September 2008

“The tree of capitalism must be refreshed from time to time with the
blood of investors and bankers.” — Angry Political Optimist


James Burke once wrote, in an essay entitled “Fit to Rule”, that the modern world was connected to root events having to do with Linnaeus. His penchant to catalog and organize nature led to Darwin’s Galapagos trip; and from that Karl Mark derived his economic theories giving rise to Communism. Nietzsche’s interpretation, itself misinterpreted, philosophically enabled Nazism and Hitler and the “manifest destiny” derivative in the hands of J. P. Morgan and Getty gave rise to capitalism. Finding root causes is always an interesting journey. So when one looks around today, especially with politicians eager to cast the blame on others, it’s good to try and establish what exactly the root cause of the current fiscal mess might, in fact, be.

The story begins in 1933 at the end of the Great Depression with the passing of the Glass-Steagall Act by Congress (F.D. Roosevelt administration) which prohibited banks from selling investments and created firewalls between investment banking, commercial banking and insurance. Soon after, in order to resolve the mismatch in maturities in loans, and because banks couldn’t loan enough to support the post WWII baby boom, the Federal National Mortgage Association or “Fannie Mae” was created as part of the New Deal in 1938 (FDR administration) to provide a secondary market for mortgages. This organization purchased loans from banks which then allowed them to continue to service and lend. And all was good — the greatest generation prospered.

For thirty years, FNMA had a near monopoly on the secondary market, then, in 1968, FNMA was privatized by L.B Johnson because of Vietnam War fiscal pressure. Now, as a private entity, FNMA could generate profits, yet FNMA still obtained special treatment under regulatory and tax laws. As a consequence of this, investors perceived minimal risk in the company. In 1970, the Federal Home Loan Mortgage Corporation (FHLMC) or Freddie Mac, was created under the Emergency Home Finance Act. The FHLMC purchased mortgages on the secondary market, aggregated, tranched, and sold them as asset backed securities (ABS). Between them, FNMA and FHLMC was estimated to hold approximately 90% of all US mortgages accounting for 46% of the national debt.

Then Congress exempted FNMA and FHLMC from the FDIC Bank Holding Company Act capital/asset ratio reserve limit of 3%. Fannie and Freddie were free to leverage their assets. In 1999, the Graham-Leech-Bliley Act, supported by Robert Rubin (Clinton-Administration) repealed the 1933 Glass-Steagall Act and allowed banks to invest in securities, offer securities, and a cafeteria of financial services. This provided an immediate market for FNMA stock, especially as these shares were considered low risk investments and were returning high returns on investment. The 1995 interpretive letter approving low income mortgage securities as viable investments under the 1977 Community Reinvestment Act (12 CFR parts 25, 228, 345, and 563e) provided another market for FNMA. Commercial banks could now invest CRA dollars in FNMA legally. In 1992 Congress (H.W. Bush administration) mandated (GAO report number GAO-04-269T) that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers and specified that approval metrics such as the ratio test should henceforth include unemployment and welfare payments as sources of income. HUD (Clinton administration) established ‘quotas’ for FNMA and FHLMC to insure 50% of all their loans be to minorities by 2001. Since FNMA and FHLMC are secondary markets, they pressured originating banks to offer more minority loans.

(The story accelerates to Internet time.) FHA regulations are written with loopholes that allows 0% down-payment mortgages. Down payment assistance market develops to exploit the loophole. The Zero Down Payment Act of 2004, introduced by Rep. Pat Tiberi (R-OH) (G.W. Bush administration), requires the Federal Housing Administration (FHA) to offer federally insured mortgage loans to certain eligible households to buy a house without a down payment. In 2005, FNMA revises its loan approval criteria to support post hurricane rebuilding.

The Rating Reform Act of 2006 passes into Law requiring the use of “Nationally Recognized Statistical Rating Organizations” or “NRSROs”. As a result, internal credit analysis at investment banks deteriorate. In 2007, FASB 157 is imposed on corporations requiring that assets be marked to market. Also in 2007, the Office of Federal Housing Enterprise Oversight (OFHEO) increased the FNMA conforming loan limit upwards to $729,750. This increase in allowed principle increased profit for FNMA. All these regulations and acts let FNMA and FHLMC offer securities at net interest margins that were extremely profitable. FHA mortgages with 0% down make it impossible for banks to compete. Banks have to match terms in order to compete. Financial houses have to develop new instruments in secondary markets to compete with FNMA and FHLMC.

At this point the dominoes are all aligned and ready to go. Backtrack in time slightly and pick up a second parallel thread. Two events occur: investors realize that a few lines of software, a pretty business plan, and a catchy name do not a market make; and two planes make unauthorized landings into downtown Manhattan. The 1-2 punch of the Internet bubble bursting and 9/11 sends the economy into a recession. The Federal Open Market Committee (“Fed”) ratchets interest rates lower and makes a horrible mistake, leaving them low for far too long. Liquidity is generated with nowhere to go since money markets and deposits are generating low returns. Well, there is always real estate.

