Monday, April 30, 2007

ECON310: Potential Impact of Additional Hedge Fund Regulation

Our last assignment for Money and Banking was to apply all the wunderbar tools that we'd learned throughout the semester and write a paper. This is not a traditional research paper as much as an opportunity to prove that we didn't occasionally: (A) sleep through class, (B) come to class drunk, (C) leave early to meet Andrew for a nosh at Metro 29 Diner, or (D) all of the above [guilty].

I really liked my professor, and I learned a lot on this class, but I have no plans to change my major. Economics is a still a social science, which is why this paper reads like "My friend Billy's arbitrage scheme wasn't hugged enough as a child, and studies show that insufficient hugs cause boo-boo-sadness in one-half of one-quarter of all forward contracts".

I am so glad this semester is almost over.

Hedge funds are private investments that seek to profit in all kinds of markets. The term hedge fund is used to differentiate from retail funds; typically they are limited to a certain number of investors and have restrictions on the divestiture of their shares. Despite $2 trillion invested among some 6000-7000 funds, the Securities and Exchange Commission is nearly powerless under the current regulatory structure.

A trend that concerns the SEC is the increase in hedge fund investments along with a lack of sophistication in hedge fund investors. For example, investment by pensions in hedge funds is expected to rise from $5 billion in 1995 to $300 billion in 2008, but most pension fund participants -- and even some pension executives -- do not realize they have investments in derivatives.

The SEC has sought further regulation of hedge funds to prevent another failure like that of Long Term Capital Management. Among the board of directors at LTCM were two Nobel Prize winning economists who helped to develop their fixed-income arbitrage model. Though they did very well in their first four years of operation, LTCM had a $4.6 billion loss in 1998 and eventually shut down in 2000. This illustrates the kind of risk the SEC feels the average, unsophisticated investor should have more protection from. Though many different regulations have been proposed, we will review two and see their affect on a real hedge fund like Eddie Lampert's ESL Investments.

Re-defining accredited investor

Currently the SEC only requires that hedge fund clients be accredited investors: they must have a net worth of at least $2 million or have made at least $200,000 per year ($300,000 if married) for the last two years. At an open meeting December 13, 2006, they proposed adding a new category, accredited natural person, to differentiate between pension funds and individuals. Either group would be required to own no less than $2.5 million in investments, which would be adjusted periodically for inflation. The SEC says that 8.47% of US households are eligible under current rules, and the new rules would reduce that number to 1.3%.

By limiting the number of households who could invest, this regulation may reduce the working capital available to hedge funds. Data has not been collected to show what percentage of current hedge fund investors would be disqualified by this change, but it is likely that this would cause only a small reduction in working capital to a fund like ESL Investments. This small reduction in working capital would slightly reduce the amount of leverage ESL has to make investments, and may then slightly reduce their profitability, but in all likelihood that reduction would again be very small.

Likewise, there is no data to show how this would protect investors from a hedge fund failure, but would only keep people will fewer financial mean from investing in such funds. In short, this won't stop hedge funds from failing, but should one fail the direct investors who had invested should hopefully be rich enough to better absorb the loss.


Unlike publicly traded companies, hedge funds are not required to file financial reports with the SEC. Proponents of further regulation would like hedge funds to disclose what investments it makes, what risk they carry, and file un-audited quarterly and audited annual financial statements with the SEC in the hopes that additional scrutiny will keep fund managers honest.

The Securities Act of 1933 recognizes that registration of a security is a long and expensive process, and the cost of compliance with registration greatly exceeded any public benefit. We can infer this by looking at Section 3 of the Act, which provides exemptions for securities issued by the Federal Government, national banks, non-profit organizations, and farmers' cooperatives. With the passage of the Sarbanes-Oxley Act of 2002, several public companies chose to buy-back their stock rather than incur the added expenses of auditor independence, corporate governance, and financial disclosure. While most bank covenants require private companies to share their audited financials, it may not be to the extent and expense that the SEC requires of public companies.

