Major Label Messes With the Wrong Guy

By Eliot Van Buskirk

Tim Quirk, a senior vice president at the digital music service Rhapsody, used to front a band that was signed to one of the major labels, Warner Bros.

His experiences at Rhapsody taught him firsthand that it’s possible to build a big database that accounts for what each copyright holder is owed. However, he and others contend, major labels have no incentive to put such a transparent database in place — quite the opposite: They only stand to benefit by obfuscating the accounting process for middle- and long-tail bands and tracking their digital streams and downloads casually.

Quirk estimated that his band’s three out-of-print major-label releases should have earned between two and five times as much digital revenue as its four independently-released albums earned, given that they are “far more popular.”

But when he compared IODA’s payouts to Warner Bros.’ payouts over the same five-year period, he was shocked to discover the reverse to be true.

His band earned about $12,000 from the independent albums distributed digitally through IODA, but only $62.47 from Warner Bros., so $395,214.71 of the band’s advance remains unrecouped (meaning that it owes that amount against future royalties earned).

Quirk (right) doesn’t think his band will ever recoup that sizable advance, but it’s the principle of the thing. By refusing to update their accounting technology for dealing with revenue from digital streams and downloads — data that digital music services such as Rhapsody and iTunes already deliver to the label anyway — he claims major labels are letting all sorts of digital revenue slip through the cracks and into their coffers, not to mention absorbing large upfront royalty advances from music start-ups.

“We all know that major labels are supposed to be venal masters of hiding money from artists, but they’re also supposed to be good at it, right?” asks Quirk in his post.

The whole saga makes for a fascinating (if somewhat lengthy) read.

Clarification: Although Quirk’s post says he “doesn’t necessarily subscribe to [the theory] that labels and publishers deliberately avoid creating the transparent accounting systems today’s technology enables,” it also says, “what’s so weird about this, to me: they have the ability to tell the truth, and doing so won’t cost them anything.”

Update: Warner Music Group issued a statement: “As a matter of policy, we don’t comment on specific terms of artists’ agreements. Accurate accounting to our artists is a high priority for WMG. We take these issues seriously and Mr. Quirk’s implications to the contrary are flat-out wrong.”

Update: Rhapsody issued a statement: “Tim Quirk’s views are his own and do not reflect those of Rhapsody management. Rhapsody and our label partners are focused on ensuring that artists and copyright holders are compensated appropriately. After years of working together with Warner Music, we believe the company has made every effort to provide accurate accounting to its artists and copyright holders. The number of parties involved makes this a very complex problem to solve, but one that we, as an industry, are committed to solving.”

See Also:

• Streamlining the Search for Music
• Free Music Equals Net Profits
• Independence Day for Indie Bands
• Report: Beatles’ Rock Band Royalties Could Reach $40 Million
  
• Sony Buys Part of the Long Tail

(Image courtesy of Too Much Joy) Photo of Tim Quirk: Flickr/penmachine

http://www.wired.com/epicenter/2009/12/major-label-messes-with-wrong-guy/

Fed Transparency Should Precede Bernanke Confirmation

The following is a joint piece by Dean Baker, the co-director of the progressive Center for Economic and Policy Research, and Mark Calabria, the director of financial regulations studies at the libertarian Cato Institute.

Congress will soon consider whether Ben Bernanke merits another term as Chairman of the Federal Reserve. It is fair to say that no single individual played a larger role in responding to the recent financial crisis. The Fed has directly lent more than $2 trillion to financial and non-financial institutions in the last two years. It has guaranteed trillions more. It is also fair to say that few individuals and institutions played as large a role in the economy leading up to the crisis than Ben Bernanke and the Federal Reserve.

However, at the moment Congress lacks the independent and objective analysis needed to fully assess Bernanke’s performance and therefore to make an informed judgment as to whether he deserves re-appointment. For this reason, Congress should put off a vote on Bernanke’s nomination until there has been a full audit of the Fed’s actions preceding and during the crisis.

Before considering Bernanke’s role in containing the financial crisis, Congress should, via the Government Accountability Office (GAO), investigate the role of Fed policy in allowing the housing bubble to grow. This is not just an effort at playing the blame game; an objective assessment of this policy will also be helpful in avoiding future bubbles.

It is often noted that Mr. Bernanke’s research on the Great Depression makes him well prepared to run the Fed in this period of crisis. Unfortunately, Mr. Bernanke’s research apparently did not tell him the obvious: that allowing an $8 trillion housing bubble to grow unchecked would lead to an economic disaster like what we are now experiencing. He and his colleagues at the Federal Reserve Board either could not see, or did not care about, this huge bubble. As a result, Ben Bernanke has been running around for much of the last year and a half telling us about his knowledge of the Great Depression.

