What’s the best narrative for revolution?

The views expressed below are those of Cathy O’Neil. Crossposted from mathbabe.org.

Yesterday at our weekly Alt Banking meeting we had an extraordinary speaker, Merlyna Lim, come talk to us about social media and grass roots organizing.

Her story was interesting and nuanced; I won’t get everything down here. But there were quite a few sound byte takeaways I can express.

  • The organizing which culminated in the Arab Spring started way before Facebook or Twitter came to the region.
  • To a large extent social media has replaced chatting in the cafe, which we don’t do anymore.
  • But that’s actually a good thing, since many regimes are so oppressive they won’t let large groups of people hold regular meetings (and large can mean 5 or more).
  • Whereas social media is pretty good at energizing people to “get rid of their enemy” at a given critical moment, and mobilize on the street, it’s not that great at nuanced discussions for how to build something permanent and lasting afterwards.

One other thing I wanted to mention was Merlyna’s work on Mohamed Bouazizi, the Tunisian street vendor who self-immolated after getting into a dispute with a police officer.

The original story that got people mobilized in Tunis and out on the street, was that the police officer was a woman, that she slapped him, and that he was a college educated street vendor. It turns out these were white lies – he never finished high school, the police officer may have been a man, and there was probably no slap – but they built a narrative that people really loved. Merlyna wrote a paper about this available here if you want to know more.

That brings us to the question of why this particular framing was so appealing. Merlyna put it this way: plenty of other people had self-immolated under similar circumstances in Tunisia in the past 6 months alone. But they didn’t start a revolution because they were just very poor and didn’t have this story with extra (made-up) humiliating details. Killing yourself because you are frustrated at not having enough to eat just isn’t as compelling.

It reminds me of this Bloomberg View piece I’ve been chewing on for a couple of week, written by Peter Turchin and entitled Blame Rich, Overeducated Elites as Our Society Frays. He studies conditions for revolution as well, and claims that having a large unemployed but highly educated population – the “lawyer glut” we’re seeing today – is asking for trouble. From his article:

Elite overproduction generally leads to more intra-elite competition that gradually undermines the spirit of cooperation, which is followed by ideological polarization and fragmentation of the political class. This happens because the more contenders there are, the more of them end up on the losing side. A large class of disgruntled elite-wannabes, often well-educated and highly capable, has been denied access to elite positions.

Food for thought. Does one have more sympathy for people whose foodstamps have been recently cut or for someone who got a law degree and can’t find a job? Or is the real outrage when both happen (or at least are said to happen)? Personally, and this is maybe because I’ve been reading Jonathan Kozol’s Savage Inequalities, I’m not as worried about the lawyer.

Protest JP Morgan at noon on Wednesday #OccupyJPM #OWS

Crossposted from mathbabe.org. Opinions expressed are those of Cathy O’Neil.

I’m looking forward to protesting in front of JP Morgan with my #OWS Alt Banking group this Wednesday at noon. The exact location is 270 Park Avenue, near 48th Street.

It’s part of a “Week of Action” being put together by a broad coalition of activist and labor groups here in New York. The overall theme of the week is to try to communicate to New Yorkers, in this time of transition from Bloomberg to de Blasio, that we can effect positive change in our city. The theme of the day on Wednesday, at least for us, is to “be in the know,” which makes it a bit more positive than other protests we’ve been part of.

I think this makes sense. There’s so much widespread distrust and hatred of the big banks at this point that I feel like Occupy’s role has gone from provoking people to be outraged to provoking people to be hopeful. Hopeful about the fact that things could be a whole lot better than this, if we work together.

Anyhoo, we spent yesterday planning the action, and made some signs. Here’s one based on an idea we borrowed from Alexis Goldstein from her recent twitter war with JPMorgan:


and here’s a sign we’ll hold up while playing a “rigged game” with props:


I also made a sign that referenced the London Whale and the risk model, but someone said we might need to give people a copy of our recent book, Occupy Finance, just to understand that sign. Sigh.

The facebook page is here, please share it with people who may be able to join us Wednesday!

