First time for me at the AoM and it was quite an experience. So, a few initial, quick notes from the poolside in Anaheim.

Daniel and I took part in a session titled Market Devices, which was (apart from a blatant promotion of a book with the same title), actually a very good session. More about this session in a separate post. That session, by the way, was not the best session I attended. In my opinion, the best session was “Financial Markets: an economic sociology perspective”: a set of diverse, but very nice papers, followed by a cracking discussion and comments from Ed Zajac. Again, I will post more about this session later on.

What else? Oh, yeah. We had a little poolside SSF get-together where many of the accomplices in this blog had beers with decent civilians. Among which were representatives of our older brother blog – org theoryBrayden King and Teppo Felin.

Session Title: Market Devices: Understanding the Underbelly of Financial Markets
Submission Type: Symposium | Session Sponsor(s): (OMT, MOC, TIM)
Date & Time: Monday, Aug 11 2008 from 10:40AM – 12:00PM
Location: Anaheim Marriott, Grand Ballroom – Salon F

Session Title: How financial issues impact our organizations?
Submission Type: Paper Session | Session Sponsor(s): (PNP)
Date & Time: Monday, Aug 11 2008 from 10:40AM – 12:00PM
Location: Anaheim Marriott, Platinum 1

Session Title: Market Formation and Construction Processes: What we Know and the Questions we Ask
Submission Type: Symposium | Session Sponsor(s): (AAS)
Date & Time: Monday, Aug 11 2008 from 12:20PM – 2:10PM
Location: Anaheim Marriott, Grand Ballroom – Salon E

Session Title: When Financiers become Entrepreneurs: Understanding Institutional Entrepreneurship in Finance
Submission Type: Symposium | Session Sponsor(s): (OMT, ENT, BPS)
Date & Time: Monday, Aug 11 2008 from 2:30PM – 3:50PM
Location: Anaheim Convention Center, 210D

Session Title: Financial Markets: An Economic Sociology Perspective
Submission Type: Symposium | Session Sponsor(s): (BPS, OMT)
Date & Time: Tuesday, Aug 12 2008 from 8:30AM – 10:10AM
Location: Anaheim Convention Center, 202A



When we use cash do we ever really stop to think about how it is made? 


After reading The Story of the American Bank Note Company by William H. Griffiths (1958), I inspected my paper money.  I happen to have several types of five unit currency in my wallet – euros, CND and US dollars.  There are two common anti-counterfeiting devices that are common to all three bills which become visible when they are held up to the light.  Embedded in each is a thin band running vertically and off center with the currency amount written on it.  Secondly, they have shadow images that repeat the picture featured on the face of the bill: in the Canadian and US bills these are people (Sir Wilfred Laurier and Abraham Lincoln); in the case of the Euro it is a repetition of the architectural form.[1]


A fascinating aspect of money is its material history – the ways in which it was physically confectioned and by whom, to resist counterfeiting and ‘raising’ (adding value through alteration).  The American Bank Note Company was once responsible for printing the paper currency in the United States.  It started as an association of private engraving firms in 1858.  In 1879, it became a single consolidated company following an act of Congress in the wake of the Civil War stating that “not more than one printing on a National Currency Note could be executed by a private organization, and that the final printing must be done by the Treasure Department” (p 48).  The company went public in 1916.


Methods of security printing have developed incrementally out of a kind of a technique called ‘intaglio’ where lines impressed into a surface are filled with ink and run through a steel-plate printing press.  Uniformity has been key since the comparison of a bill against one known to be genuine is a simple way of revealing forgery.  As Griffiths points out however, “while the general tendency of industry is to eliminate the personal characteristics of individual craftsmen, bank note engraving carefully continues them, even stresses them, because, despite all technological advances, the counterfeiter’s most baffling problem in the unique personality of the artist which the engraving process transmits directly to the document.” (p 11)  Thus the artistry and innovation of master engravers has mattered enormously to defeating unauthorized duplication.  One such technique is the ‘geometric lathe’ a machine that engraves a unique repetitive pattern according to particular settings use to make the distinctive figured borders on U.S. notes.  These early techniques have been supplemented by more ‘scientific’ ones, such as printing serial numbers in private formulas of contrasting inks.


