Monthly Archives: November 2008
Bailout Blues part II
I highly recommend Mark Perry’s blog posting entitled “A Cancer on the Big Three: The $29/Hr. Pay Gap“. This gap is graphically illustrated in the figure posted on Mark’s Perry’s weblog, which I reproduce here:
Why Bankruptcy Is the Best Option for General Motors
Michael Levine, who is a former airline executive and currently holds a position as distinguished research scholar and senior lecturer at NYU School of Law, has written a very compelling essay in today’s Wall Street Journal entitled “Why Bankruptcy Is the Best Option for GM”. Last week, I wrote a blog entry entitled “Bailout Blues” in which I noted, among other things, that “…it would make sense to let these firms go through bankruptcy, which would enable them to abrogate and renegotiate existing contracts, sell off or liquidate parts of their businesses that don’t make any sense, and reorganize so that they can come out of bankruptcy with sustainable business models. All that a bailout does now is to encourage the continuation of a broken business model…”. Mr. Levine picks up where I leave off, making a very cogent argument that not only is a Chapter 11 bankruptcy an option, in fact it represents by far and away GM’s best chance at once again becoming a viable business entity.
Bailout Blues
Lately, we have been discussing in my classes that a necessary, although not sufficient policy question concerning bailout economics is whether the bankruptcy of a given firm creates a systemic risk with effects which go well beyond the direct stakeholders (e.g., shareholders, creditors, employees, suppliers, customers) of the firm in question. Based upon this criterion, I think that a logically coherent case can be made for infusing capital into commercial banks as part of a risk management strategy designed to prevent a financial contagion which could take down the entire economy.
However, when we look at GM, Ford, Chrysler, etc., it isn’t clear to me that these firms pose a substantial systemic risk. In the case of the U.S. auto industry, I think that it would make sense to let these firms go through bankruptcy, which would enable them to abrogate and renegotiate existing contracts, sell off or liquidate parts of their businesses that don’t make any sense, and reorganize so that they can come out of bankruptcy with sustainable business models. All that a bailout does now is to encourage the continuation of a broken business model, including things like the UAW job banks which comprise workers who get UAW negotiated compensation in exchange for not producing any automobiles. I take this as prima facie evidence that there is way too much overcapacity in the US auto business as it is currently structured.
In Modeling Risk, the Human Factor Was Left Out
In the Business section of yesterday’s New York Times, there was an excellent article entitled “In Modeling Risk, the Human Factor Was Left Out”. Among other things, this article points out the dangers of people treating financial models like black boxes and not fully grasping model limitations. The article’s main premise is not that the models are wrong or culpable as far as the financial crisis concerned. Rather, the problem boils down more to fundamental failures in human judgment.
Will the U.S. Senate have a 60 seat Democratic Majority?
At this point, it would appear (on the basis of prediction market trading this morning) that the answer will likely be no. CNN.com currently lists 56 Democratic Senators, 40 Republican Senators, and 4 undecided Senate seats in the states of Alaska, Georgia, Minnesota, and Oregon. Here are the last trades this morning on Intrade.com pertaining to the four undecided races:
1. Alaska: AK.SENATE08.REP: 75.5, AK.SENATE08.DEM: 15
2. Georgia: GA.SENATE08.REP: 85, GA.SENATE08.DEM: 25
3. Minnesota: MN.SENATE08.REP: 90.1, MN.SENATE08.DEM: 8.5
4. Oregon: OR.SENATE08.REP: 75, OR.SENATE08.DEM: 33.1
Preliminary assessment of the accuracy of the Intrade State-by-State contracts
Now that the election is over, it is interesting to compare the actual outcome with my naive “prediction” method which allocated Electoral College votes based upon a cutoff price point of 55 for the 102 state-by-state Intrade contracts. On the eve of the election (see “Prediction Markets Update: November 3, 2008“), the state-by-state contracts implied a 353-174 Obama Electoral College “lead” over McCain, with Missouri being the only swing state. This morning, according to the Wall Street Journal‘s Interactive Map, Obama has officially won 349 Electoral College votes compared with 163 Electoral College votes for McCain. The actual state-by-state allocation matches mine exactly with the following exceptions:
1. I had Indiana going for McCain; apparently Indiana’s 11 Electoral College votes will instead end up in Obama’s column. This is why McCain’s actual Electoral College vote total is 11 less than what I predicted on November 3. In Indiana, Obama ended up with a 22,986 vote (0.86%) margin over McCain out of 2,681,726 votes cast.
2. North Carolina has yet to be called (although this morning, with 100% of the precincts reporting, Obama currently appears to have a 12,160 vote (0.29%) margin out of 4,191,812 votes cast). If you reduce Obama’s November 3rd total of 353 Electoral College votes by 15 (for North Carolina) and add 11 (for Indiana), this gives you 349 Electoral College votes for Obama.
This morning, the NTH.CAROLINA.DEM and NTH.CAROLINA.REP contracts are trading for 96 and 2 respectively, so it is almost certain that North Carolina’s 15 Electoral College votes will end up in Obama’s column. Furthermore, the MISSOURI.REP and MISSOURI.DEM contracts last traded this morning at 96.5 and 3.2 respectively, so it is almost certain that Missouri’s 11 Electoral College votes will end up in McCain’s column. Therefore, I expect the final Electoral College totals for the 2008 Presidential election to be 364 Electoral College votes cast for Obama, compared with 174 Electoral College votes cast for McCain.
Addendum: November 5, 2008 Electoral College Vote allocation (based upon actual voting data reported by the Wall Street Journal):
Barack Obama (349): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Indiana (11), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)
John McCain (163): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)
Not yet called for either candidate: Missouri (11) and North Carolina (15)
Prediction Markets Update: November 3, 2008
The 2008.PRES.OBAMA Intrade contract now trades at 90.5, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 10 (compared with 83.3 and 17.3 respectively as as reported in my last update on October 30).
On this, the eve of the 2008 election, the state-by-state contracts imply that Mr. Obama holds a 353-174 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Since my last update on October 30, Missouri has moved out of the Obama column and is now a “swing” state (indeed, the last recorded trades for MISSOURI.DEM and MISSOURI.REP were at prices of 50.1 for both contracts).
FiveThirtyEight.com currently gives Mr. Obama a 340.2 to 197.8 advantage over Mr. McCain.
Addendum: November 3, 2008 Electoral College Vote allocation
Barack Obama (353): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), North Carolina (15), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)
John McCain (174): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)