Occupy Finance, the book: announcement and fundraising

Crossposted on mathbabe.org.

Members of the Alt Banking Occupy group have been hard at work recently writing a book which we call Occupy Finance. Our blog for the book is here. It’s a work in progress but we’re planning to give away 1,000 copies of the book on September 17th, the 2nd anniversary of the Occupation of Zuccotti Park.

We’re modeling it after another book which was put out last year by Strike Debt called the Debt Resistor’s Operations Manual, which I blogged about it here when it came out.

Crappy Kickstarter

I want to tell you more about our book, which we’re writing by committee, but I did want to mention that in order to get the first 1,000 copies printed by September 17th, we’ll need altogether $2,500, and so far we’ve collected $2,150 from the various contributors, editors, and their friends. So we need to collect $350 at this point. If we get more then we’ll print more.

If you’d like to help us towards the last $350, we’d appreciate it – and I’ll even send you a copy of the book afterwards. But please don’t send anything you don’t want to give away, I can’t promise you some kind of formal proof of your contribution for tax purposes. This is Occupy after all, we suck at money. Consider this a crappy version of Kickstarter.

Anyway if you want to help out, send me a personal email to arrange it: cathy.oneil at gmail. I’ll basically just tell you to send me a personal check, since I’m the one fronting the money.

Audience and Mission

The mission of the book, like the mission of the Alt Banking group, is to explain the financial system and its dysfunction in plain English and to offer suggestions for how to think about it and what we can do to improve it.

The audience for this book is the 99% who are Occupy-friendly or at least Occupy-inquisitive. Specifically, we want people who know there’s something wrong, but don’t have the background to articulate what it is, to have a reference to help them define their issues. We want to give them ammunition at the water cooler.

What’s in the book?

After a stirring introduction, the book is divided into three basic parts: The Real Life Impact of Financialization, How We Got Here, and Things to do. I’ve got links below.

Keep in mind things are still in flux and will be changed, sometimes radically, before the final printing. In particular we’re actually using DropBox for most of our edits so the links below aren’t final versions (but will be eventually). Even so, the content below will give you a good idea of what we have in mind, and if you have comments or suggestions, please do tell us, thanks!

Our table of contents is as follows, and the available chapters have associated links:

Introduction: Fighting Our Way Out of the Financial Maze

The Real Life Impact of Financialization

  1. Heads They Win, Tails We Lose: Real Life Impact of Financialization on the 99%
  2. The bailout: it didn’t work, it’s still going on, and it’s making things worse

How We Got Here

  1. What Banks Do
  2. Impact of Deregulation
  3. The top ten financial outrages
  4. The muni bond industry and the 99%

Things to Do

  1. Reject common myths
  2. Smart Regulation
  3. New Money
  4. Resources
  5. Occupy!

If we bailed out the banks, why not Detroit? (#OWS)

This is crossposted from mathbabe.org. All the opinions below are those of Cathy O’Neil.

I wrote a post yesterday to discuss the fact that, as we’ve seen in Detroit and as we’ll soon see across the country, the math isn’t working out on pensions. One of my commenters responded, saying I was falling for a “very right wing attack on defined benefit pensions.”

I think it’s a mistake to think like that. If people on the left refuse to discuss reality, then who owns reality? And moreover, who will act and towards what end?

Here’s what I anticipate: just as “bankruptcy” in the realm of airlines has come to mean “a short period wherein we toss our promises to retired workers and then come back to life as a company”, I’m afraid that Detroit may signal the emergence of a new legal device for cities to do the same thing, especially the tossing out of promises to retired workers part. A kind of coordinated bankruptcy if you will.

It comes down to the following questions. For whom do laws work? Who can trust that, when they enter a legal obligation, it will be honored?

From Trayvon Martin to the people who have been illegally foreclosed on, we’ve seen the answer to that.

And then we might ask, for whom are laws written or exceptions made? And the answer to that might well be for banks, in times of crisis of their own doing, and so they can get their bonuses.