The same techniques used for printing paper money (also used for postage stamps) were an important part of issuing stock and bond certificates.  In 1874, following numerous cases of fraud, Edwards Barndon, then Chairman of the New York Stock Exchange’s Committee on Securities, announced that it would require “all future applications to place Securities on the List, that they shall be carefully engraved by some responsible Bank Note Engraving Company”.  He further recommended “that Certificates of Stock of One-hundred Shares should have the denomination conspicuously engraved thereon, and that Certificates of lesser denominations should be of a different style and color” (p 46),  It follows that ‘bond paper’, invented and named by Zenas Crane, refers to paper impregnated with parallel silk threads for printing bonds and currency.  And it was engraver Asher Durand who popularized the convention of placing “Greek gods and goddesses in vignettes on documents of value” (p 29).

The techniques of security printing have a specific history.  Although notes, stocks and bonds are different ‘dispositifs of value’, it is interesting to consider how they were once literally, visually and physically assembled by the same producers.  Moreover, many of these production techniques – in and of themselves a distinct means of ‘making value’ – seem to have circulated out of this precise commercial location of invention, into government agencies and throughout the rest of the world.  It is indeed noteworthy that The American Bank Note Company printed bills for Greece and Columbia as early as 1862; in 1912, the newly formed Chinese Republic put in an order for notes; during WWI it was hired by the U.S. treasury to reorganize the Bureau of Engraving and Printing as well as to assist in the issuance of savings bonds and stamps; and in 1952 it began printing United Nations postage stamps – just to name a few of the company’s important customers.


That we no longer inspect each bill as we receive it may be a sign of our trust in money; but it is a trust that has been empirically established out of the widespread success of its material production as a ‘thing of value’.




Griffiths, William H. The Story of the American Bank Note Company: American Bank Note Company, 1958.


[1] There are other security features that are not shared by all the bills.  When held up to the light, a five appears in the middle of the Canadian bill, while the incomplete 5 in the top left hand corner of the Euro bill completes itself.  Moreover, the Canadian and Euro money has a shiny holograph bearing silver band running down each side.


This has nothing to do with financial markets, at least not directly. But, what an inspiring polticial speech! (and how often can you use ‘insipring’ and ‘political’ at the same sentence?)

On Friday, crude oil prices jumped in a new all-time high: the benchmark futures contract of light sweet crude was traded at US$139.54 in New York.

This new record was attributed to a comment by Iranian-born Israeli deputy prime minister, Shaul Mofaz, who said that: “If Iran continues its nuclear weapons program, we will attack it. Other options are disappearing. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear program.”

The news stories did mention that the context for this comments is the primaries in Kadima, PM Olmert’s party, where Mofaz is a contender and that it is likely that the comments were made for ‘domestic consumption’. The reaction to the statement shows that in today’s highly connected markets distinction between the local and the global cannot be made easily. Mofaz’s Israeli political bravado injected volatility to global oil markets. Such effect, in itself is dangerous enough, of course, but the other ‘leg’ of the reflexivity circle is potentially even riskier. In fact, this side of the phenomenon may feed a social loop that can place Iran and Israel on a sure collision course.

How so? Mofaz is now aware of the impact that his words have on markets. However, if anyone may think that this would serve as a lesson and that future comments would be less vehement, then they do not know the Israeli political discourse. Mofaz will now celebrate his influence on global oil markets and will use last week’s price rise as leverage for creating more political capital. Moreover, the reaction to this comment will motivate Mofaz and other Israeli politicians to outdo it and to have even more impact. So, as long as the scandal-ridden Olmert government is haemorrhaging support we should expect increasingly more flamboyant statements from Israeli politicians about Iran, more volatile markets and a steady progress to the brink of a (possibly, nuclear) war in the middle east.