It is worth quickly explaining why a collapsed housing bubble leads to a recession, since the policy people responsible for this disaster have done so much to try to obscure the obvious. In the years prior to its collapse, the bubble was driving the economy. Bubble-inflated house prices created an unprecedented housing boom. Residential construction peaked at more than 6.0 percentage points of GDP in 2005.

The $8 trillion in bubble housing wealth led to a consumption boom also. This is the well known housing wealth effect that holds that one dollar of additional bubble wealth will cause annual consumption to increase by 5-7 cents. The implication was that an $8 trillion bubble would push annual consumption up by between $400 billion and $560 billion.

When the bubble collapsed, residential construction fell through the floor as builders suddenly realized that we had an enormous housing glut. The drop in annual construction was more than 3 percentage points of GDP, or more than $500 billion. At the same time, when the bubble driven housing wealth disappeared, we lost close to $500 billion in annual consumption.

Further losses in demand associated with the bursting of a bubble in non-residential real estate, added to the problem pushing the total drop in annual demand to more than $1 trillion. This was an entirely predictable outcome of the collapse of a housing bubble.

The simple reality is that there is nothing in the Fed’s bag of tricks that allows it to easily replace over $1 trillion in annual demand. In short, the bubble guaranteed the economic disaster that we are now experiencing: end of story.

Those who are opposed to a full audit of the Fed’s conduct often contend that this sort of audit counters an international consensus towards central banks that are independent of legislatures. While the extent of this consensus is questionable, it worth noting that Iceland was often held up as a model by those who shared in this consensus because of its independent central bank and its strong record on inflation targeting.

Examining the Fed’s decision-making during the crisis can also inform Congress, and the public, not only on the appropriateness of Bernanke’s actions, but also on the Fed’s framework for distinguishing between liquidity and solvency problems. The public has been given the impression that such institutions as Citibank and Bank of America are worth more as on-going concerns than if they were liquidated as insolvent banks. To better understand the nature of financial crises, GAO should analyze the Fed’s framework for evaluating market liquidity and bank insolvency.

Bernanke has argued that an audit of Federal Reserve activities would undermine the independence of the Fed and unhinge inflation expectations. Nothing could be further from the truth. Subjecting the Fed’s decision-making on monetary policy to objective and independent analysis could improve inflationary expectations by increasing the public’s understanding of the conduct of monetary policy.

Congress and the White House already have ample opportunity, both in regular hearings and in private meetings, to influence the Federal Reserve as to monetary policy. It would not be unfair to characterize Bernanke as an active member of both the Obama and the Bush Administrations. A GAO audit will, if anything, reduce political pressures by exposing such pressures to the light of day, as well as the influence of the financial industry on Fed policy.

As Bernanke can continue to serve indefinitely as Chairman after his term expires in January 2010, there is no urgency in his nomination. Congress has ample time to consider an audit of the Fed before weighing the merits of his confirmation.

http://www.huffingtonpost.com/dean-baker/fed-transparency-should-p_b_377112.html

Abbott’s deal with Teva keeps generic TriCor off the market yet again

Melly Alazraki

The case of Abbott Laboratories’ (ABT) cholesterol drug TriCor is quite interesting. The drug has been a blockbuster, and it has been under patent protection for decades. That’s right, decades. Now, Abbott has managed to seal a deal with generic drug maker Teva Pharmaceuticals Industries Ltd. (TEVA) that would stave off generic competition for TriCor — yet again — until March 2011 at least.

How did Abbott manage to keep TriCor under patent protection all these years? The story begins back in the 1960s, when the drug was discovered by the French company Fournier. It began selling the product in Europe in 1975 and Abbott licensed it in 1998. The drug’s underlying patent had expired by that time, but Abbott, which earns more than $1 billion in annual sales from the drug, found a way to patent it again … and again … and again.

In 1999, a generic drug company that was later acquired by Teva was about to introduce a generic version of TriCor. Abbott sued for patent infringement and the two have been in court ever since. To protect its patent, Abbott used a tactic favored by many pharmaceutical companies in their scrambles to keep drugs under patent protection: Abbott patented a new formulation for TriCor by changing the type of pill (from capsule to tablet) and the dosage. In doing so, it prevented pharmacists from automatically switching prescriptions for TriCor to a generic version. Teva’s plans for the generic version were derailed and this whole scenario repeated itself in 2002.