I’m not a huge fan of the original bailouts, because it ignored the social and legal contracts in the opposite way, that failures should fail and people who are criminals should go to jail. It didn’t seem fair then, and it still doesn’t now, as JP Morgan posts record $6.4 billion profits in the same quarter that it’s trying to settle a $500 million market manipulation charge.

It’s all very well to rest our arguments on the sanctity of the contract, but if you look around the edges you’ll see whose contracts get ripped up because of fraudulent accounting, and whose bonuses get bigger.

And it brings up the following question: if we bailed out the banks, why not the people of Detroit?

Payroll cards: “It costs too much to get my money” (#OWS)

Crossposted from mathbabe.org. Opinions expressed are those of Cathy O’Neil.

If this article from yesterday’s New York Times doesn’t make you want to join Occupy, then nothing will.

It’s about how, if you work at a truly crappy job like Walmart or McDonalds, they’ll pay you with a pre-paid card that charges you for absolutely everything, including checking your balance or taking your money, and will even charge you for not using the card. Because we aren’t nickeling and diming these people enough.

The companies doing this stuff say they’re “making things convenient for the workers,” but of course they’re really paying off the employers, sometimes explicitly:

In the case of the New York City Housing Authority, it stands to receive a dollar for every employee it signs up to Citibank’s payroll cards, according to a contract reviewed by The New York Times.

Thanks for the convenience, payroll card banks!

One thing that makes me extra crazy about this article is how McDonalds uses its franchise system to keep its hands clean:

For Natalie Gunshannon, 27, another McDonald’s worker, the owners of the franchise that she worked for in Dallas, Pa., she says, refused to deposit her pay directly into her checking account at a local credit union, which lets its customers use its A.T.M.’s free. Instead, Ms. Gunshannon said, she was forced to use a payroll card issued by JPMorgan Chase. She has since quit her job at the drive-through window and is suing the franchise owners.

“I know I deserve to get fairly paid for my work,” she said.

The franchise owners, Albert and Carol Mueller, said in a statement that they comply with all employment, pay and work laws, and try to provide a positive experience for employees. McDonald’s itself, noting that it is not named in the suit, says it lets franchisees determine employment and pay policies.

I actually heard about this newish scheme against the poor when I attended the CFPB Town Hall more than a year ago and wrote about it here. Actually that’s where I heard people complain about Walmart doing this but also court-appointed child support as well.

Just to be clear, these fees are illegal in the context of credit cards, but financial regulation has not touched payroll cards yet. Yet another way that the poor are financialized, which is to say they’re physically and psychologically separated from their money. Get on this, CFPB!

Update: an excellent article about this issue was written by Sarah Jaffe a couple of weeks ago (hat tip Suresh Naidu). It ends with an awesome quote by Stephen Lerner: “No scam is too small or too big for the wizards of finance.”

SEC Roundtable on credit rating agency models

Crossposted from mathbabe.org from May 14, 2013. The views expressed are those of Cathy O’Neil.

I’ve discussed the broken business model that is the credit rating agency system in this country on a few occasions. It directly contributed to the opacity and fraud in the MBS market and to the ensuing financial crisis, for example. And in this post and then this one, I suggest that someone should start an open source version of credit rating agencies. Here’s my explanation:

The system of credit ratings undermines the trust of even the most fervently pro-business entrepreneur out there. The models are knowingly games by both sides, and it’s clearly both corrupt and important. It’s also a bipartisan issue: Republicans and Democrats alike should want transparency when it comes to modeling downgrades- at the very least so they can argue against the results in a factual way. There’s no reason I can see why there shouldn’t be broad support for a rule to force the ratings agencies to make their models publicly available. In other words, this isn’t a political game that would score points for one side or the other.

Well, it wasn’t long before Marc Joffe, who had started an open source credit rating agency, contacted me and came to my Occupy group to explain his plan, which I blogged about here. That was almost a year ago.