The news of Eliot Spitzer’s fall from grace as the governor of New York following the exposure of his patronage of a high end prostitution outfit called the Emperor’s Club, is being largely reported on as a ‘sex scandal’. Interestingly enough if you can get beyond the issue of moral disgrace, the judicial core of the charges hinge upon the details of his financial transactions. In addition to possible charges for having violated the Mann Act, which banns the interstate transport of females for ‘immoral purposes’, federal investigators are pursuing Spitzer for having potentially engaged in ‘structured cash transactions’. As reported on in the New York TimesUnder the Bank Secrecy Act, all financial institutions are required to file currency transaction reports with the federal government for any deposit or withdrawal of more than 10,000.” (This is the reason why the blue and white U.S. customs cards ask people to report whether they are carrying in excess of $10,000 in financial instruments into the country.) Structuring’ (IRS Manual, Section is the act of breaking up cash transfers over several transactions to avoid being detected and is considered a felony. In short then, it is the govenor’s methods of payment more so than his sexual practices that are of central legal concern. Apparently, however (according to the same NYTimes article quoted above) “If the governor was simply trying to conceal his activities from, say, his wife, it would be considered different from trying to deceive federal authorities.”

For a brief but informative NYTimes radio account of structuring click here, and then on clip featuring Gerald L. Shargel, a criminal defense attorney commenting on the legal issues of the case. For the story of the woman whose services unleashed the storm, see here.

Roach on recession.

March 6, 2008


Op-ed, New York Times

Stephen Roach, chairman of Morgan Stanley Asia, thinks there’s ‘Double Bubble Trouble’ in the air.  In an op-ed today he argues that the situation in the U.S. looks a lot like Japan in the 1990’s.  Commenting on Washington’s recent manoeuvres to mitigate the onset of a recession – aggressively lowering interest rates, negotiating relief for homeowners, OFHEO’s uncapping Freddie and Fannie – he observes that:  “If the American economy were entering a standard cyclical downturn, there would be good reason to believe that a timely countercyclical stimulus like that devised by Washington would be effective. But this is not a standard cyclical downturn. It is a post-bubble recession.”  His frank assessment?  For asset-dependent, bubble-prone economies, a cyclical recovery — even when assisted by aggressive monetary and fiscal accommodation — isn’t a given.”  Gulp!

Nobel prize winning economist Joseph Stiglitz and Linda Blimes (lecturer in public policy at Harvard’s Kennedy School) have just released a new book entitled The Three Trillion Dollar War (published by the incomparable Norton Press).   The title, plastered all over the press, gives away the basic argument: it’s a calculation for the estimated cost of the war.

Like all good financial figures, this is a projection – an estimation that includes future costs, such as the long term responsibility of providing health care to disabled veterans.  (For a visual image outlining the argument see here).

An estimate of the actual costs of the war is available on a moving counter at the National Priorities Project website.  It is noteworthy that two years ago, the suggestion of a one trillion dollar war was still barely believable. 

The Stiglitz and Blimes book, released yesterday is available on Amazon, where, in the US at least, it’s selling for a curious 32% off the cover price.   And incidentally, Fox News, which publishes many trillion dollar reports, had nothing to say about it.  Guess their book reviewer can’t read as fast as Charles Taylor, who must have stayed up all night to get his review in to Bloomberg today.

As situation diffuses everywhere and asunder, I though it might be interesting to collate a few notes, gathered from mainstream press reports, on the stages of the current global credit crisis and the impending recession…   

1. crash (2001): The popular story – after the terrorist attacks and the fall out of the bubble, risk wary investors redirect their capital into something secure and substantial – housing: ‘There’s no investment as quite as safe as houses’!  The shift is assisted by an historic FRB interest rate cuts. Based on a classic model of how monetary policy can be worked to produce macroeconomic stability, Alan Greenspan sustains liquidity in the money supply by aggressively lowering the cost of borrowing.

2. Housing bubble (2001-2005):  U.S. real estate undergoes an extraordinary acceleration leading to a ‘speculative housing frenzy’, part of a worldwide rise in real estate prices that The Economist has famously called “the biggest bubble in history”[i].  Defying sound economic expectations, the price of real estate rises “more in real terms [between 1997 and 2002] than in any previous five-year period since 1945”[ii].  The median home price surges from $177,000 in Feb 2001, to $276,000 in June 2006.[iii]  A steep increase in home equity creates more than $5 trillion in wealth a five year period, the equivalent of $70,000 per average family of four. [iv]  Through various ‘cash out’ refinancing programs and other novel home financing products, U.S. homeowners treat their houses like ATMs.  They converted inflating home equity into immediate spending money, pulling over 700 billion dollars (roughly 5% of the GDP in 2004 alone[v]) out of their homes.  Real estate’s biggest bull, David Lereah, chief economist at the National Association of Realtors NAR, boldly claims that real estate is “the only sector propping up the economy and keeping it from a full-blown free fall” [vi].