Quants on Wall Street create new classes of securities to access this liquidity — Collateralized Mortgage Obligations (CMOs) and Structured Investment Vehicles (SIVs). Quants are not stupid and know that these are risky, so they create credit default swaps (CDSs) to cover and distribute the risk. Markets develop to trade these instruments. Purchases go global. Trillions of dollars are traded in these vehicles.

With easy money and low interest loans, more houses are constructed, exceeding the number of available buyers, even at 0% down. The value of real estate drops on market fundamentals (law of supply and demand). The underlying value of mortgages drop. Loans are valued at more than the house or real estate they are collateralized with. Because many houses were purchased on speculation, and the dollars invested are essentially zero, owners walk way leaving banks with securitized assets that are non-producing. The primary cascade starts.

As underlying values tank, derivatives such as CMOs and SIVs collapse and swap liabilities under CDS’s increase. FASB 157 requires assets to be marked to market and assets are devalued accordingly. As assets are devalued, new capital to make up the difference is required. However, the complex interconnection of derivatives and new investment vehicles do not provide mechanisms to evaluate risk. Few are willing to invest without an understanding of the risk involved. Bank and investment company outlooks become speculative and their stock prices reflect this. Rating agencies downgrade the companies. This triggers additional capital requirements written into the CDS contracts. The cascade increases. FASB 157 becomes virtually impossible to implement since there effectively is no market. Liquidity stops because 1) banks can’t value what they own; and 2) they don’t loan assets they have because they might need them for capital.

People don’t understand because political parties are off blaming each other. News commentators spew gloom and doom scenarios. Runs on money markets ensue. Money markets sell short term securities to cover withdrawals and the market for commercial paper, which is funded through the money markets, dries up. Liquidity in commercial loans drops. Companies cannot access their lines of credit by commercial paper (bonds, etc,) Companies have to restrict operations and downsize.

People without jobs cannot pay mortgages. Second stage of cascade begins. Consumers look at institutions and decide that their money isn’t safe. They withdraw funds — banks become insolvent and are seized by the FDIC. Other banks stocks fall as result. Confidence erodes further.


So if we look at the root cause of all this, while Wall Street has it’s share of responsibility, you don’t discipline a dog for urinating on a fire hydrant — he’s just being a dog. Similarly, investment bankers do what they do — borrow and lend money and attempt to make markets. In this case, the road to hell is paved with good intentions and shares of Fannie Mae stock.

Once there was a group, established by a society, which was endowed with a high level of respect. Members of this group were fragmented in their beliefs and practiced their craft in accordance with their beliefs. Some, enamored with righteousness and a belief in the primacy of the Church, believed that society’s ills were the work of demons and established laws and rituals to expunge them. Men of high status were called evil and their works questioned. Others, no less righteous, insisted that there were fundamental humours that were required to remain in balance for good health, and periodically vented and tapped these to release them from the body. As may be expected all this venting and tapping had some unintended consequences — the patient died. At some point, around the 1850s, some members of this group stepped back and performed a little critical analysis noting that the patients untreated had as much change of survival as patients treated. This observation led to a complete philosophical paradigm shift. A phrase was taught to all who entered this profession: “Primum non nocere —First, do no harm.” Physicians use this expression to note that human acts with good intentions may have unwanted consequences.

In the last few weeks, various treatments to the illness of the financial markets have been tried. These included federal takeover of Fannie Mae and Freddy Mac (Why are there two of them anyway?), the fire-sale manipulation of Bear Sterns, the abandonment and bleeding of Lehman Brothers, what amounts to the acquisition of AIG, and most recently the promise of some new and radically untried set of procedures. These include the suspension of short sales, the acquisition of asset backed securities by the government, the FDIC like insurance of money market mutual funds, and the opening of FED credit lines to cover corporate paper and short term liquidity needs.

In order to implement many of these policies, the regulatory bodies — the SEC, the FED, the Treasury — need Congressional approval. As any first year economics student is taught, actions and expenditures by the government have attached multipliers and consequences on the macroeconomic landscape, not all of which can be accurately predicted. It would prudent then for Congress to do the minimum necessary to treat the problem. Doctors Bernanke, Paulson and Cox have a prescribed treatment plan — one that doesn’t involve additional economic incentive payments, additional mortgage subsidies, or riders to support venting of additional humours. Congress should realize that these prescriptions are for Main Street and not for just Wall Street.

