This Month In Medical Science

Posted by Matt at 6:01 PM Tagged with: , ,
Aug 222011

Some interesting medical advances have been made recently, and I thought I’d share a few headlines with my readers.  These stories are pretty easy to miss.  Even though humans are figuring out cool things all the time, for some reason they don’t make headlines unless someone dies or cheats on his wife in the process.

  • We’re used to thinking of bacterial infections are curable and viral infections as something you just deal with–through riding it out, dying, or simply living with it.  Researchers at MIT think they’ve come up with a novel method that might be able to cure people of viruses (potentially lots of them–or to hear the press distort the claims of the researchers: every virus ever known to mankind will be cured by this one simple therapy).  They call it DRACO (Double-stranded RNA Activated Caspase Oligomerizer).  I think a catchier, more memorable, and more descriptive name would be: Selective Cell Suicide.  Basically, their technique induces infected cells to shut down before they can be used by invading viruses to breed more virus cells.  Think of it as a microscopic scorched earth policy.  If it works, this could change the world.  If it doesn’t, it’s still a neat step forward.
  • Scientists are my alma mater think they’ve found a new way to treat leukemia.  I’m going to nickname this one the “Teenage Mutant Ninja T-Cell” strategy.  What these scientists have done is extract ordinary T-cells (part of the body’s immune system, which is usually inadequate to beating leukemia on its own) and modify them into superhuman leukemia-fighting mutant T-cells.  Then they take Leo, Don, Raph, Mikey and all their tiny little friends and reintroduce them into the original body.  Think of it as taking a small contingent from your body’s natural defenses and putting them through special forces training.  That’s way more awesome than lab work.  They’ve only tried it on 3 people so far, but 2 of them are in complete remission.
  • You can’t teach an old dog new tricks, but German scientists have taught some new dogs an old trick.  This is not the first group of scientists to train dogs to sniff out lung cancer, but hopefully as more studies confirm that canine noses are at least as good as expensive technological equivalents, we’ll see more dogs finding work in the medical sciences.  There are a few awesome implications of this research, but the one I’m most excited about is a future in which dogs in white coats and spectacles are called in for oncology consults in hospitals.

Happy Monday.

Science and Technology No Responses »

S&P Q&A (Or: Everybody Loves Ampersands)

Posted by Matt at 1:11 PM Tagged with: ,
Aug 112011

Dear Readers: Thanks for all the feedback, questions, and requests for a follow up post to my latest entry detailing a few of the ways in which rating agencies suck.  I’ve taken many of your questions and prepared a special Part II, which will look a lot like I’m interviewing myself.  Rest assured, though, that most of the questions being asked came from actual conversations with, or messages from, readers like you (though probably not as good looking and brilliant).

I saved the most popular question for last: “How can we fix it?”  (Feel free to skip ahead.)

Q: Aside from the obvious impending macroeconomic disaster, what makes this downgrade so noteworthy and stupid?
From my perspective, two things make this downgrade particularly noteworthy and stupid:

  1. This may be the only downgrade in history in which the downgraded bonds became MORE VALUABLE.  I’m going to repeat that: Treasury bonds became more valuable AFTER the downgrade.  Why’s that?  Well, the downgrade happened; people started panicking; and investors seeking protection sold off stocks (in a massive way) to move their money into the SAFEST INVESTMENT THEY COULD FIND.  What were those miraculously safe investments you might ask?  That’s right, freshly downgraded securities issued by the Treasury of the United States of America!  Treasury markets had a strong rally while everything else fell off a small cliff.  Clearly the markets don’t agree with S&P in thinking that the United States has a significantly higher risk of default, which brings me to…
  2. We got a debt ceiling agreement, and the credit rating went DOWN.  Forget absolute risk for a moment.  Forget other countries, forget history, forget the letters and calculations and analysis and politics.  Just consider the following: What was the default risk a few weeks ago?  This was when Congress was threatening to force a government default if they didn’t get political concessions (with at least 90 Tea Partiers in the House who actually thought a default might be GOOD in the long run).  How likely were we to default then?  During that whole negotiation the United States was AAA rated.  Now, AFTER THE DEAL (which ensures we’ll be solvent for quite a few years), we get downgraded?  Find me anyone on the planet, aside from a rating agency employee, who honestly believes the United States is riskier now than it was before the debt ceiling increase.  Seriously, I’d like to talk to that person.  (If S&P had lowered the rating during the negotiations and then raised it back to AAA once we had a deal, then I might be OK with the move.  Instead, they did the exact opposite.)

