Month: February 2013

Maybe It Was Apple

By James Kwak

A little over a year ago, iconic but fading department store J.C. Penney hired Ron Johnson as CEO. Johnson was head of retail operations at Apple—which, in case you didn’t know it, is just about the most successful retailer in the world by a bevy of metrics.

According  to today’s Wall Street Journal article, Johnson quickly eliminated coupons and most sales at J.C. Penney.

“Johnson bristled when a colleague suggested that he test his new no-discounts strategy at a few stores. . . . ‘We didn’t test at Apple,’ the executive recalled Mr. Johnson . . . saying.”

Well, yeah. Apple doesn’t discount because they sell stuff that people really, really want and that they can’t get anyplace else. And they don’t test because Steve Jobs refused to. At Penney? Sales have fallen by about 30 percent.

Continue reading “Maybe It Was Apple” →

The Importance of Excel

By James Kwak

I spent the past two days at a financial regulation conference in Washington (where I saw more BlackBerries than I have seen in years—can’t lawyers and lobbyists afford decent phones?). In his remarks on the final panel, Frank Partnoy mentioned something I missed when it came out a few weeks ago: the role of Microsoft Excel in the “London Whale” trading debacle.

The issue is described in the appendix to JPMorgan’s internal investigative task force’s report. To summarize: JPMorgan’s Chief Investment Office needed a new value-at-risk (VaR) model for the synthetic credit portfolio (the one that blew up) and assigned a quantitative whiz (“a London-based quantitative expert, mathematician and model developer” who previously worked at a company that built analytical models) to create it. The new model “operated through a series of Excel spreadsheets, which had to be completed manually, by a process of copying and pasting data from one spreadsheet to another.” The internal Model Review Group identified this problem as well as a few others, but approved the model, while saying that it should be automated and another significant flaw should be fixed.** After the London Whale trade blew up, the Model Review Group discovered that the model had not been automated and found several other errors. Most spectacularly,

“After subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a factor of two and of lowering the VaR . . .”

Continue reading “The Importance of Excel” →

A Growing Split Within Republicans On Too Big To Fail Banks

By Simon Johnson

An interesting debate is developing within the Republican Party on how to approach the problem of too-big-to-fail financial institutions.

On the one hand, a growing number of influential voices are pushing for measures that would limit the size of megabanks or even push them to become smaller. Richard Fisher, president of the Federal Reserve Bank of Dallas, continues to draw a lot of attention, as does Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City and now vice chairman of the Federal Deposit Insurance Corporation. And Jon Huntsman planted a strong conservative flag on this issue during his run for the presidency in 2011.

This assessment is now shared much more broadly across the right, as seen in recent opinion pieces by George Will and Peggy Noonan, as well as regular analysis by James Pethokoukis of the American Enterprise Institute, including on the issue I write about today. See this Holiday 2012 survey, provided by the Dallas Fed, with links to views in favor of and against breaking up the big banks. Continue reading “A Growing Split Within Republicans On Too Big To Fail Banks” →

Michael Lewis!

By James Kwak

On the title page of my copy of The Big Short, in black ink, it says:

“For James Kwak

With admiration”

And then a scrawl that I take to be Michael Lewis’s signature. (Christopher Lydon got the book signed for me, since Lewis was on his radio show a few days before I was.) It may be the only book I’ve ever bothered to get autographed.

So I was especially happy to read that Lewis also wants to break up the big banks (hat tip Ezra Klein):

“Along with the other too-big-to-fail firms, Goldman needs to be busted up into smaller pieces. The ultimate goal should be to create institutions so dull and easy to understand that, when a young man who works for one of them walks into a publisher’s office and offers to write up his experiences, the publisher looks at him blankly and asks, ‘Why would anyone want to read that?'”

When Simon and I made that the centerpiece of the last chapter of 13 Bankers, I thought our chances were slim. When we wrote, in the epilogue to the paperback edition, that a proposal to do exactly that had been voted down, 61 to 33, in the Senate, I thought they had changed from slim to none. It’s still a long shot, but the issue hasn’t died, and if anything is getting more attention now, what with people like George Osborne threatening to break up banks if they don’t reform themselves. Perhaps it isn’t impossible.