Keeping the Act to enable these prescriptions to the minimum necessary will surely test the wills of both sides of the aisle. It will be difficult enough to fill in the details without loading up the bill with each party’s pet programs and election-year incentives. And as for the details, a couple of suggestions:

  1. Let’s go easy on the shorts. Markets work best by including all information and short sales provide a valid channel of information. By all means, lets clamp down on the ‘naked’ shorts, but an accross-the-board ban on shorts is a bad thing.
  2. If the Treasury is going to buy securitized mortages, CMOs and SIVs, the so-called “toxic paper”, then let’s value the asset on the basis of discounted cash flows and not mark-to-market. Especially when a viable market doesn’t exist. Not only will this eliminate a bad accounting practice, but it will rapidly establish a mechanism for global markets to understand the risk/value of assets already on their books. It will also eliminate the death spiral of under-capitalization, Agency rating downgrades and further capitalization reserve requirements which are weighing down Goldman Sachs and Mogan Stanley. It probably would have helped Merrill Lynch and Lehman Brothers also.
  3. Providing FDIC-like insurance to Money Markets and Mutual Funds needs to be thought through. We don’t want to make the funds more attractive than deposits and cause a massive unintended shift of capital from the commercial banks. That would just shift the crises from Wall Street to Main Street. Perhaps insurance coverage could be adjusted to equalize over the return on investment on any given instrument — treating deposits and funds equally after weighting.

But most importantly, moderation and minimal intervention.

After all, when the heart surgeon cracks you for that triple bypass, he doesn’t usually divert to perform a liposuction, or have his OR technicians perform a manicure on the patient, no matter how beneficial to the patient’s image. Anything that diverts attention from the heart attack is to be avoided. Perhaps the Congressional motto should be changed to “Primun non nocere”. Congress take note.

The speculation that Comcast is going to impose download quotas on their Internet services has got me seeing red and has blood shooting out of my nose. Granted, a 250 GByte limit per month seems like a reasonable limit, and I really really do understand their concerns with peer-to-peer, but there is more here that should be addressed.

Now, as it happens, I have access to certain information about the network utilization at a large State University. The campus, having recently completed an expensive DWDM fiber ring to a major city, now has access to commodity rates for Internet connectivity and in aggregate has around 3 G/s available. The campus housing system, which consists of dorms and greek houses, is attached to the Internet on a rate limited basis. When the limit was 100 M/s the housing network was using, strangely enough, 100 M/s. When the rate limit was increased to 200 M/s, the utilization increased to 200 M/s in the time it took to press the final keystroke to the time it took to display the new statistics. Doubling the limit again resulted in similar results, from which I conclude that the housing network would consume exactly as much of the aggregate bandwith as was made available.

Now I find it hard to believe that any group of students browsing the web, IM-ing their fellow students, or emailing their friends and family could generate precisely this utilization statistic. Clearly this is a result of around 30,000 peer-to-peer programs running on their machines. So I, as I said, understand Comcast’s attempted strategy for maintaining some semblance of control over their bandwidth utilization.

What has me seeing red is the fact that I have no control over my utilization. When browsing the web, in the new ‘World according to Google’, my downlink is jammed up with Flash code, streaming video advertisments, and an enormous amount of crap I really don’t want to see. It is annoying enough to check the weather at Intellicast for the local doppler radar, and have to wait for all the connections to googleanalytics, doubleclick, and the ad servers to complete before executing the java script to allow me to mouse over the drop down menu to get to the listed radar link.

It used to be that a responsible company, when designing a site on the web, would load the important stuff first in the top third of the screen and run the appropriate scripts immediately so that you could click through fast to get where you need to be. None of this waiting around for Flash to load and paint pretty, extremely annoying, and totally worthless graphics all over the index page (just to show how clever and artistic their designers are.) Damn! If I wanted to see that crap I would go to the local art museum, which by the way has a great section on computer art and generated graphics. And if Flash wasn’t bad enough, video streams for microwindows of auto advertising where the designers set the buffering level at 100% before execution. Egad! The same university I spoke of recently redesigned their index page away from a relatively useful portal to a completely annoying top third flash graphic all in the name of “Branding” the university.

If I want to read something, like a news article, at most I need 300-500 bytes in the body section. Instead, I have to wait through a header which loads all the javascript functions, the Flash loads, the video buffers, the fancy scrolling marquees, and my 500 bytes. Frantically mousing over where the menus should be and getting squat — watching the bottom left where the google analytics activity flickers, and waiting not-so-patiently for the “Done”, that’s bad enough.

But then to hear that Comcast is going to limit me to some number of bytes down to my browser before they charge me overlimit fees or trim my rate — crimson pulses throbbing down my chin. I vote for an option that provides for in-line culling of crap. Go to a web site and any connection to google analytics or a google ad server gets nulled out — before it is counted against your quota. Or better yet: The Better Web and Sanity Seal of Approval. Approved sites, without the crap, gets exempted from the quotas.

Either way, slapping quotas on the users, under the assumption that they are peering, without some consideration for what drivel is forced down the link is not looking at the whole picture. If I am running limewire, then I deserve it. If I am researching patents, or trying to get the latest stock quote, or reading the weather map, and get limited, then I am looking for another provider.

Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, and Treasury Staff have been working five weeks non-stop through weekends and away from wives and family to attempt to resolve one of the most complicated and interwoven nests of pit vipers ever conceived. First there was Bear Sterns, then Fannie Mae and Freddie Mac, then Lehman Brothers and Merill Lynch, followed immediately by AIG, and now what looks to be a rash of capital deficient investment houses and banks. Critics are everywhere and are second guessing their every move with front page news and breaking news reports on the crises entertainment channels. Our candidates for President, in spite of their economic illiteracy are formulating “plans” which, while having no bearing on reality, are spot-on to their philosophical leanings: Obama — we need more regulation and more government; McCain – we need to reform Wall Street as well as Washington.

But the best out of Washington comes from Congress. Both Republican and Democrat ranking members are a bit put out that Paulson has not included them in discussions and strategy plans to resolve the crisis. (A crisis they are largely responsible for.) It should be obvious to most that Paulson and Bernanke are a tad busy to put up with the posturing that would result, and have excluded them largely for the same reasons that generals exclude them during the execution of a battle plan.

Senate Majority Leader Harry Reid has indicated Wall Street is a problem — “a multi-trillion dollar issue.” But this requires study and can’t be done on an unrealistic timeline. House Financial Services Chairman Barney Frank and Senate Banking Chairman Chris Dodd both want to consider the problem, but believe that there is insufficient time to consider the issue this year, i.e., before they adjourn for the autumn political campaigning season. Dodd has postponed the Banking Committee meeting.

So while the evil Bush administration appointees are working in the worst pressure cooker of the century (so far) attempting to resolve a difficult set of problems, Congress is more concerned about the election, and would rather not perform any action that might be construed to be a position on the crisis that might affect their standing in the polls. In other words, … business as usual.

I have been waiting, watching and thinking about the current political landscape. With the annoyance of a two year campaign, I have kept my opinions pretty much to myself with a few exceptions which address issues more than candidates. As we plunge into the pre-November hysteria, I feel obligated to weigh in with a few thoughts.

As my readers might suspect, I have Republican leanings, although to be accurate, they are more Libertarian than true Republican. The whole earmark thing and growth of the bureaucracy makes me want to draw and quarter the Republicans. I have come to the conclusion that the first two years of Clinton and the first six years of Bush are two of the best arguments for never letting one party control the entire Government.

First, I am impressed by Obama. I think that he could very well be a decent president provided he was backed by a Republican Congress. ( I think that we can all agree here that a true third party is not in the cards.) He has very straight line liberal tendencies which I probably will not agree with, but I can see that he would be a catharsis to the nation — or an enema depending on your point of view.
At the very least, it would shut up the Jesse Jacksons and Al Sharptons of the world — an effect to be greatly desired in my book. A popular vote for Obama would dispell the myth that every white middle-class worker is a racist.

However, I will not vote for Obama because he is not going to have a Republican Congress. Pelosi, Reid and Obama is a triumvirate that gives me the shudders. Rather than the change we want and desire, we will be hamstrung by the special interests of labor, the environmentalists, and the redistributionists. While I am sure that that condition will exist only for two or at most four years, it will take an additional four to six years to undo and correct the policies that they will implement without adult supervision, just in tax policy and the economy alone. God knows what effects could occur in the state of the world that would be more persistent even permanent.

I wasn’t inclined to vote for McCain either. It strikes me that Congresscritters make poor Presidents as they are too much attuned to compromise and not enough to leadership. Certain things are not suitable for compromise — like your principles. This doesn’t leave me much choice if I want my vote to count. Voting for a third party, not voting, or writing in Mickey Mouse — same difference. McCain’s selection of Sarah Palin changed things however. Granted that she is as useful as a “bucket of warm spit” as they say in actual job responsibilities; she still brings true leadership ability to the ticket. To my way of thinking, leadership is what is important in the position. Even if McCain is a compromiser, the influence of Palin will be felt and that is a positive thing.

I believe that the media and Beltway pundits are overlooking the desire of the American people for leadership. They certainly don’t find it in Pelosi and Reid who called a recess rather than vote on off-shore drilling, which 74% of Americans support. They see the promise of leadership in Obama, but the actuality of leadership in Palin. McCain, in his selection of Sarah Palin, has won the White House in 2008 if only he has the sense to know it.

While I was driving across a bridge I happened across this incredibly awesome troll!

Bumper Sticker

…and when my messiah talked about change he meant turning water into wine!

Future history is the sine qua non of science fiction. Far term future history is fairly easy — say over the span of 600 years. Example — we have spaceflight to other planets, warp drives, transporter beams. Midterm, over the course of 5-50 years, is more difficult, although Stargate SG-1 comes close. The real challenge is to project from current technologies, political philosophies, and current events to short term events in the near future — 1 to 5 years. William Gibson (“Neuromancer”, “Count Zero”, “Johnny Mneumonic”) was able to successfully extrapolate trends and Neal Stephenson (“Snow Crash”, “Diamond Age”, “Cryptonomicon”) has had some success (if he could only learn how to end a book).