While Abbott denied any wrongdoing, it did agree to pay $184 million to settle litigation brought by state attorneys general and private entities alleging antitrust and unfair competition claims in connection with the sales of TriCor.

The SEC filing from Monday that disclosed the settlement with Teva didn’t disclose many details. What we know is that the deal involves the TriCor 145-milligram tablet and that it postpones the sale of a generic version of TriCor until March 28, 2011, at the earliest. Fournier S.A. also agreed to the deal. Also, under certain defined circumstances, Teva may not receive rights until July 1, 2012.

Another Loophole, Another Profit Booster

Meanwhile, last year, the Food and Drug Administration approved TriLipix, a new branded Abbott drug that is similar to TriCor but is approved for use in combination with statins, a popular class of cholesterol-lowering drug. So now Abbott is scrambling to switch patients to TriLipix from TriCor before generic versions of TriCor appear.

If you think that something smells funny here, you’re not alone. While Abbott makes essentially cosmetic changes to TriCor that allow it to somehow convince the FDA that it’s a new drug which warrants new patent protection, the ones who are left to foot the bill for the more expensive, branded drug seem to be, as always, the patients and the taxpayers.

Abbott is not paying Teva to delay the introduction of a generic version, Kelly Morrison, a company spokeswoman told DailyFinance. “There is no payment/commercial agreement as part of this — this is a pure licensing agreement,” she said, adding that “this allows Abbott to obtain certainty for our product and avoid risk and costly litigation around our patents.” But what Teva gets out of the deal to induce it to agree to this arrangement is not clear.

Many pharmaceutical companies have paid generic makers over the past decade to delay generics. The Federal Trade Commission doesn’t look kindly on such “pay-for-delay” deals: The practice ends up costing U.S. consumers $3.5 billion a year — $1.2 billion of which is paid by the government, FTC chief Jon Leibowitz said in June.

Questions of generics aside, some doctors are growing skeptical about the benefits of TriCor, with published studies showing that it failed to definitively reduce heart attacks and related heart diseases, while possibly causing kidney problems. Abbott defends the drug’s efficacy and safety.

Abbott has been able to fend off most problems when it comes to TriCor — to the delight of its shareholders. But perhaps it’s time someone took a closer look not just at generic delaying practices but also at FDA’s rulebook when it comes to issuing patents on barely modified drugs. The market could have had a generic version of TriCor since 1999. At $1 billion a year in sales, that’s a big chunk of savings that patients, insurers and taxpayers have missed out on.

http://www.dailyfinance.com/2009/12/01/abbotts-deal-with-teva-keeps-generic-tricor-off-the-market-yet/

CBO: Three-Quarters Of Stimulus Unspent

Only $100 billion of the $787 billion stimulus package passed nine months ago has actually been spent by the federal government so far, with another $90 billion of stimulus coming in the form of tax reductions, the nonpartisan Congressional Budget Office reported Monday evening. That leaves three quarters of the package — and its stimulative effects — yet to come.

Slow as that pace may seem, it’s in line with initial CBO estimates.

But much of the spending hasn’t had the full impact it could, the report says, because “it appears that stimulus funds substituted for some spending from regular appropriations.”

Despite the limitations, the CBO estimates that between 600,000 and 1.6 million people were employed in the third quarter of 2009 who otherwise would not have been. The spending and tax cuts raised the Gross Domestic Product by somewhere between 1.2 and 3.2 percent, it found, and reduced unemployment by 0.3 to 0.9 percent.

In Washington, the stimulus is often discussed as if the entire $787 billion was all spent on the first night — with some pundits expressing shock and dismay that the economy hasn’t already bounced back as a result. That three quarters of the stimulus has yet to be felt undermines their positions.

Shortly after the stimulus was passed, the GOP began declaring it a failure, a conclusion the party has stuck to since – even if some officials take credit for what it’s accomplishing when they’re back at home

Democrats in Congress have been stung by the criticism and even while pushing for more stimulus spending have worked hard to avoid calling it a stimulus, dubbing it a “jobs” bill instead.

Michael Steel, a spokesman for Minority Leader John Boehner (R-Ohio), told HuffPost Monday night that he’s not buying the CBO estimate.

“The White House claimed that if we passed the trillion-dollar ’stimulus’ unemployment would stay below 8 percent and jobs would be created ‘immediately.’ Instead, unemployment is over 10 percent, more than three million more Americans are out of work, and folks are asking ‘where are the jobs?’” he wrote in an e-mail.