For a fund like ESL, this would slightly increase their overhead costs to add additional staff to oversee and prepare financial statements. This would slightly reduce their profitability, however it may also give their competition insight into the secret of their success. Likewise, the SEC would need to add additional staff to review the additional financial statements from hedge funds for compliance. Individual and institutional investors would receive the largest benefit from a reduction in information costs: they would have a more clear understand how the particular fund sought its profits, and have a better understanding of the risks they were taking before they chose to invest.


There is little question that the SEC's chief concern with respect to hedge fund regulation is maintaining the public trust: preventing mom and pop investors from losing their life savings, preventing unsuspecting pension fund investors and the PBGC from substantial loss, and, increasing visibility into hedge funds to deter fraud. Both of the regulations examined directly affect the profitability of hedge funds, but do little to protect investors from catastrophic loss.

A secondary concern of the SEC in this is the potential impact of a hedge fund failure as it ripples through the economy. Whether a fund fails through honest miscalculation or fraud, there is the potential to upset either a pension fund or a bank. If a pension has over-levered itself into a fund that fails, the Pension Benefit Guarantee Corporation (PBGC) will need to step in and bail the pension fund out. If a bank has over-lent to the fund on margin, it too could fail and require the FDIC to step in. Re-defining accredited investor will not prevent either of these from happening, but additional transparency into funds may deter fraud. One could argue that public companies like Enron and WorldCom, managed to defraud their investors while following SEC guidelines, but we may never know how many corporate failures transparency prevented. If the risk of conscious fraud can be reduced through transparency, it would be of considerable benefit to investors. Ultimately, the decision to create additional hedge fund regulation should be a positive one and not a normative one.

From this day forward, I promise to never compare and contrast things as being positive or normative.

Friday, April 27, 2007

Timothy Kaine: Best Governor ever!

Dear Colleague:

Due to the upcoming State Capitol visit of Her Majesty Queen Elizabeth, II and His Royal Highness, Prince Philip, The Duke of Edinburgh, downtown state office buildings around Capitol Square will be closed for security reasons all day on May 3rd, along with certain streets adjacent to Capitol Square. The following information relates to aspects of the Royal family's visit.

Employee Recognition Leave

In recognition of this historic occasion and to celebrate 400 years of public service in Virginia, I am granting eight hours of recognition leave to state employees across the Commonwealth. Employees located in buildings adjacent to Capitol Square that will be closed on May 3rd must take the leave on May 3rd. All non-Capitol Square employees should take the recognition leave by June 30, 2007, and are encouraged to use the leave to volunteer and/or participate in Jamestown 2007 commemorative events.

We have received so much extra leave since he took office, it's too bad we can't reelect him.

Google Reader Trends

Note to self: stop reading Perez Hilton so much.

Wednesday, April 25, 2007

Mason Day 2007 :: Throwback Thursday

And I already took tomorrow off for a completely unrelated reason.

Missing In Action...possibly missing inaction

My friends and family have been calling me out of the blue for the past few days, which means they feel like I've fallen off the face of the Earth. It's justified, I was starting to think the other day that I haven't seen many of them in a while.

A quick (and not terribly interesting recap):

work :: surprisingly busy. A couple projects that I'm working on blew up at the end of last week, but the blast was contained and things are finally getting back on track. I like to think of it as a controlled release

school :: next week marks the last week of classes. I have a research paper and a term project due before I can start studying for finals. I had two exams last week, both I studied quite a bit for, both of them I only scored 81 on. Not amused. I only have one week reprieve before my insane summer school schedule (and alternate work schedule) begin.

roomates :: I believe I have two roommates lined up. One has his lease and should be mailing it back with a check in the next week or so, the other should be coming by this week to sign his lease. Both will be moving in at the end of May.

house :: I spent last weekend power washing the house and garage, cleaning the gutters, and working on the lawn. The previous owners neglected the yard in a big way, and I've really just fertilized and mowed for two years (while trying to prune all the shit they planted for 20 years). This year I'm trying to grow grass, which meant an entire day of seeding and patch repair along with daily watering.

biking :: George came by a few weeks ago and helped me get my bike fixed. I have yet to ride it, which is completely lame.