The following is a segment of the 12 Angry Men Blog dedicated to taking our philosophical biases and projecting our rants into a short term future history. Disclaimer: Any resemblance to persons living or dead, is entirely intentional.

Tehran President Barack Obama met today with Iranian President Mahmoud Ahmadinejad. Accompanying him were Secretary of State Biden and National Security Advisor Robert Wexler. In a two hour meeting, Iran pledged to stop increasing the number of its uranium separation centrifuges, currently estimated to be over 10,000, asserting that their production levels were now sufficient to meet their specified goals. Iran has been attempting to make itself energy independent, a goal which President Obama sympathized with. US average gasoline prices fell to $7.43/gallon on news of the reduction of tension with Iran. President Obama reiterated his conditions that any meaniful dialogue with the United States requires Iran to take an essentially neutral position with respect with Iraq. “The long and difficult struggle between the Iran and the previous Iraq state cannot be viewed as other than an inherent interest in the outcome of the current political process. The withdrawal of the United States from Iraq serves as a indication of our committment to allow the Iraqi people to decide their own fate without outside interference.” said Obama. President Obama further stated that “Iranian intervention would exacerbate an already intractable problem for the Iraqi people.”

National Security Advisor Wexler, in a later press release, declined to speculate on the probable outcome of the Iraqi civil war. Mr. Wexler did assert that it appeared likely that the most current shipments of weapons bearing Iranian issue markings were hijacked by rebel Shiite insurrectionists and that Iran should not be held responsible.

New York The Dow Jones Industrial Average today topped 3000 for the first time in 24 months signaling what analysts believe to be an end to the current bear market. Gainers favored losers by over a 3 to 1 margin. Financial analyst Coty Dubrowski from Bear-Sterns-Citi-Stanley(NYSE:BSCS) speaking at a dinner for independent analysts in New York, noted “The elimination of the uncertainity in corporate tax, income tax and government fiscal policy has allowed corporations for the first time in years to look ahead with some degree of confidence. The current marginal tax rates of 68% on individuals and 50% on corporations, while not conducive to growth, have allowed both individuals and corporations to plan for the future.” The S&P 200 fell slightly during after-hours trading from 151.35 to 151.2 off 9/100 of a basis point.

Springfield, IL Speaking from his Chicago office, Governor Rod Blagojovich, announced that he would remove upwards of $100 million from the proposed budget of the Illinois Board of Higher Education. The IBHE is responsible for the channeling of State money to the flagship educational institutions of the State including the University of Illinois. In addition, Governor Blagojovich indicated that the conditions of the State budget were so dire that it would be impossible to approve a capital spending bill for the state’s decaying infrastructure. From the University of Illinois, The Chancellor Richard Herman, speaking from the steps of Lincoln Hall, decried the Governor’s actions indicating that Lincoln Hall has been on the list of needed capital improvements for over ten years. Lisa Madigan, who was in attendance, noted that her priorities had to include the rebuilding of the I-74 bridges over the Mackinaw river and over the Illinois River at Peoria. Speaking from the crowd, Madigan reposted Herman saying “While higher education is an important element of Illinois’ future, I-74 is responsible for shipment of food across the state and must enjoy a higher priority.” Madigan has been endorsed by the Illinois Teamsters Union.

Author’s Note. This was written July 16th, prior to Senator Obama’s selection of Biden as his running mate. Apparently, Obama decided that he needed a VP with foreign policy experience more than a Secretary of State.

Hola amigos! The other night, I was sitting rather quietly at home watching internet TV when my phone rang. Caller ID tells me it’s local, and figuring it’s one of my hombres calling drunk from a pay phone or some such, I answer it.


On the phone was a 70+ year old gentleman from some Obama group here in lovely New Mexico asking what I thought about the election. I was honest — I’m not thrilled with the other guy, but liked his guy even less. McCain ’00 was a real inspiring character, McCain ’08 appeals to who exactly? I’m not entirely sure, but given McCain’s 5-point lead over Obama in what should be a landslide victory for the Democrats, he must be appealing to somebody. Either that or the Obamessiah is really turning people off. But I digress from my actual story.

After establishing that I was a fair candidate for initiation into the secret mysteries of the Audacity of Hype Hope, the Obamabassidor makes his pitch, asking me what I thought of Sarah Palin. No doubt, the elderly Obamaniac expected a, “Well, I don’t have an opinion” and was ready to provide the official version approved by Obama’s spinmeisters. Sadly for the gentleman, he was calling the Angry New Mexican.

By the time I was finished with my discussion of the politics of Veep choosing and an opinion of the political wisdom of choosing Palin and Biden (both good choices, BTW), the Obamasaurus was left with only his final, last-ditch, line of attack.

“McCain is old. What if something happens?”