The White House had been mocked for its flawed reporting of how many jobs the stimulus created – which included jobs in congressional districts that don’t actually exist. But the CBO said it used a different model than relying on the word of bureaucrats.

“Estimating the law’s overall effects on employment requires a more comprehensive analysis than the recipients’ reports provide,” the CBO said. “Therefore, looking at the actual amounts spent so far (where identifiable) and estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law’s impact on employment and economic output using evidence about how previous similar policies have affected the economy and various mathematical models that represent the workings of the economy. On that basis, CBO estimates that in the third quarter of calendar year 2009, an additional 600,000 to 1.6 million people were employed in the United States.”

That could be a tremendous underestimate, as the CBO’s thinking doesn’t take into account the possibility that the economy might have fallen off a cliff if the stimulus hadn’t been passed, with world markets panicking and employers continuing to eliminate jobs at an eye-popping pace.

Similarly, the reason the CBO failed to predict the rise in unemployment that has taken place since February is that the model it uses doesn’t take into account the fact that the banking system collapsed.

http://www.huffingtonpost.com/2009/11/30/stimulus-unspent-cbo_n_374729.html

DOES THIS NUMBER SCARE YOU? $700,000,000,000

On ABC’s This Week, host George Stephanopoulos asked Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, about the argument that the nation’s rising debt level may lead to “a major weakening of American power.” Krugman responded:

KRUGMAN: You know, first thing to say is people are putting their money where their mouth is, which is the bond market. Things were fine. You know, the U.S. government is able to borrow long-term at 3.3 percent interest rate. So, obviously, you know, the market is not convinced.
Now, the market has been wrong. But, then if you do the arithmetic, these numbers look huge. The American economy is huge. The debt burden, even after five years, is going to be well below as a share of GDP well below levels that lots of industrial countries have reached in the past, including ourselves after World War II, when we were able to handle that just fine. [...]

We’re not going to hit 100 percent (of GDP in debt) until a decade from now. And countries have gone above 100 percent. I mean, if you actually ask about the interest cost, particularly inflation-adjusted interest cost, you know, we’re now paying 1.2 percent real interest rate on federal debt. Even if you add 50 percent of GDP in debt, which I don’t think is going to happen, that’s still only a fraction of a percent of GDP in additional debt service costs.

Washington Post columnist George Will, a vocal deficit hawk, pushed back: “But even unreasonably cheerful assumptions about economic growth and interest rates, we’re apt to be spending in 10 years $700 billion a year servicing our debt.”

On Monday, Krugman took to his blog to call Will’s response an example of “debt scare,” joking that the statistic about 700 billion dollars should have been “read in the voice of Dr. Evil.“

I get that a lot — people who talk about the big numbers which are supposed to imply that things are terrible, impossible, we’re doomed, etc.
The point, of course, is that everything about the United States is big. So you have to interpret numbers accordingly. As the graphic above shows — it’s taken from an article that managed to maintain a grim tone while reporting numbers that actually weren’t all that grim — what we’re talking about is a debt-service burden roughly comparable to that under the first President Bush. How many of the people now warning about the impossible burden of currently projected debt were issuing similar warnings back in 1992? Not many, I’d guess.

As Krugman notes, the cost of servicing debt levels are quite low today by historical standards, and even when interests rates rise, they are projected to grow to levels experienced during the 1980s and 90s.

Moreover, as Huffington Post’s Ryan Grim reported recently:

The focus on the deficit is also fraught with economic miscalculations. Long-term interest rates are extremely low, despite the hysteria, and the U.S. government is well positioned to meet its obligations indefinitely. The Chinese government, meanwhile, which holds a pile of U.S. debt, has little recourse other than to continue to buy U.S. bonds.
The Nation’s DC editor Chris Hayes put it succinctly, using an old saying, in a recent column: “‘When you owe $100,000, the bank owns you. When you owe $100 million, you own the bank’ — and it aptly describes the US relationship with China, which holds approximately 70 percent of its 2.3 trillion foreign reserves in dollars.”

Nevertheless, deficit hawks are threatening a dramatic move to force cost-cutting plans, as McClatchy reported on Monday.

A bipartisan group of more than a dozen senators is threatening to vote against an increase in the debt limit unless Congress passes a new deficit-fighting plan.
“I will not vote for raising the debt limit without a vehicle to handle this. … This is our moment,” California Democratic Sen. Dianne Feinstein said.