Q: If S&P sucks so much, why do we care what they say?
A: Unfortunately, a lot of people still listen to them.  And even beyond that, a lot of entities (ranging from governments to union pension funds to hospitals) had so much faith in them at one point that referencing to ratings exist in formalized policies.  There are laws, bylaws and policies on the books that say things like: “This pension fund must have 75% of its fixed income investments in securities rated AA or better by all 3 major rating agencies” or “The portfolio managers will only invest in AAA rated securities.”

Like it or not, ratings matter.  These agencies were given a hugely influential place in our financial system and tasked with being the credit watchdogs.  The predictable human forces of greed and laziness have not enabled these entities to do their jobs well.

Q: How is it that other places in the US [like Montgomery County in Maryland] can have a AAA rating while the United States of America does not?
It’s worth noting that the rating agencies have separate scales, and Sovereign Nations are their own self-contained entity.  I agree it’s kind of confusing to use the exact same ranking method for every scale they have, especially when the ranking system in place isn’t anything special.  These letter grades confer no special advantage in clarity of precision–if anything, they actively detract from those laudable goals.

Q: No, seriously, wtf?  All those subprime mortgage bonds had AAA too?
Look, I’m not saying S&P is corrupt, but the banks paid the rating agencies for each and every bond issue that got a rating.  Countries, on the other hand, don’t pay the rating agencies anything.

Q: How good are the ratings in general?
In general, ratings loosely correspond with creditworthiness.  But what an investor cares about is default risk (meaning: “How likely am I to get my money back with interest?”).  Noted statistician and mathematical busybody Nate Silver found (using data available to everybody) that a country’s Debt-to-GDP ratio alone is a better predictor of default risk than an S&P rating.  This means that S&P spends weeks and weeks worth of man-hours to destroy (or at least hide and obscure) information about creditworthiness.  It also means they contribute literally no value to the process (at BEST).  Oops.  He also found that S&P ratings are biased toward favoring European countries (how’s that working out for you, Greece/Spain/Italy/Suckers?).  And he made the same point I did about how unbelievably slow S&P is at taking into account new information.

Q: How do the rating agencies actually do the analysis?
Quite poorly.  They send a team (it can be as small as a couple of guys) to go to a country and dig around for about a week.  They have meetings with officials, request documents, evaluate financial information, and make their own assessment of the political climate (fun fact: all S&P analysts are extremely well trained political scientists or historians…nah, j/k).  Then they have some meetings; there’s a committee (to which the entity being rated can usually make a presentation or appeal); and then they slap a rating on it.  For the United States, they put a little more work into the analysis than they do for an average country, but their standards for “sufficient” are surprisingly low.  Also, as I mentioned in my last post, their quality standards are at least equally low (see: the 2 trillion dollar error they made then ignored).