That’s right. The most compelling attack against McCain: What if McCain drops dead and the inexperienced Sarah Palin becomes president?

It makes me wish I had said, “Well, I supposed that it is no different than if the inexperienced Barak Obama becomes president. Lucky thing that the Democratic ticket isn’t the other way around, forcing me to do the math as to whether Biden or McCain will drop dead first and which of the Veeps would be worse in the Oval Office.”

Seriously, if your best argument against McCain is “Well, maybe he could die leaving us with an inexperienced president,” then your guy better hang up his hat because he is hosed. You’re lucky McCain’s campaign has been asleep at the wheel since the spring, since if his A-game was turned on, Obama’s candidacy would make Walter Mondale look like an unqualified sucess.

This isn’t Chicago any more, Barack. Time to play ball with the big boys.

Having some experience in the credit card collections and recovery business, I thought it might be time to address the collections business. Most of the impetus for this comes from reading comments on the Tax Collections grabs by the State of Virginia. Apparently the post hit a nerve with people who lived in or were associated with the State of Virginia. Collections agencies are, for the most part, douchebags.

[Overheard conversation in a collections department]
Collector: You owe us $5,450.00. You are delinquent 90 days. We need to see some cash.
Consumer: Yes, but my mother just died, and I have to pay her funeral bill.
Collector: Did your mother have a car?
Consumer: Yes, Why?
Collector: Well then. Sell the car and send the money to us.

Once your account goes into collections there are consequences. Collections becomes a derogatory event or “derog” in the parlance of the industry. Derogs on your file incease your card interest rate; make it difficult to borrow money for houses, cars, and those sundries of life; and will remain there for as long as the file exists — essentially forever or until the sun novas.

It’s even worse now. The card issuers have all pretty much adopted “dynamic risk based pricing”. The classic underwriting process was to pull a set of credit scores based on some criteria, send some mail, repull the scores after you responded to the offer, and then assign a fixed price — interest rate — based on the score. This is the “as low as…” offer. Now however, scores are routinely monitored. Your 11% card rate may be raised to 22% on the basis of a missed payment on another account not even related to your issuing bank — say you missed a payment on your car loan. This just illustrates the importance of your credit history.

A brief diversion here. While scores and your credit file are important, and you should review them periodically, there is no need to sucumb to the fear tactics that marketing groups practice with their catchy pirate and ice tea commercials, identity theft horror stories, and peace of mind come-ons.

When you apply for a loan, the originating loan officer will check your credit score. To do so however, he will need your permission and you will have to sign something. If this occurs, simply say that “I wish to see and review the information which you are using to approve my loan.” If you ask to see the information, they are required by law to show it to you. Same thing if a credit report is pulled when leasing an apartment. Ask to see the report. Same thing for any “instant” credit approvals.

If you aren’t involved in transactions like this, you can go to the or other like sites and actually get your reports. Just click NO on all the offers they attempt to sign you up for, no matter how enticing they sound. The FACTA law requires that they provide this to you free. (They use the opportunity to scare you into signing up for crap you don’t need.) Note that they ARE NOT required by law to provide your FICO score and for that they make you pay. If you want to see your FICO score, you can get this by reading your file when you apply for a loan — they do provide the scores to merchants and underwriters; pay to see it; or estimate it using an on-line calculator.

The problem with the free credit report nonsense is that they offer no assistance when you really need it, i.e., you have a derog on your file and can’t get rid of it. There are three, really four, credit bureaus (data accumulators) in the United States. Currently these are Experian, Trans-Union, Equifax, and Innovis. I say currently because they get absorbed, changed and renamed periodically. Traditionally, each bureau had a geographic concentration and you could obtain better data from the one in your region. That has largely gone by the wayside.

The important thing to remember is that a credit bureau is an aggregator of information and does not source or generate the information. Issuing banks and other loan underwriters send information on you to these bureaus. Why do they do this? It’s essentially blackmail. If banks don’t report to them, they can’t use their services, i.e., banks and credit issuers can’t do “pulls” to obtain a marketing list. The reporting process occurs fairly automatically. Underwriters generate reporting files on their book, including delinquencies, payments, and other evaluatory data. These files have specific formats for each bureau — for example, Trans-Union uses the TU-4 format, Equifax the Metro-2 format which was standardized by the Consumer Data Industry Association (CDIA). These files are cut to tape and shipped or just secure FTP’d to the bureaus.

So if you have a derog on your file which you believe to be invalid, it doesn’t do much good to bitch to the bureaus. If a bureau manually deletes your derog, the next monthly update will restore it. So you have to go to the source to get the problem fixed. Because of the persistance of data in the bureau files, the government has implemented some procedures to protect citizens. If you believe that your file is in error, you can file a dispute. Disputes appear simply as a note on the derog that indicates that the consumer has disputed the item’s validity. The item still remains on the file. Dispute procedures are available on all the major bureau sites. Disputes are added by running a dispute file against the master file after it has been updated. If the derog is not valid, file disputes with all three bureaus in order to document and support your position as soon as possible.