3. Housing correction (mid 2005 –ongoing): The peak of the boom is the middle of 2005.  Through the end of the year public commentary remains reassuringly optimistic but within a matter of months trading volumes in real estate have begun to slow, stagnate and then to decline.  Word of a bubble, which had previously remained within the parley of professional economists and elite commentators, spills into the public at large.  A Wikipedia entry titled ‘United States housing bubble’ appears in May.  In July, only 23% of Americans polled by Gallup are familiar with the term ‘housing bubble’, but a year later the figure has jumped to 40%.[vii]  By August, Robert Toll of Toll Brothers  – “the nation’s premier builder of McMansions”[viii] – is publicly stating that the downturn was unlike anything he’s every seen.  In Jan 2006 the buzzword is ‘soft landing’[ix] indicating a general acceptance that the market is indeed cooling, but betraying a widespread hope that things will slow without prices collapsing.  It’s the beginning of a ‘market correction’ for those, like Ben Bernanke, who prefer not to use the word ‘pop’.[x] 

4. Subprime mortgage crisis (end 2006-ongoing): At the tail end of 2006, default rates shoot up in segment of the mortgage market called the ‘subprime’ that has received little attention in main stream reporting.  The subprime is a class of borrowers with ‘blemished credit records’.  These homeowners have been “exposed to the multi-featured, exotic, exploding, non-traditional – whatever the name you have for them”[xi] mortgage products.  Alternative credit products typified by the ‘option adjustable rate mortgages’ (ARMs), are hit with bad press.  (A 2/28 ARM signifies that the payment schedule is set for two years at a low interest rate, after which payments and interest will fluctuate for the remaining twenty eight years of the loan.)  ARMs are openly condemned as “the riskiest and most complicated home loan product ever created”[xii].  During the boom however, ARMs have flourished, accounting for as much as 20% of the sizable loans volumes being underwritten in 2005 and 2006.[xiii]  The unconventional structures of ARMs prove vastly more sensitive to a slowing market and the interest rate hikes that are gradually imposed by the FRB.

5. Subprime securities crisis (2007-ongoing):  By the end of the first quarter, twenty five specialized ‘subprime mortgage lenders’ have gone into bankruptcy, announced losses, or are putting themselves up for sale because they are unable to raise sufficient cash flow from rapidly defaulting borrowers to pay their securities holders.  Regulators and the public discover that the high-risk loans issued during the buying frenzy had been packaged into bonds in the form of residential mortgage backed securities (RMBS) and pushed through to the secondary markets.  During the boom, money poured into RMBS doubling their amount to a record $476 billion.  As “a segment of the market that was once Wall Street’s darling”[xiv] falls into the proverbial doghouse, Standard & Poor’s begins massively downgrading the credit ratings on mortgage backed debt securities, an official red flag of their deteriorating quality.[xv]  Wall Street and the lending industry tightened their belts and clamped down on the underwriting of all loans classes that have fallen out of favour with investors. 

The press announces that the flight to quality “will be most severely felt by minority and poor home buyers and owners, who will face trouble refinancing adjustable rate loans that they can no longer afford”[xvi].  The U.S. Senate Committee on Banking, Housing and Urban Affairs begins hearings titled ‘Mortgage Market Turmoil: Causes and Consequences’ (March 22, 07), and consumer advocacy groups call for a moratorium on foreclosure as well as for an infusion of federal bail out funds to support payment-stressed families.  In total “[n]early 2 million ARMs are resetting to higher rates this year and next”[xvii] throwing as many households into what has elegantly been termed ‘payment shock’.  The NAR forecasts that in 2007, the U.S. will see its first drop in the median sale price since the Great Depression (April 12th, 07).[xviii]  In an attempt to stem the threat of foreclosures, treasury Secretary Henry Paulson unveils a plan that involves no federal monies, but would freeze rates for five years on some categories of exotic mortgages originated between Jan. 1, 2005, and July 31, 2007.