Q: OK, Mr. Smartypants, if you’re so smart, how would YOU do it?  It’s easy to criticize a complex system that will invariably contain some errors, but do you have any better ideas?
Glad you asked.  Here’s a very short list of ideas that would make everything better:

Government Sponsored Enterprises (GSEs), or something similar
Fannie and Freddie are a special kind of entity known as a GSE or Government Sponsored Enterprise.  Fannie and Freddie are quasi-private organizations (which have shareholders), but they are also in part an extension of the government with a mission to operate in financial markets with the goal of achieving a policy objective.  Ratings should work in a similar manner–rating agencies should be at least partly answerable to the government above shareholders.  Pure profit-seeking doesn’t work in this field.  A microeconomist could break down the many ways in which this leads to market failures, but suffice it to say you wind up with informational asymmetries, natural monopolies (or at least oligopolies), and a massive incentive to worsen or create new informational asymmetries for personal profit.  The goal of rating agencies should be to make better information available to everyone.  But given the massive conflicts of interest faced by these organizations (who get paid by the people they’re rating), it would be almost impossible to make substantial lasting improvements while S&P, Moody’s and Fitch operate as profit-maximizing corporate entities (there’s just too many ways to make money by screwing over other people).

The details can change, but the basic argument here is that something needs to be done to better align the incentives of the rating agencies with the incentives of the people who use the ratings (and there’s a problem when the money comes from firms who profit off the ignorance of the people who use the ratings).

Stop The Letter Grades
The letter grades are obscure and confusing.  There are multiple scales, all with an identical grading scheme, and it’s very hard to interpret what they mean.  It’s also incredibly difficult to tell exactly how risky S&P thinks an investment is.  And under the current multi-scale system, it’s sometimes IMPOSSIBLE to determine which bond is a higher risk in the eyes of the rating agencies (for example, what’s riskier: AA rated countries or AAA rated states like Delaware?  Good luck getting an answer).

Let’s Use NUMBERS!
What if, instead of obscure letter ratings, we had the rating agencies give us 3 numbers?  Here’s my proposal for a new ratings system:

  1. Time Horizon (measured in years): This is kind of important.  How far in the future are you looking?  If a city does a 30 year bond issue and gets a rating on that issue, does that mean the 1-year bonds are that risky?  The 30-year bonds?  The middle bonds at 15 years or so?  The median bond at 20 years or so?  Are you expecting me to believe that a 30 year bond carries the same default risk as a 1 year bond (that is, if they don’t default in the next year, they won’t default in the next 29 years either?)?  Tell me how far out you’re looking, because that’s important information for investors to know.
  2. Probability of Default (measured using a number between 0 and 1): Instead of giving me a letter grade, just tell me, how likely is this bond to default?  You’ve got models, tell me what they spit out.  Combined with the time horizon, this would be very useful.  Instead of saying “These 30 different bonds issued together by the City of Philadelphia all get a rating of A-” you could say “We think the city of Reading, Pennsylvania has a 2.2% probability of defaulting over the next 10 years.”  If you had a million dollars to invest, which would you prefer?  (NOTE: This has the added benefits of making the rating agencies very easy to grade.  We could, in effect, rate the rating agencies very easily–perhaps rewarding good track records and punishing bad ones.)
  3. Standard Deviation (or some other measure of uncertainty): This one is a little controversial, but in addition to the probability and the timeline, I’d like to give the rating agencies a little wiggle room.  How SURE are you?  Give me a 95% confidence interval.  Is the probability of default 2% ± 1%?  Or is it more like “We think it’s 5%, but it could be anywhere between 1% and 28% because we really don’t understand how a mortgage backed security operates”?  If you’re not very confident about something, let me know and I’ll do some more homework on my own.

Let’s look at a recent example of how my proposed system would stack up against the current system:

I have two bonds.  A mortgage backed security and a security issued by the United States government.

Old System: S&P rates both at “AAA” and collects a hefty check from an investment bank to keep giving AAA ratings to mortgage bonds.

New system: S&P, now reporting to the taxpayers, can freely admit–without impacting their paychecks at all–that they think the probability of default on the mortgage bonds is about 3%, but they’re reasonably uncertain.  It’s probably between 1% and 3% for a total default and between 1.5% and 20% for a technical default that doesn’t wipe out everything.  There’s a footnote saying that their projections are based on a 10 year time horizon.  Meanwhile the probability of a US default should be about 0.01%, but given the political climate they’re going to say it’s 1% ± 1%, over the same 10 year horizon.