So let’s say that a merchant believes incorrectly that you owe him money. He will try to collect it himself if at all possible, and if he has the wherewithall to do so — that is to say a dedicated group of collections people. If he can’t, then he will engage a collection agency to either collect on his behalf or sell the account at a steep discount to an agency, which will then attempt to collect. An attorney or agency will generally collect for 50 cents on the dollar. Third party sale of bad paper goes for as little as 10 cents on the dollar. Clearly, if a merchant can collect, then it is to his financial benefit. Here is the catch: as many as 60% of the people that go delinquent and reach charge-off status are not locatable. They have moved and not left a forwarding address and disappeared. These are called “skips”. In a group of accounts, the skips are filtered out and placed in collection agencies almost immediately. It takes a lot of time and energy to resolve these cases and identify a new contact channel with the consumer. If initial attempts to resolve the skips fail, then the paper is usually identified for sale at a discount. (As another aside — it is getting more and more difficult to completely skip with the prevalence of databases and on-line activities. They WILL find you eventually.) The reason I mention this at all is that once the account has been sold, then access to the merchant who originally placed the report is limited. The merchant may have even purged the account completely. Getting to the source is the fastest way to correct bad information on your bureau file.

The way to get started is to utilize a system which was developed collaboratively by the four mentioned credit bureaus called e-OSCAR. This is the Online Solution for Complete and Accurate Reporting. It allows you to pursue corrections to your file and hit all four bureaus simultaneously. Since all reported data has a source identifier, e-OSCAR allows queries to be issued to the data source. In addition, since it is real-time, updates to the bureau files can be made independently of the source reporting cycle.

This simplifies the process, but you still have to have supporting data to make your case. Just wishing the derog will go away seldom works. If you are dealing with a collections agency, remember that they don’t source the data. Your position has to be that the source data was incorrect and the file is invalid — through, of course, no fault of your own. The real threat you want to convey here is that dealing with you is going to consume so much time and energy that it won’t be worth the miniscule amount they might collect. If you are aware of the system and how it works, they are less free to intimidate you. It’s also a good thing to attempt to find out whether they are working the account on behalf of the merchant or whether they have purchased the paper. This fact affects how they will behave in response to your inquiries.

To that end, the Fair Debt Collection Practices Act sets some limitations on collections agencies and what they may or may not do. For those who can’t read Congressionalese, other sites are available to translate. To mention a couple, if you tell them that the account is disputed — remember me mentioning that you should dispute the derog — then they cannot legally continute to attempt to collect. Additionally, they can only collect during reasonable times. If they call you after 9:00 PM local time, then the call is illegal. Ask for and obtain the name of the collector, the supervisor and the name of the agency. (You should also keep all correspondence with a collections agency.) Many collections agencies, in their letters or calls, do not give out telephone numbers or addresses. This makes it difficult to contact them — which is exactly what they want. They want to be the one doing the harrassing.

Ask them for their NCRA subscriber code. This can be backtracked via a bureau to a contact. Find out where they are located. Then contact the state and obtain the contact information from the business license. Much of this is online. The object here is to identify a person, preferrably a company officer or manager with which you can have a conversation. The object of the conversation is to identify contacts at the merchant with which you may continue the conversation. The ultimate objective is to get the merchant who sourced the derog to approve its deletion. (e-OSCAR will email the source requesting approval of the purge.) Once approved, e-OSCAR updates all of the bureaus and you are clear.

You should of course verify that the derog has been cleared and continue to check for several months to insure that all of the source files have been purged. Backup files restored for whatever reason at an agency may have old reporting data and the derog may magically reappear. Vigilence is necessary.

So in recap:

  1. Monitor your credit data
  2. File a dispute with all bureaus on an invalid item immediately
  3. Register with e-OSCAR to work the dispute
  4. Identify the reporting source, obtain the address and contact information
  5. Contact the reporting source and advocate approval for the e-OSCAR purge
  6. Check afterwards to insure that the derog does not reappear

In the above I have tacitly assumed that the derog was in fact, invalid. If the item is valid and the result of a slip of some kind on the part of the reader, you can still use this procedure. Your goal is to negotiate with the collections agency or with the merchant. The best strategy is to identify whether they are collecting on behalf of the merchant, or on paper they have purchased. Knowing the percentages, you know what they paid for the right to collect and what they expect to collect. You can offer some partial payment in consideration of approving the e-OSCAR item purge. Remember to discuss this only with the manager or officer. The collections agents manning the telephones are paid incentives on the amount they collect and have no reason to work with you. You are more likely to get the kind of discussion overheard at the start of this post.

Well it’s back to school time and one of the big sticker shock items in the eyes of many students is just how much textbooks cost. There was a nice little article on the WaPo recently on this, but I didn’t need to be reminded of it. Unfortunately, I believe some of my colleagues might.