Today the SEC is going to have something they’re calling a Credit Ratings Roundtable. This is in response to an amendment that Senator Al Franken put on Dodd-Frank which requires the SEC to examine the credit rating industry. From their webpage description of the event:

The roundtable will consist of three panels:

  • The first panel will discuss the potential creation of a credit rating assignment system for asset-backed securities.
  • The second panel will discuss the effectiveness of the SEC’s current system to encourage unsolicited ratings of asset-backed securities.
  • The third panel will discuss other alternatives to the current issuer-pay business model in which the issuer selects and pays the firm it wants to provide credit ratings for its securities.

Marc is going to be one of something like 9 people in the third panel. He wrote this op-ed piece about his goal for the panel, a key excerpt being the following:

Section 939A of the Dodd-Frank Act requires regulatory agencies to replace references to NRSRO ratings in their regulations with alternative standards of credit-worthiness. I suggest that the output of a certified, open source credit model be included in regulations as a standard of credit-worthiness.

Just to be clear: the current problem is that not only is there wide-spread gaming, but there’s also a near monopoly by the “big three” credit rating agencies, and for whatever reason that monopoly status has been incredibly well protected by the SEC. They don’t grant “NRSRO” status to credit rating agencies unless the given agency can produce something like 10 letters from clients who will vouch for them providing credit ratings for at least 3 years. You can see why this is a hard business to break into.

The Roundtable was covered yesterday in the Wall Street Journal as well: Ratings Firms Steer Clear of an Overhaul – an unfortunate title if you are trying to be optimistic about the event today. From the WSJ article:

Mr. Franken’s amendment requires the SEC to create a board that would assign a rating firm to evaluate structured-finance deals or come up with another option to eliminate conflicts.

While lawsuits filed against S&P in February by the U.S. government and more than a dozen states refocused unflattering attention on the bond-rating industry, efforts to upend its reliance on issuers have languished, partly because of a lack of consensus on what to do.

I’m just kind of amazed that, given how dirty and obviously broken this industry is, we can’t do better than this. SEC, please start doing your job. How could allowing an open-source credit rating agency hurt our country? How could it make things worse?

Global move to austerity based on mistake in Excel

Crossposted from mathbabe.org. The views expressed below are those of Cathy O’Neil.

As Rortybomb reported yesterday on the Roosevelt Institute blog (hat tip Adam Obeng), a recent paper written by Thomas HerndonMichael Ash, and Robert Pollin looked into replicating the results of a economics paper originally written by Carmen Reinhart and Kenneth Rogoff entitled Growth in a Time of Debt.

The original Reinhart and Rogoff paper had concluded that public debt loads greater than 90 percent of GDP consistently reduce GDP growth, a “fact” which has been widely used. However, the more recent paper finds problems. Here’s the abstract:

Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogo ff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff ’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.

A few comments.

1) We should always have the data and code for published results.

The way the authors Herndon, Ash and Pollin managed to replicate the results was that they personally requested the excel spreadsheets from Reinhart and Rogoff. Given how politically useful and important this result has been (see Rortybomb’s explanation of this), it’s kind of a miracle that they released the spreadsheet. Indeed that’s the best part of this story from a scientific viewpoint.

2) The data and code should be open source.

One cool thing is that now you can actually download the data – there’s a link at the bottom of this page. I did this and was happy to have a bunch of csv files and some (open source) R code which presumably recovers the excel spreadsheet mistakes. I also found some .dta files, which seems like Stata proprietary file types, which is annoying, but then I googled and it seems like you can use R to turn .dta files into csv files. It’s still weird that they wrote code in R but saved files in Stata.

3) These mistakes are easy to make and they’re mostly not considered mistakes.

Let’s talk about the “mistakes” the authors found. First, they’re excluding certain time periods for certain countries, specifically right after World War II. Second, they chose certain “non-standard” weightings for the various countries they considered. Finally, they accidentally excluded certain rows from their calculation.

Only that last one is considered a mistake by modelers. The others are modeling choices, and they happen all the time. Indeed it’s impossible not to make such choices. Who’s to say that you have to use standard country weightings? Why? How much data do you actually need to consider? Why?

[Aside: I’m sure there are proprietary trading models running right now in hedge funds that anticipate how other people weight countries in standard ways and betting accordingly. In that sense, using standard weightings might be a stupid thing to do. But in any case validating a weighting scheme is extremely difficult. In the end you’re trying to decide how much various countries matter in a certain light, and the answer is often that your country matters the most to you.]