She and nine other senators wrote to Senate Majority Leader Harry Reid, D-Nev., asking that Congress create a special commission to make recommendations that then could be decided by an up-or-down vote.

HuffPost’s Jason Linkins has much more on this plan for a deficit-fighting commission HERE.

http://www.huffingtonpost.com/2009/11/30/krugman-deficit-hawks-try_n_373976.html

Dispensing Prescription Drugs in 3-Month Supplies Reduces Drug Costs by a Third

“The use of three-month supplies of prescription drugs is now confirmed as a potent method that doctors, patients and third-party payers can use to help bring down health care costs,” said G. Caleb Alexander, M.D., M.S., assistant professor of medicine at the University of Chicago Medical Center. (Credit: University of Chicago Medical Center)

Purchasing prescription drugs in a three-month supply rather than a one-month supply has long been regarded as a way to reduce the cost of drugs for patients and third-party payers. New research from the University of Chicago quantifies the savings for the first time.

An analysis of 26,852 prescriptions filled for 395 different drugs from 2000-2005 showed that patients who purchased their drugs in three-month supplies rather than with one-month supplies saved on average 29% in out-of-pocket costs. After factoring in third-party payers, including Medicare, Medicaid and insurance companies, total savings averaged 18%.

“These savings may not seem large to some, but they could help trim the cost of health care, which is especially important given the nationwide debate about how to finance health care reform,” said G. Caleb Alexander, MD, MS, Assistant Professor of Medicine at the University of Chicago Medical Center and senior author of the study, which will be published in print November 20, 2009, in Applied Health Economics & Health Policy.

Although prescription drug costs represent only about 10% of the nation’s total health care bill, they are one of the fastest growing sectors and affect a large proportion of patients.

“No matter what any health care reform package looks like, millions of Americans are burdened by prescription drugs costs, and this is one important way to help relieve that burden,” Alexander said. “Other methods to lower prescription drug costs include substituting generic drugs for brand-name drugs and discontinuing non-essential medicines.”

The drugs in this study were limited to those that were prescribed for common chronic conditions, including high cholesterol, hypertension, hypothyroidism and depression. Only patients who received both a one-month supply and a three-month supply during the same year in the same dose and quantity were included in the main analyses.

Forty-four percent of the prescriptions examined were dispensed in three-month supplies; the remainder were dispensed in one-month supplies. “This indicates that there is a significant amount of cost savings yet to be realized by converting from one-month supplies to three-month supplies,” Alexander said.

The average monthly out-of-pocket cost for a one-month supply was $20.44 compared with $15.10 for a three-month supply yielding a 29% savings after adjustment for potential confounders. The corresponding numbers for the average monthly total costs were $42.72 and $37.95, respectively, yielding an 18% savings after adjustment for potential confounders.

If all the drugs in the study had been provided as three-month supplies, the out-of-pocket savings would have amounted to an estimated $148.6 million. Total savings would have amounted to $245.1 million. All figures are in 2005 dollars.

Patients’ sex, race, level of education and number of chronic conditions did not seem to predict who was most likely to fill a 3-month supply, Alexander said. “We were surprised to find that there were no substantial systematic differences in the characteristics of individuals filling one-month and three-month supplies.”

“Patients who are paying a lot each month for medicines — especially to treat chronic conditions — should investigate whether they can save money by using a three-month supply,” he said. “Physicians need to keep this in mind as a potent way to help patients afford their medications.”

Story Source:

Adapted from materials provided by University of Chicago Medical Center, via EurekAlert!, a service of AAAS.

http://www.sciencedaily.com/releases/2009/11/091120081625.htm

‘Cash for Clunkers,’ household edition

Program expected to boost appliance sales as economy drags

By Peter Whoriskey

Washington Post Staff Writer
Friday, November 27, 2009

In U.S. history, there may have been no better time to own a junk car, a rattling old fridge and a leaking dishwasher.

On the heels of its ballyhooed “Cash for Clunkers” program for cars, the federal government is expected to finalize details in the coming weeks of another tax-supported shopping extravaganza, known as “Cash for Appliances.”

Supported by $300 million from the economic stimulus, the program will offer rebates to consumers who buy energy-efficient refrigerators, dishwashers, air conditioners and other appliances to replace their older models.

And like the $3 billion cars program that gave consumers money for swapping their clunkers for more fuel-efficient rides, the appliance initiative seems destined to inspire shoppers, drive up sales for a while and profoundly divide economists over how much lasting good this chunk of government spending will do for the economy.