The textbook market is, of course, several different markets, and much of what really angers students is the big intro course textbook, which frequently costs a small fortune. If you’re taking five intro courses as a new frosh, be prepared to be spending $1000 a semester on textbooks. Factoring in inflation, I don’t think textbooks are really all that much more expensive than they were when I was an undergraduate, but then one could buy used books, which cut the bill by about 30% after you factored in the lower cost. The ability to sell the books back at the end of the semester got you a little more. It was something, and an efficient way to recycle, too. However, publishers in this kind of area have been fighting off the used market more and more by churning editions, making custom editions for a given university, adding electronic resources of dubious nature, etc. This is all to let them keep collecting rents on textbooks by undercutting the used market. Students have, of course, replied by downloading scanned versions from torrent sites, sharing books, and so on.

Let me give you an example of edition churn. As a graduate student I taught a junior/senior level mathematics course that I had taken as an undergrad just under a decade before. (It was junior/senior level because Calculus III was a pre-requisite.) When I took the course, the book was in its third edition with a copy date of about 1980 (not exactly sure and my copy is elsewhere). It was showing its age. When I started teaching the class, the book was, sensibly enough, in its fourth edition. During the three years I taught the course it went through two version changes, fourth to fifth, fifth to sixth. It is now in its seventh edition. Even though I believe one of the authors has subsequently died, it is still being updated. Yes, it’s true the material has changed a bit, but most of the alterations were just large enough to justify a new copyright. For instance, material in the third edition was altered in the fourth but put back in fifth. Or was it the sixth? Like Dirty Harry, I can’t remember! The point is, it was rearranging deck chairs on the Titanic because the substance didn’t really change… nor should it, because it was the introduction to a topic that really wasn’t all that different. Sure the authors would add snippets of newer developments but I’m fairly convinced no one ever actually used much of the newer material—remember, this was an intro class and there’s only so much one can do in a semester. Rearranging an existing book is, of course, much easier than writing one de novo. It could probably be done as work for hire, which means the “author” provides limited input at best. Maybe one of the authors had a love child to put through college (ironic, n’est pas?) or, more likely, wanted to put a down payment on that retirement condo in Taos….

Now the reality is that faculty members—with the notable exceptions of the authors of intro books who grind through editions—are not getting rich on textbook publication. Believe me, I’ve written one. It took my co-author and I hundreds of hours and between the two of us, we’ve made a few thousand dollars on it all told. Now admittedly it helped get a good job so I’m getting paid that way, but still, I’m not exactly sipping rum punch on Bermuda after playing the back nine with Sean Connery off the proceeds. And this is to be expected. Last I checked our book has sold a few thousand copies, mostly to libraries. Here’s another example: I had a fantastic professor in grad school who taught a very technical mathematical theory class. He had amazing notes he’d put a lot of time into, all very nicely typeset in LaTeX. He just gave them away. I asked him why he didn’t publish them as a book (most textbooks in this area are dismal) and he said “I’m a full professor and won’t be promoted any higher. It simply doesn’t do me any good and would be too much work, so I just give them away for free. I’ll probably put them on Lulu eventually.” The problem, of course, is that nobody will know about his work except by word of mouth because it will not be promoted by a publisher, which is too bad. His course notes are simply that good. So there is a reason for publishers to exist. I do not begrudge them making money. They’re not in it for free, after all, but I could at least expect books that would last a references, but I believe quality has been going downhill, too, at many publishers…. especially the ones churning editions.

Beyond that, too many faculty members are insufficiently price sensitive. They simply don’t bother to look and fall for the blandishments of publishers, which include nice wine and cheese spreads at academic conferences, constant spam and direct mail, free quasi-worthless course material posted on book web sites, etc. Here’s another personal example. I teach a graduate level theory class where there are a few different textbooks. I like the one I used but it’s too advanced for most students. (I had the benefit, or curse depending how you look at it, of having the author as the instructor.) There are some other choices, most of which don’t provide enough details to be workable for my class, or else provide too many details that are really nice for me but not for students. I was left to choose between a $150 hardback and a $30 paperback reprint of an older book. I didn’t know the cheaper book well but decided it would be worth looking at it to see if it would be good for the students… the answer was yes, in fact it was better than the other more well-known text, covered most of the relevant theory well without any glaring “here’s how we do it in the days of mainframes” computational details that is always a risk for older books. That’s the one I picked. In fact, it is possible to get a copy of it for less than $10, used. The other course book can be had for $40 in paperback and I post my course notes and the extra journal articles on the class web page. Total cost: < $100, counting printing (believe me, grad students always find a way to print for cheap or free so even a few hundred pages of printing won’t cost them that much).

I urge any of my colleagues reading this to consider how many extra hours flipping burgers McDonald’s or peddling clothes at Abercrombie & Fitch, or, worse yet, how many extra dollars their students have to go in debt, before piling on all the extra books.

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