5. Global credit crunch (mid 2007-ongoing):  Bear Stearns discloses that the two subprime hedge funds have imploded amid the rapid decline in the market for subprime mortgages (July 16, 07).  BNP Paribas freezes three funds (Aug 9, 07).  WJS reports that the slowdown in mortgages lending had extended to other forms of U.S. consumer credit.[xix]  A general drought in the credit markets brings an end to 46 leveraged financed buyouts.[xx]  And as the Dow tumbles 387 points, the European Central Bank pumps $130 billion into the financial system, the U.S. Federal Reserve $24 billion[xxi].  In the midst of this, CDOs – structured packages of securities backed by bonds, mortgages and other loans more complex that RMBS, which have reached $503 billion, a fivefold increase in three years – hit the mainstream press.  In general, it’s not clear just where the bottom tranches, th ‘toxic waste’ of these investments are, but at least some are have worked their way into retirement and pension funds.[xxii]  The corporate ‘victims’ of the crisis start piling up:  Stan O’Neal CEO of Merrill Lynch retires (Oct 28, 07); Prince steps down as head of Citigroup (Nov. 5, 07); James Cayne of Bear Stearns resigns (Jan 7, 08).  Then come the write downs: Wachovia, $ 1.7 billion (Nov, 10, 07); BofA $3 billion, (Nov 14, 07); Morgan Stanley, $9.4 billion (Dec 20, 07); Bear Sterns, 1.9 billion (Dec 20, 07); Citigroup, $18 billion (Jan 15, 08); JP Morgan Chase 1.3 billion (Jan 16, 08).   It is estimated that Wall Street’s largest banks and brokers will be forced to write down as much as $130 billion and losses may reach $400 billion.[xxiii]    

6. Recession (Jan 2008):  Talks start to help bailout bond insurers such as Ambac Financial. The markets continue to experience high volatility and the Feds cut the federal funds rate twice, back to 3-1/4%, in a bid to stop the onset of a recession.  After a weak holiday season, U.S. consumer spending slows…[xxiv]  [To be continued.]

[ii]The Economist. ‘As safe as what?’. Aug 31, 2002 

[iii] Bob Ivry. Foreclosures May Hit 1.5 Million in U.S. Housing Bust (Update 3). Bloomberg March 12, 2007

[iv] Dean Baker. ‘The Housing Bubble Fact Sheet Issue Brief’ Center for Economic and Policy Research. July 2005 

[v] Edmund Andrews.  ‘Most Homeowners Not Overly in Debt, Fed Chief Says’ NYTimes. Sep 27 2005   

[vi] David Lereah. Why the Real Estate Boom Will Not Bust – And How You Can Profit from It, Currency Publishers. 2006

[vii] Hubert B. Herring. ‘If No One Whispered ‘Housing Bubble’, There’d Be No Worry’ NYTimes April 30, 2006

[viii] Paul Krugman. Op-Ed. NYTimes August 25, 2006

[ix] Stephanie Rosenbloom. ‘The Power of Words’ NYTimes Jan 29, 2006  
[xi] Daniel Mudd. Fannie Mae President and CEO Remarks, Delivered January 31, 2007 to Citygroup, 2007 Financial Services Conference  
[xii] Mara Der Hovanesian. ‘Cover Story: Nightmare Mortgages’ Business Week Sept 11, 2006

[xiii] Victoria Wagner. ‘A Primer for the Subprime Problem’ Business Week March 13, 2007    

[xiv] Vikas Bajaj. ‘Freddie Mac Tightens Standards’ NYTimes Feb 28, 2007  

[xv] Vikas Bajaj. ‘Rate Agencies Move Towards Downgrading Some Mortgage Bonds’ NYTimes July 11, 2007;  Bloomberg News, July 13, 2007

[xvi]  Ibid.