“The premise seems to be that for Americans to be richer, they need to throw out their old appliances faster — I don’t see it that way,” said James D. Hamilton, an economics professor at the University of California at San Diego, who has blogged about the clunkers rebates. “I don’t like the idea of just spending money for its own sake.”

While many economists believe that government incentives to lift consumer spending can boost the economy during a recession, they differ over whether the sales spikes that accompany the rebates are meaningful or merely concentrate sales that would have occurred before and after the rebate period anyway.

The Obama administration’s Council of Economic Advisers has indicated that the clunkers program provided a worthwhile boost even though many of the 690,000 clunkers sales would have happened anyway. In their baseline assessment, the program increased car sales in 2009 by 330,000.

Clunkers “is one of several stimulus programs whose purpose is to shift expenditures by households, businesses, and governments from the future to the present,” the council wrote in a September report. “Such time-shifting is valuable in a recession, when the economy has an abundance of unemployed resources that can be put to work at low net economic cost.”

The appliances program may be destined to continue the debate. For when it comes to stimulus, timing can be critical, and the implementation of the effort has dragged on, possibly diminishing its usefulness.

Although the $787 billion stimulus program was signed by Obama in February of 2009, much of the cash-for-appliances money won’t hit the streets until next February, March or April. The rebate program is being run by state governments, which must define and enact their rebate plans with federal government funding and approval. A survey of some of the largest states shows that California is planning to begin its program in March, New York in February, Pennsylvania in the spring, Illinois in January and April.

Under the program, Virginia is expected to receive $7.5 million, Maryland $5.4 million and the District $568,000, but the requirements and rebates have not yet been disclosed.

Now the home appliance manufacturers who celebrated the passage of the program worry that the delay in its implementation might actually depress sales at first, with consumers putting off purchases until the rebates begin.

“Our desire would be to see these programs rolled out as soon as funding is available,” said Jill Notini, a spokeswoman for the Association of Home Appliance Manufacturers. “Unfortunately, you may have people saying, ‘It’s kind of on the blink, but we’ll wait.’ We wish that the states would follow the intent, which is to stimulate the economy now.”

The number of shipments of home appliances in the United States, which is closely linked to new home construction, is down 12 percent from last year, Notini said, and this comes after three years of decline.

No one doubts that the appliances program will attract consumers. While the programs will vary by state, some of the proposed rebates that have been announced so far range from $50 to $100 per appliance. The state-administered programs also have varying requirements regarding whether consumers must recycle an old appliance to qualify for the rebate.

The states are required to estimate how many jobs their programs will create. California, which will receive $35 million, preliminarily estimated that it will create 350 jobs. This was based on the assumption that for every $92,000 expended, one job would be created.

Overshadowing the debate over the rebate program are questions regarding the health of the U.S. economy, which despite some signs of strengthening is still beleaguered by high unemployment. So while the rebates will be slower to get into consumer’s hands than some had hoped, some economists said the economy remains weak enough to justify the program even if it isn’t enacted yet.

“No one is saying we are going to have too much growth next year,” said Zach Pandl, an economist at Nomura Securities. “We want full employment of the economy’s resources, and we’re nowhere near that at this point.”

http://www.washingtonpost.com/wp-dyn/content/article/2009/11/26/AR2009112602420.html

Econophysicist Predicts Rogue Financial Waves

If financial markets behave like nonlinear wave-like systems, then rogue waves are an inevitable consequence.

On New Year’s Day 1995, a single giant wave hit the Draupner oil platform in the North Sea off the coast of Norway. By chance, the platform was fitted with laser measuring equipment which recorded the height of waves as they passed by. This one measured in at an unprecedented 25.6 metres, about the size of a seven storey office block. The Draupner event finally confirmed the existence of rogue waves, previously known only to science through the anecdotal evidence of the few who had seen and survived them.

Curiously, the existence of rogue waves was predicted mathematically more than ten years earlier by Howell Peregrine at the University of Bristol in the UK. The theoretical prediction and the observational confirmation should have generated an obvious question: shouldn’t rogue waves also occur in other wave-like systems?

And yet it wasn’t until 2007 that the first optical rogue waves were observed in an optical fibre. Since then things have moved rapidly. This blog recently discussed the first measurement of rogue microwaves and earlier this year another group predicted the existence of rogue matter waves using numerical simulations.

But what of more abstract systems? Today Zhenya Yan at the Institute of Systems Science in Beijing says that rogue waves can also occur in financial systems, and in particular in equity markets. Traditionally, econophysicists have modelled equity pricing using the Black-Scholes economic model, in which prices change stochastically, like the movement of particles under Brownian motion.