As a citizen and investor, which would you prefer?

Policy and Politics 1 Response »

Why Does S&P Hate America?

Posted by Matt at 12:38 PM Tagged with: ,
Aug 082011

A couple years ago, I was talking to a group of high school students about the economic crisis.  One of them asked me a pretty simple question: If I had to blame any one person or group for the crisis, who would it be?  Back then I had said the major rating agencies (Moody’s, S&P and Fitch) were probably most to blame, succumbing to massive conflicts of interest and generally doing a poor job.  I thought it was a combination of greed and laziness.  But now I’m beginning to see that there’s no way those two forces alone could be steering these organizations.  Since S&P downgraded the credit rating of the United States of America (for the first time in history), I’ve come to the conclusion that they’re also stupid.  And maybe a little bit evil.  In fact, if I were to adopt the debating tactics of some Fox News pundits, I might go so far as to say:

Standard and Poor’s (S&P) hates America.  S&P also hates freedom.  (Search engines, eat your heart out.)

First some basics: the rating agencies have the job of determining how creditworthy a particular investment is.  They give ratings to everything from mortgage-backed securities to bonds issued by the US Treasury department.  In some cases, we refer to the rating of an entity (for example, the State of Delaware is rated AAA by all 3 major rating agencies).  This just means that when that entity issues bonds, they get whatever rating we’re saying is held by the entity itself.  The ratings places like S&P assign are supposed to reflect how likely it is that an investor will be paid the money he or she has been promised.

Why should we care?  Credit ratings matter.  References to credit quality as defined by these ratings are everywhere, even formally written into some laws and regulations governing how public money can be spent.  Lots of investors rely on them, and portfolio managers often are constrained by them as well.  Almost everyone in the economy is directly affected by credit ratings in at least some small way, and everyone in the world is indirectly affected.  Credit ratings can have an impact on investment availability, investment performance, how easy it is to get a small business loan, how governments manage and raises taxes, rates on mortgages and student loans and car loans…basically everything financial.

How does a place like S&P determine what the ratings should be?  Well, presumably they do a lot of really sophisticated analysis, involving interviews, reading, investigation, and lots of rigorous economic modeling.  In reality, it’s more like reading the newspaper and throwing darts.  Here are some highlights from the past few years.

Real Estate Prices
Rating agencies are often tasked with assigning credit ratings to investments that are tied to real estate markets (for example, mortgage-backed securities).  Before the bubble burst, some of the economic models used to determine these ratings didn’t allow for the possibility of negative price growth.  That is: sometimes it was assumed that real estate prices could stay the same, go up a little, or go up a lot.  But a fundamental assumption built into the very beginning of some of the analysis was: real estate prices don’t go down. Of course those bonds are going to come out with perfect AAA ratings!  They’re tied to investments that can never lose money!

Conflicts of Interest
Pretend you’re a rating agency.  An investment banker comes up to you with a new kind of bond you’ve never seen before.  The way they work is buried in 400 pages of legalese, but they’ll give you a slick PowerPoint presentation that shows how financial wizardry, brilliance and magic turns risk into gold.  You really have no idea how it actually works.  But here’s what you DO know: if you give it a perfect AAA rating, people will buy the investment, and the banker will make more of those bonds.  Every time he sells a batch of bonds, he needs you to put the “AAA” stamp on them, and each time you use that stamp, you get paid $50,000.  If you give his new idea a lower rating, you only get one payment and he never comes back to you.  Don’t you think those bonds are looking like a pretty safe investment?  This is more or less exactly what enabled the subprime markets to get out of control.

If you ask me, stamping AAA on everything that came across their desk was probably the #1 contributing factor to taking down the global economy back in 2008 and 2009.  If the rating agencies has said “No way, these are super risky” things wouldn’t have been nearly so bad.  A move like that would also have been known as “doing their job.”