[xviii] James R. Hagerty. ‘Realtors Predict Price Drop, Lower Forecasts for Sales’ April 12, 2007  
[xx] Victorial Howley et al. ‘Credit Chill Freezes Leveraged  Deal’ WJS Aug 3, 2007  

[xxi]  Tomoeh Murakami Tse an David Cho. ‘Credit Crunch In U.S. Upends Global Markets’ Washington Post Aug 9, 2007  

[xxiv] Michael Barbaro and Louis Uchitelle. ‘Americans Cut Back Sharply on Spending’ NYTimes Jan 14, 2008;  Shobhana Chandra and Andy Burt ‘U.S. Recession is Now and Even Bet as Spending Slows’ Bloomberg Feb 8, 2008

Comment on ‘Last year’s model: stricken US homeowners confound predictionsBy Krishna Guha and Gillian Tett The Financial Times, Comments and Analysis, January 31, 2008 19:01

Story The Financial Times raised an interesting question this week about changes in consumer repayment behavior, and the failure of mathematical models to keep up to these changes in relation to the subprime mortgage mess. It would seem that a statistically visible number of consumer have been opting to continue repaying their credit card bills and car loans even while defaulting on their mortgages. This contradicts conventional wisdom which suggests that rather than risk foreclosure, households would prioritize the home over small debts, paying mortgage payments first and foremost when in financial trouble.

Malcolm Knight, head of the Bank of International Settlements, summed up this new pattern of repayment as follows (quoted by Guha and Tett):

“Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of the house, or have negative amortization mortgages, keep paying off their credit card balances but hand in the keys to their house… these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities.”

The article goes on to suggest two possible reasons for the change in behavior that escaped the mortgage default models: first that it may be due to cultural changes that lessen the stigma associated with missing a payment or loosing a home, and second that people may no longer have an incentive to pay mortgages where the loan-to-value ratio has become excessively high with dropping property prices. That is, they’ve decided it’s just not worth it.

Implications Drawn to its logical conclusion, what this piece implies is that on a large scale the American consumer no longer minds having their property taken away from them and might even willingly abandon it once they’ve calculated that it’s too expensive. Hmmm. That sounds kind of… doubtful. Consider the gushing tears and suicidal thoughts of precarious homeowners featured so prominently in Scurlock’s (albeit melodramatic) documentary, Maxed Out. It’s unfortunate that these financial journalists, who appear to live across the pond in London, only had access to macro data. If they had had the chance to come over and investigate the actual practices of American consumers up close, they might have considered dropping culture and economic rationality – two of the falsest friends the social sciences have ever confabulated – and discovered some more plausible reasons to account for this new consumer behavior. Hint – it’s a risk model. FICO® consumer credit bureau scores which receive so much attention in consumer circles – and almost none in the financial press related to the mortgage crisis – are one of the key pieces of information used for matching loan products to consumers in the U.S. In 2001, after pressure from consumer groups started to build in Washington, the scores were released to the public which is now able to purchase access to their scores (see So consumers know a thing or two about how the models work, and there is plenty of advice in circulation to tell them how to behave accordingly. What is ironic is that the scores only came to public attention after they were adopted by the Government Sponsored Agencies (GSEs) in 1995 as a sub-component of their automated underwriting programs (Loan Prospector® at Freddie Mac and Desktop Underwriter® at Fannie Mae). From there they worked their way through the mortgage industry into the securities underwriting models (such as S&P’s LEVELS®). Interestingly enough, no mortgage data used to calculate FICO® scores, which were originally designed as risk indicators for small consumer credit, supporting in particular the credit card industry. They were never redesigned to accommodate the mortgage markets because the bureaus have traditionally not had access to mortgage data.

Conclusion Since these scores are the obligatory passage point to further consumer credit and play a role in refinancing – i.e. getting out of a subprime loan, getting another mortgage… and so on – a move to preference credit cards payments over home loans would probably not have much to do with a growing indifference towards foreclosure. Rather it would be a performed consumer response targeted at protecting their precious risk scores. Not convinced? Remember the Paulson Plan released in December? It suggested interest rate freezes on ARMs but would have limited these to cases where the borrower had a FICO® of 660 or more. This means that the category of people the federal government will agree to rescue pay their credit card bills faithfully and on time… even when they can’t afford their mortgages. In this light, paying credit card bills would be a way of waving a white flag that cries out ‘help me (I’m helping my self)’, and not at all a way of bailing out of an overpriced home. If we can consider changing consumer behavior a form of getting it right, then at least one risk model didn’t get it wrong… At least, not this time.