Researchers have long known that the Black-Scholes model cannot account for the observed volatility of the real market but had no alternative to turn to. However, earlier this month, Vladimir Ivancevic at the Defence Science & Technology Organisation in Australia proposed a nonlinear wave model as an alternative to Black-Scholes.

The Ivancevic Option Pricing Model approximates to Black Scholes under certain circumstances but also allows for a rich variety of other behaviours and so has the potential to better describe real markets. Much of this behaviour is as yet unexplored.

Enter Yan, who points out today that one solution of a nonlinear wave system is a rogue wave, an event of far greater magnitude than would be expected by any standard method of analysis.

That’s interesting. There’s no shortage of anecdotal evidence for the existence of financial rogue waves. Look at the Asian financial crisis of 1997 or the current global financial crisis. But econophysicists will want more than that to confirm that financial rogue waves really exist.

Perhaps what they need now is the financial equivalent of the Draupner oil platform measuring ambient wave height and waiting for the big one to hit.

Ref:arxiv.org/abs/0911.4259: Financial Rogue Waves

http://www.technologyreview.com/blog/arxiv/24456/

Treasury Rethinks TARP: Strong Banks, Weak Credit

JIM KUHNHENN

WASHINGTON — Big banks are roaring back. At crisis’ edge last year, they are repaying billions of dollars dumped into their vaults to rescue them. Dividend checks are accumulating at the Treasury. Taxpayers won’t recoup the full sum of the government’s unprecedented infusion to the financial sector, but the returns are ahead of schedule.

With large bets on bonds, commodities and exotic financial products, big banks are reporting third-quarter profits.

Of the $250 billion that the government initially set aside to spend in direct assistance to banks, it has spent $205 billion and the Treasury is already taking steps to bring that program to an end. The ledger: Banks have paid back $71 billion of the infusions. They have also paid the Treasury nearly $7 billion in dividends.

If propping up much of the teetering financial markets was the goal of the government’s $700 billion Wall Street rescue, then mission accomplished.

But there were other objectives for the Troubled Asset Relief Program, too: greater lending to consumers and businesses, mitigating foreclosures and helping banks shed toxic mortgage-backed assets.

On that, it’s unfinished business.

A program announced with fanfare four weeks ago that would funnel money to small banks at low rates to increase small business lending is still being designed. Treasury officials are looking at plans that could cost taxpayers between $10 billion and $50 billion but are encountering reluctance from small banks.

“I’m told by banker associations and banks, ‘Hey, this is good capital, we’d like to have it, but we don’t want to be the only bank in town who takes your capital because the others will advertise against us,’” Herbert Allison Jr., the assistant Treasury secretary in charge of TARP, said in an interview. “There is a stigma and it’s frustrating, frankly.”

Meanwhile, TARP is set to expire Dec. 31. But with about $140 billion still uncommitted (even more, about $300 billion, unspent), the Obama administration is considering extending at least a portion of the huge fund until next October.

“We are winding it down and will close it as soon as we can,” Treasury Secretary Timothy Geithner told a congressional committee. But he stiffly opposed any congressional effort to force the program to end. The struggle facing Treasury is how to continue TARP as insurance against further instability without having Congress use it as a source of new spending.

Officials are keeping a wary eye on smaller banks, which have been failing at the highest rate since 1992 due largely to losses from commercial real estate loans.

“The financial system is stable, but it is not normal and it could be derailed again, and you need to guard against that possibility,” said economist Mark Zandi, head of Moody’s Economy.com and a regular adviser to congressional Democrats.

Extending TARP as insurance for banks wouldn’t be a popular move. Conservatives and liberals object to the direct assistance to big banks and insurance conglomerate American International Group. Republicans have called for the program to end and assigning the unused money to debt reduction. Some liberals want the money for jobs programs.

Overall, the bank infusions alone could end up costing taxpayers about $14 billion, according to estimates by Economy.com. While banks are paying money back, not all of them can be saved. Earlier this month, a San Francisco bank became the first bailed-out institution to fail. More could fall. And two weeks ago small business lender CIT Group, which received $2.3 billion in rescue funds, filed for bankruptcy protection with little hope of repaying taxpayers.

Add to that the money injected into the auto industry, AIG and a $50 billion mortgage assistance program, and Economy.com estimates taxpayers could be left with a bill totaling $155 billion.

For instance, General Motors announced it would pay back a $6.7 billion in U.S. government loans by 2011, four years ahead of schedule. But that still leaves more than $40 billion that the government lent to GM in exchange for a common equity stake. Moody’s estimates taxpayers could recoup half of that.