My father is in town this weekend, and I'm really looking forward to April being over. This month has been really insane, hopefully things will normal-up a little by May 1st.

Friday, April 20, 2007

I am a MILF Don't U 4 Get

Early last week, I heard "Big Wheel", the new single for Tori Amos' forthcoming album, American Doll Posse. Despite my long standing relationship with Tori, we've grown further and further apart the past several years.

Frankly, I don't think the men's union will let me buy a cd called American Doll Posse.

I saw this post on Perez Hilton that her new video is out:

For once, Perez and I agree:

We've had the opportunity to listen to the entire new Tori Amos CD, American Doll Posse.


"It takes a while to get used to it."

Click here to watch the video for her new song, Big Wheel.

Wrinkles forehead.


The video sure is....


As one of the bigget Toriphiles around, we're kinda heartbroken. The album just.......

Yeah...I might have to call Tori and tell her to come get her stuff. Me thinks it's time to pass the torch to another generation of embittered teenagers.

Thursday, April 19, 2007

Hi. My name is Alpha John, and I have uncontrollable rage issues.

My temper is a monster.

I've been working hard for the past few years to relax and not let things bother me. Even though I've made a lot of progress, I still have blow-ups like I did over losing my keys and my scheduling problem. The triggers are as much a mystery as my response.

I never did find my missing car keys, but Mary was good enough to run me home at lunch to pick up my spares. A few hours after I got back from lunch, I decided to rearrange my summer and fall schedules to get all the classes I needed. Not only did I work around the conflict, but the new schedules make a lot more sense than the old ones did.

Once I calmed down, I turned lemons into lemonade. If only I could stay calm all the time.

Wednesday, April 18, 2007

The hits just keep on coming

I didn't lose all my keys, just the car key and remote Since parking my car this morning, I've only left my desk twice: to get coffee next door and to the bathroom once. I've retraced my steps twice and can't find it anywhere. I called our "lost and found" and nobody has turned it in. I guess I'll be walking to get the key, then walking back to campus to get my car.

This day just gets better and better. I am fucking starving and now I have to eat lunch on campus.


Registration for Fall 2007 began on Monday, and my time ticket came up this morning:

My fall will be spent in classrooms taking classes that (1) I've taken before under the Comp Sci label, and (2) that I could teach at the 500 level. None the less, I'm concerned because three of the classes I need each have only one section open in the fall. I went to register for them:

and now I have to go beg a Dean for an override. I have to beg for an override to take "Databases for Business Majors", "Networks and Security for Business Majors", and "Systems Analysis and Design for Business Majors".

I am, by the way: a 10 year veteran of IT, a certified Project Management Professional, one of the most proficient Oracle database people we have (and certainly #1 with SQL Server), I piloted the Network and Security class at a previous college where I got an 'A'. As a CS Major I got in 'A' in algorithm design (all paper and psuedo code), five programming classes including Assembly Language, and Computer Organization. I think I can handle these three classes...for Business Majors.

Yet here I sit in panic, because if I can't get this override, or they fill up before I do, I won't be able to graduate in the spring.

At which point I might just quit my job and go consult, because I fucking hate working here.

Tuesday, April 17, 2007

Apparently, today we are all Hokies

This was in Tim Reffner's Photos on Facebook:

I'm not sure how I feel about it (especially the portrayal of Gunston).

Tuesday, April 10, 2007

Iota Kappa Awesome: Now on Facebook

By invitation only...

