Category Archives: Banking

The power of power- Warren Buffett throws $800bn lifeline to bond insurers

If you haven’t been watching the slow, ugly waltz to recession, the role of the bond insurers in the housing mess in the US has been crucial. Bored with insuirng boring (but so important) municipal bonds, the insurers decided to lend their good name too the high risk securitized mortgages which were the basic log on the bonfire of the housing fever.

They insurers now face lots of uncertainty ad because the rating they give to ANY bond becomes the rating for EVERY bond, their former gold standard (but boring, of course). Idiots. Boring can be good in all things financial). The ripple effect of not covering their claims and loosing their rating will be wide, profound, and in some schoolyard way, unfair. Why should my little borough face a credit crunch because the Martini swilling money classes in NY were “bored” by municipal bonds?

Anyway, enter Warren Buffet, superman of the financial age.

Warren Buffett throws $800bn lifeline to bond insurers – Times Online
Warren Buffett, the world’s third-richest man, has offered to help out three of the biggest bond insurers by reinsuring the $800 billion £408 billion of local government securities they underwrite.

Mr Buffett told CNBC television in the US that his firm, Berkshire Hathaway, had approached MBIA, Ambac and FGIC and offered to take on their municipal bond liabilities by providing a second level of insurance.

One of the aphorisms that Castells throws around that rolls around in my read is that in the information age what matters is not “the flow of power but the power of flows.” Maybe, as the hobbling of mighty banks and investment houses to the power of credit ratings and cash flows away. But, doesn’t Buffet’s potential to single-handedly right the global financial system offer a different new vision of power- the power of the super-duper rich to make singular impacts in the gargantuan global financial economy?

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Filed under Banking, Network Society, Political Economy

Thoughts on SL Banking ban

I know I’ve talked to people about virtual worlds and when they point out that it is “odd” or somehow “wrong” for people to adopt other identities, I sometimes repsond that the ability to do so, or at least, the ability to do anything meaningful as your alter ego, will be limited by how porous the boundary between virtual and real wrold is.  moreover, that barrier is getting more porous in most cases.  As virtual worlds develop, what people want to do in and iwth them will bump against the very real world of durable identity and the need for regulation

So, the fall out from the banking crisis as described in his WSJ article seems to affirm my point.

First, only in SL  :>):

Cheer Up, Ben: Your Economy Isn’t As Bad as This One – WSJ.com
On Sunday night, the female character was wandering topless through the virtual lobby of a Second Life bank called BCX Bank, where a sign said it was “not currently accepting deposits or paying interest.”

I still don’t get very well what these banks’ business model was?  What is their loan portfolio?  How could they possible deliver 100% returns?  The answers are not clear.  I suppose partly it is speculative dynamics around land.  Do the bankers know about Linden’s plans to control land supply?  Would that constitute insider information?  Or, through fast growth SL business; this was the story behind Ginko Financial which failed last summer and was purportedly investing in gambling in SL (another story of regulation).

For example, how can this guy say the ban will not effect his business?

Cheer Up, Ben: Your Economy Isn’t As Bad as This One – WSJ.comSteve Smith, who runs BCX bank under the avatar name Travis Ristow, yesterday said depositors — who are owed a total of $20,000 — will be able to get their money back next week. The bank, which had promised to pay depositors more than 200% in annual interest, is now allowing only small withdrawals.

“This won’t affect us long term. It’s just a short-term difficulty,” said Mr. Smith, 40 years old, who also has significant land and real-estate interests in Second Life. He said he retired from the real-life mortgage business to devote his time exclusively to his Second Life enterprises.

Finally, there is one mention that one bank was arbitraging Linden-US exchanges to the tune of $15,000/year in profit. and

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Filed under Banking, Business, policy, Political Economy, Second Life, virtual worlds

Irrational versus Rational Financial Panics

There is  a big difference between a crisis of liquiditya nd solvency, as Pual Krugman popintso ut in today’s NY Times.  Liquidity is a problem of access to cash in a defined time frame.  Solvency is a problem of not having value (assets).  The problem with the current housing blues (sub prime weakness et al) is one of solvency, not liquidity.   The big financial institutions simply made a lot of bad loans.  Until those are uncovered and dealt with, fundamental confidence will not return.  hence, investors, worried that market signals about which loans and institutions are high irsk are not clear at all, are quite rationally paniced.  This is quite different from the “irrational” bubbles I discussed with my students like the 17th century tulip bubble or the 1990s dot-con bubble.  In those cases, values were bid up over hard to specify assets because decision makers paid attention to relevant others.

When will things be better?   Can the Fed and Treasury make things right? Here is what Krugman prognosticates:

After the Money’s Gone – New York Times
Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.

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Filed under Banking, Government, macroeconomics, Political Economy

The Wall Street Facebook

In a double example of the power of networks, my mother-in-law, who religiously reads the NY times ( I don’t have time) alerted me to this great network graphic today.

It shows actors in the world of finance (Wall Street’s Facebook) and also captures their firm, firm type, graduate school affiliation and undergraduate affiliation.

Article: http://dealbook.blogs.nytimes.com/2007/10/03/the-facebook-of-wall-streets-future/
Graphic: http://graphics8.nytimes.com/images/2007/10/02/business/1003-spg-web-MASTERS.jpg

Enjoy!
Jordi

I was bummed to see my alma mater’s  in-state rival, Macalester, with two nodes to Carleton’s goose egg.  Clearly, it produces too many scholars relative to investment bankers.  :<)

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Filed under Banking, Elites, Network Visuals, Social Networks

Banking Crisis in Second Life and the Convergence of real and virtual

Second Life Research: Banking Crisis in Second Life — Calls for Regulation

This blog post form one of my new favorite blogs, Second LifeResearch (because it helps me sort out the reams of info about SL) describes how an investment bank with $750,000 collapsed.  With no SL FDIC to back up deposits, the money is gone.  While this will surely make many people’s jaws drop as they start to mouth silently or out loud “what kind of idiot would put real money in a virtual bank?!?!” the blog post points out that many residents have nothing esle to do with their money. The fallout will be more oversight, by organized residents or Linden Lab itself, or, more likely, both.

I was thinking more about Edward Castronova’s point in Synthetic Worlds.  In the introduction, I found him trying to say that synthetic worlds have many of the same features as real worlds.  As they become more ubiquitous, they will become more like the real world.  This is the convergence argument.  And I find it compelling.  This banking story is a great example.  However, Castronova, at the same time as he is normalizing synthetic worlds to make them palatable to the academic/technophobe crowd, wants and needs to say that there is something profoundly unique in them  Well, this presents a dilemma.  SL is supposed to be just like the real world and also totally different!

As I read the book more, and think about my own research, I will have to resolve this dilemma more satisfactorily.  What is distinctive about the sociology of Second Life?

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Filed under Banking, Information and Communication Technology, Second Life