The mortgage assistance program, off to a slow start, has now helped 650,000 homeowners with trial loan modifications, with average savings of $500 a month. The administration aims to help between 3 million and 4 million over three years, but that is $50 billion that won’t get repaid directly to the Treasury.

The potential cost to taxpayers illustrates the dramatic change in TARP’s purpose from the fall of 2008 when President George W. Bush proposed using the entire $700 billion to help banks get rid of toxic mortgage-backed assets. “We expect that much, if not all, of the tax dollars we invest will be paid back,” Bush said on Sept. 24 of last year.

Administration critics say Geithner has not spelled out with clarity how the program will ultimately end.

“Suppose they didn’t renew it; there would be shock,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and an economic adviser to Republican John McCain’s 2008 presidential campaign. “There is an implicit expectation that they’ll do something. But there is not a nicely framed expectation of how they will exit.”

If stabilizing the financial sector was TARP’s main goal, increasing lending was the other.

Treasury Department figures released this month show that outstanding loan balances by TARP recipients in September, the latest available data, were 3.8 percent lower than they were in February when the economy was at its worst. Lending by the largest banks that received TARP money declined for the eighth straight month in September.

Analysts and Treasury officials attribute the decline to decreased demand from borrowers and continuing skittishness by banks in the face of economic weakness. “TARP giveth, but unemployment taketh away,” said Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents large banking institutions.

Lending volume has declined less than it did during the 1991-92 recession, even though this downturn was deeper. But Allison said there is still a widespread perception that banks could be lending more.

“That’s what the business community is telling us uniformly,” he said.

Given that, the administration has a dual message for banks that are regenerating their capital.

“We want to see them using their capital for lending as much as they reasonably can,” Allison said. “We want to see banks that took TARP capital, especially the larger banks, paying it back when they are able to.”

http://www.huffingtonpost.com/2009/11/24/treasury-rethinks-tarp-st_n_368765.html

Fed Said to Ask Stress-Tested Banks to Submit Plans on TARP

By Scott Lanman and Craig Torres

Nov. 24 (Bloomberg) — The Federal Reserve asked nine of the U.S. banks that were part of this year’s stress tests to submit plans for repaying the government’s capital injections, a person familiar with the situation said.

The central bank this month asked Bank of America Corp. and eight other banks to give plans including a timetable, said the person, speaking on condition of anonymity. The firms may have the option to repay Troubled Asset Relief Program funds soon if they’ve been able to raise common equity and would continue to exceed capital buffers set in the stress tests, the person said.

“It would send a terrific message to the market if there was a plan and a timetable for at least the top banks in TARP to pay the money back,” said Joel Conn, president of Lakeshore Capital Inc. in Birmingham, Alabama, which owns stock in PNC Financial Services Group Inc. “It would signify they are good enough to stand on their own.”

The Fed’s request may turn up the pressure for banks accustomed to more flexibility on the timing and process of TARP repayment. Together the nine banks have received about $142 billion in bailout funds, out of the $700 billion Congress authorized in 2008 for the financial rescue.

The banks in the stress test that have yet to repay TARP are Bank of America, PNC, Citigroup Inc., Fifth Third Bancorp, GMAC Inc., KeyCorp, Regions Financial Corp., SunTrust Banks Inc. and Wells Fargo & Co.

Stress Tests

The Fed released results in May from stress tests that showed how the 19 largest U.S. lenders would fare in a slower recovery with higher-than-forecast unemployment. Ten companies including Bank of America, Wells Fargo and Citigroup needed to raise additional capital.

Banks had been prohibited from repaying TARP money quickly unless they replaced it with private capital. That changed with February’s $787 billion stimulus law.

Since then, Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. among others have returned TARP funds by proving they were well capitalized without the government money.

Regions doesn’t comment on talks with regulators, spokesman Tim Deighton said. Bank of America and SunTrust declined to comment. Citigroup’s Stephen Cohen and Wells Fargo’s Julia Tunis Bernard declined to comment.

Bill Murschel, a KeyCorp spokesman, and Debra Decourcy of Fifth Third didn’t return calls for comment. Fred Solomon, a PNC spokesman, and GMAC’s Gina Proia declined to comment.

The request was reported earlier by DealReporter.com, a news service that focuses on mergers and is part of Pearson Plc’s Financial Times Group.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net.

http://www.bloomberg.com/apps/news?pid=20601103&sid=aD00dAKNxIfo