4) We need to actually consider other modeling possibilities.

It’s not a surprise, to economists anyway, that after you include more post-WWII years of data, which we all know to be high debt and high growth years worldwide, you get a substantively different answer. Excluding these data points is just as much a political decision as a modeling decision.

In the end the only reasonable way to proceed is to describe your choices, and your reasoning, and the result, but also consider other “reasonable” choices and report the results there too. And if you don’t like the answer, or don’t want to do the work, at the very least you need to provide your code and data and let other people check how your result changes with different “reasonable” choices.

Once the community of economists (and other data-centric fields) starts doing this, we will all realize that our so-called “objective results” utterly depend on such modeling decisions, and are about as variable as our own opinions.

5) And this is an easy model.

Think about how many modeling decisions and errors are in more complicated models!

Ina Drew: heinously greedy or heinously incompetent?

Crossposted from mathbabe.org. Views expressed are those of Cathy O’Neil.

Last night I went to an event at Barnard where Ina Drew, ex-CIO head of JP Morgan Chase, who oversaw the London Whale fiasco, was warmly hosted and interviewed by Barnard president Debora Spar.

[Aside: I was going to link to Ina Drew’s wikipedia entry in the above paragraph, but it was so sanitized that I couldn’t get myself to do it. She must have paid off lots of wiki editors to keep herself this clean. WTF, wikipedia??]

A little background in case you don’t know who this Drew woman is. She was in charge of balance-sheet risk management and somehow managed to not notice losing $6.2 billion dollars in the group she was in charge of, which was meant to hedge risk, at least according to CEO Jamie Dimon. She made $15 million per year for her efforts and recently retired.

In her recent Congressional testimony (see Example 3 in this recent post), she threw the quants with their Ph.D.’s under the bus even though the Senate report of the incident noted multiple risk limits being exceeded and ignored, and then risk models themselves changed to look better, as well as the “whale” trader Bruno Iksil‘s desire to get out of his losing position being resisted by upper management (i.e. Ina Drew).

I’m not going to defend Iksil for that long, but let’s be clear: he fucked up, and then was kept in his ridiculous position by Ina Drew because she didn’t want to look bad. His angst is well-documented in the Senate report, which you should read.

Actually, the whole story is somewhat more complicated but still totally stupid: instead of backing out of certain credit positions the old-fashioned and somewhat expensive way, the CIO office decided to try to reduce its capital requirements via reducing (manipulated) VaR, but ended up increasing their capital requirements in other, non-VaR ways (specifically, the “comprehensive risk measure”, which isn’t as manipulable as VaR). Read more here.

Maybe Ina is going to claim innocence, that she had no idea what was going on. In that case, she had no control over her group and its huge losses. So either she’s heinously greedy or heinously incompetent. My money’s on “incompetent” after seeing and listening to her last night. My live Twitter feed from the event is available here.

We featured Ina Drew on our “52 Shades of Greed” card deck as the Queen of diamonds:


Back to the event.

Why did we cart out Ina Drew in front of an audience of young Barnard women last night? Were we advertising a career in finance to them? Is Drew a role model for these young people?

The best answers I can come up with are terrible:

  1. She’s a Barnard mom (her daughter was in the audience). Not a trivial consideration, especially considering the potential donor angle.
  2. President Spar is on the board of Goldman Sachs and there’s a certain loyalty among elites, which includes publicly celebrating colossal failures. Possible, but why now? Is there some kind of perverted female solidarity among women that should be in jail but insist on considering themselves role models? Please count me out of that flavor of feminism.
  3. President Spar and Ina Drew actually don’t think Drew did anything wrong. This last theory is the weirdest but is the best supported by the tone of the conversation last night. It gives me the creeps. In any case I can no longer imagine supporting Barnard’s mission with that woman as president. It’s sad considering my fond feelings for the place where I was an assistant professor for two years in the math department and which treated me well.

Please suggest other ideas I’ve failed to mention.