Slow Reactions
Rating agencies are supposed to be out in front of news.  Ratings are supposed to predict what’s going to happen, how likely an entity is to default.  But in fact, rating agencies are often very reactionary; their ratings reflect the past, not the future.  They downgraded the United States government AFTER the biggest danger had passed.  Before there was a debt ceiling deal, yes, maybe there was a high probability of default.  But S&P basically decided to point out a problem after the worst of it had been taken care of.

Even internally, rating agencies are slow to react to problems.  Remember those massive conflicts of interest we were just talking about?  It wasn’t until after the meltdown that Fitch decided “Maybe we shouldn’t have the guys who give the ratings be the same guys who quote the prices and try to drum up new business.”  I found out this fact from a Fitch employee who was actually BRAGGING about how proactive they were being and how well they were learning their lessons.

General Incompetence
When S&P downgraded the United States of America, they gave the government a preliminary copy of their report.  The government almost immediately found a two trillion dollar error.  That’s “trillion” with a T.  Now, I’d like to think that a group of people making an announcement that will affect the health and actions of the entire global economy would be a little more careful than that.  But if an error was pointed out to them, don’t you think they’d at least have the common sense–or even the basic human decency–to go back and double check things again?  If a two trillion dollar error immediately jumps out of a report (a report which doesn’t even contain all the details and proprietary models), what other mistakes might they have made?  So guess how S&P responded:

They deleted the part of the report with the error and downgraded the United States anyway, according to their original schedule.  And I suppose it bears pointing out that they’re hurting the United States today for reasons that were largely the fault of the rating agencies themselves.  Which prompts me to ask…why does S&P hate America so much?

I can’t tell what the exact mix is between greed, stupidity and evil, but I do have a proposal:

Let’s all band together as a global community and just stop listening to these people.

Or at the very least, I’m going to start my own rating agency which rates the credibility of other rating agencies.  Right now, I’d say Moody’s is in the lead with an F, while S&P and Fitch are neck-and-neck with solid F-minuses.  I’ll give my own rating agency a BB (that is, way ahead of the other agencies, but honestly, it’s all speculative.  I’m just a guy with a blog–but at least I’m an HONEST guy with a blog).

Policy and Politics 2 Responses »

Nananananananana Photos!

Posted by Matt at 8:55 AM
Aug 052011

The new Batman movie is being filmed across the street from my apartment.  Meanwhile, I had this big post planned about the debt ceiling.  Guess which one I’m going to be blogging about?

Here are some selected photos.  You can click on any of them for a larger, higher resolution version of the image.  I know what my readers want, so I’m going to stop talking now:

A wide shot of extras being set up for a brawl

The brawl, in progress

The Caped Crusader

Batman in the brawl

This looks like it would be fun to drive. I can't believe they wouldn't let me take it for a spin.

Prepping a motorcycle

Gotham City's seat of government. I hope the movie includes a council debate about using tax increment financing districts to revitalize depressed neighborhoods. Honestly, Gotham needs good city planning more than they need Batman...but I don't expect that to come up much in the movie.

Of the 19 extras lying on the ground in this scene, only 17 are supposed to be dead; 2 are just planking.

Down the street, a veritable queue of cool stuff waiting to be unloaded and unveiled

Spoiler Alert: The good guys win sometimes.

Some extras milling around. It's like hanging out at the water cooler, except you're wearing multiple layers of winter clothing outside in the middle of August. Also, there's no water.

I'm no expert on movies or music, but based on this photograph, I'd expect the song "Convoy" to be included in the movie's soundtrack.

It's Batman without his mask! Quick, take a...no, wait, that's just a body double or something.

This one's a little grainy and from an awkward angle, but I couldn't leave you without at least one picture of Batman beating somebody up.

In closing, I’d just like to say that my life is probably more awesome than yours.  Now if you’ll excuse me, I have to go ride my pet T-Rex to the all-bacon brunch I’m having with my ninja friends.

Miscellaneous 2 Responses »
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