at Beauty’s glance,
And watch her feet, how they can dance:

No time to wait till her mouth can
Enrich that smile her eyes began?

A poor life this if, full of care,
We have no time to stand and stare.

Renaissance

Ravi — Fri, 11 Mar 2011 06:50:35 +0000

After a long sabbatical, I plan to revive this forum as my primary output of thoughts. Taking inspiration from David Brooks’s latest book- The Social Animal- I have also decided to extend the scope this blog to include themes related to the “unconscious” mind. Hence, future posts will be much more diverse than the finance stuff that has been posted so far.

Structured Securities & “Computer Farms”

Ravi — Thu, 19 Aug 2010 17:21:19 +0000

Complexity of structured securities has attracted wide-spread attention for their role in the Financial Crisis which culminated in late 2008. This complexity obscured the extent of risk in the financial system, until the entire system crumbled.

In the following article from FT.com, Professor Donald MacKenzie elaborates on the mind-boggling level of complexity of these financial instruments and the supercomputers required to analyze them:

http://www.ft.com/cms/s/0/8127989a-aae3-11df-9e6b-00144feabdc0.html

An excerpt:

The limits of the language came when mortgage-backed securities were repackaged into collateralised debt obligations (CDOs), complex debt securities based on pools of other assets. You could still run Intex, first for each of the securities and then for the CDO, but it could be a slow process. Often, CDOs included not just mortgage-backed securities, but tranches of other CDOs, each maybe incorporating further CDOs. This multiplied enormously the number of underlying mortgage pools, causing a single valuation run to take hours (emphasis added).

P.S. In an apparent jibe at the current state of finance, this insightful article comes not from a professor of Finance or Economics; but of Sociology.

Finally, a shot at better regulation of Credit Rating Agencies

Ravi — Fri, 14 May 2010 05:49:00 +0000

Financial reform bill is into its second week of debate on the Senate floor. The original bill contains several excellent proposals. The consumer protection agency will rectify some of the informational asymmetry between consumers and financial institutions. I am not entirely convinced with the efficacy of a systemic regulator. Financial institutions, with their deeper pockets, will always outsmart the regulators. However, I support it for its ability to generate currently unavailable information pertaining to systemic risk. Proposals to end “too big to fail” and streamlining the responsibilities of each of the four bank regulators are common sense solutions. Again, I am skeptical of the efforts of reforming derivatives. Derivatives, as financial instruments, have existed even before the development of modern financial system. So, brushing all derivative products as evil, as the current debate has very often done, would be imprudent. However, I am supportive of the proposals that promote exchanges and central clearinghouses over OTC trading. Similarly, I am supportive of reforms aimed at executive compensation, corporate governance, and investors protections.

[My comments are based on a summary of the bill provided by Senate Committee on Banking, Housing, and Urban Affairs; link:http://banking.senate.gov/public/_files/FinancialReformSummary231510FINAL.pdf ]

However, the elephant in the room is reform of credit rating agencies. Armed with SEC recognition, they have become ultimate arbiters of capital allocation in global economy. Small errors in their judgments are likely to cause widespread dislocations in economy, which exactly was the case in the current financial crisis. Moreover, the “issuer pays” model leads to direct conflict of interest. It’s like a student paying the professors who grade their work. Now, the original legislation under consideration had no concrete proposals at correcting either of these problems (you may refer to its summary through the link given above). However, recent developments have made me hopeful.

In a paper for my ECON class, I discussed two possible resolutions:

Author of this paper has a strong preference for free-market solutions. So, he argues for removal of NRSRO status for current ratings agencies. This would open up the market for other firms and possibly improve performance. If this does not happen by itself, he also advocates anti-trust action. These steps would reduce the role of ratings agencies in investment decision resulting in greater emphasis on individual research. It would prevent conformity of opinion and herd-mentality among investors.

Matthew Richardson and Lawrence White at the NYU suggest an alternative approach of greater regulation (2008). They focus on the conflict of interest arising out of payment models. They argue that “issuer pays” model has a recognized conflict of interest issue while “investor pays” model is liable to free-rider problem. As a resolution, they propose centralized clearinghouse for ratings agencies. This clearinghouse would assign the rating tasks based on individual specialization, historical performance, past audits etc. Since the assignment occurs through a neutral agency, problem of ratings arbitrage is resolved. In addition, role of performance maintains the incentive for excellence on the part of agencies.

[Link to Richardson & White paper: http://whitepapers.stern.nyu.edu/docs/white_papers_ch03.pdf ; Link to my paper: http://worldlyphilosophy.files.wordpress.com/2010/05/prescriptions-for-greater-financial-stability.pdf ]

Today, the Senate passed two major amendments directed at the ratings agencies [http://www.ft.com/cms/s/0/68275518-5eb9-11df-af86-00144feab49a.html ]. Both these amendments follow the suggestions discussed in the aforementioned excerpt. So, I am glad to report that the Congress is finally acting on the core issue of ratings agencies. However, there is a strong possibility of these measures being discarded in the merger process between the House and Senate versions of the bill. I urge the visitors of this blog to take a firm stand on this crucial issue and press their respective Congressional leaders to protect these proposals.

Follow up to my recommended read: “The Big Short”

Ravi — Fri, 30 Apr 2010 03:50:31 +0000

For those, who have not been persuaded/impressed by the NPR review of The Big Short in my previous post, here are the (review/promotional) videos on the book from CBS 60 Minutes.

http://www.cbsnews.com/video/watch/?id=6298082n

http://www.cbsnews.com/video/watch/?id=6298084n

These two videos interview Michael Lewis, the author of the book, and Michael Burry, one of the central characters. However, the interviews are far broader in scope and provide an unprecedented insight into the mysterious underbelly of the financial world. A must watch!

Understanding ‘Synthetic Securities’

Ravi — Fri, 30 Apr 2010 06:06:15 +0000

(Warning: Highly technical and jargon-filled language involved)

Steve Waldman from Interfluidity provides an excellent exposition on synthetic CDOs- the latest of the financial jargons to make it to the headlines.

http://www.interfluidity.com/v2/795.html

ECON 238: How the repo market works

Ravi — Fri, 30 Apr 2010 05:48:44 +0000

Simple tutorial from FT.com

http://www.ft.com/cms/s/0/ff20ada4-2385-11de-996a-00144feabdc0.html

How complex are the structured financial products?

Ravi — Sat, 24 Apr 2010 15:01:31 +0000

By now, you must have read/heard several financial gurus emphasize how complicated financial system is, with the introduction of structured products. To get a first-hand idea, check out the following image (from Wall Street Journal) and try to connect the dots:

It traces back an actual mortgage holder from the (now) infamous deal that lead to SEC charges against Goldman Sachs.

You may also check out the actual article on WSJ:

http://online.wsj.com/article/SB10001424052748704133804575198120387721724.html\

Emerging view at Fed on Asset Price Bubbles

Ravi — Fri, 23 Apr 2010 20:13:02 +0000

A speech by William Dudley of New York Fed on asset bubbles:

http://www.newyorkfed.org/aboutthefed/videos.html?bctid=76762791001

Includes latest research from behavioral econ as well as other seminal research on bubbles (check the text version for references of these research).