A Blast From the Past

Mike H. shot me an email this morning with a link to this A.V. Club article that mentions On the Television:

Stars Upon Thars

I remember seeing a sketch-comedy show on Nick At Nite, around 1989 or so. At least part of the show was given over to reviewing fictional movies; there were two hosts, one of which would give each film either 1,000 stars or 0 stars. One of the sketches involved a Clint Eastwood type who helped a housewife with obvious safety suggestions, specifically that she should peel potatoes by slicing away from her body.


That isn't actually a question, Jad, but Donna Bowman answers it anyway:

Those two hosts were Tim Conway, Jr. (aren't you glad there's a Tim Conway, Jr.?) and George McGrath, playing Siskel-and-Ebert-style critics disagreeing about the merits of TV parodies like The Gigantic Herman's Playground and The Valerie Harper Only Show. And the show was On The Television, Nick At Nite's first original series, which ran twice a week for 40 episodes in 1990-1991. "Clips" from the fictional TV shows being reviewed featured many up-and-coming comedians of the day, including Lisa Kudrow, Kathy Griffin, and Julia Sweeney. And other better-known personalities—Phil Hartman, Avery Schreiber, Elvira, and Brady Bunch grads Christopher Knight and Eve Plumb—made guest appearances.

On The Television had its genesis in an April Fool's Day special, and its humor leaned toward the bizarre, for the time. It's never been collected or re-aired, supposedly due to residuals owed its principals by the bankrupt production company. If those issues could be worked out, we're willing to bet that there would be enough nostalgic, slightly damaged former tweeners out there to support a DVD release. Meanwhile, if anyone still has some episodes on tape, would you digitize them and put them up on YouTube tout suite? What's the point of the Internet, otherwise?

Mike H. and I were huge fans of On the Television; we used to watch it every week and discuss in agonizing detail. There's hardly any mention of it on the Internet, which I'm sure delights the people who made it possible almost 20 years ago. Still, I know at least two former tweeners who'd put it in their Netflix queue.

Monday, April 09, 2007

Unions take on Executive Pay

I saw this article from yesterday's Financial Times that the AFL-CIO is taking on Ivan Seidenberg, Verizon's CEO, over executive pay:

The AFL-CIO, the largest US trade union federation, is to make Ivan Seidenberg, Verizon Communications’ chief executive, the “poster child” for its campaign against excessive executive pay after previously targeting the chief executives of Pfizer and Home Depot.

Richard Trumka, the AFL-CIO’s secretary-treasurer, noted that Mr Seidenberg had earned more than $109m in the past five years, despite negative total shareholder returns during the same period of about 5 per cent.


The AFL-CIO’s decision last year to mount what it described as a “successful campaign” against Pfizer and Home Depot helped fuel growing investor concern about performance of chief executives and their severance packages.


Finally! All of the people who argue that unions aren't relevant anymore don't understand the big picture: it's not just about worker pay, it's about the overall health of the company. If the company can't sustain its workers long term, how much the trench-workers make is irrelevant.

I don't believe Berney Ebbers would have been able to pull off that debacle at Worldcomm if it had been a union shop. It doesn't hurt to have another set of eyes from an interested party watching the books, especially since their Board of Directors were asleep at the wheel. Ebbers used mergers and acquisitions to hide his indiscretions, and unions go over everything with a fine tooth comb before they sign of on any m&a deals.

Just my opinion, but I know I'm right.

A Tasty Easter Indeed!

Thanks to Greta, George, and Joe for celebrating Easter with me. Greta brought a tasty salad, there was lots of yummy alcohol and oinky, we watched Sopranos and Entourage, and George brought delicious pies to snack on after. I was very full and very buzzed when I passed out last night.

Sunday, April 08, 2007

Happy Birthday Little Joey!

Pictures from Little Joey's birthday celebration during a Nats game finally arrived in my inbox.

Joey and Bo:

Chrissy and I:

After the Nats, we went to Murphy's in Old Town and then to Tiffany's Tavern. When they moved to Rock It Grill, I left to meet Andrew for dinner.

WaPo's Easter Peep Diorama Contest

Greta forwarded this artcle to me from

Peeps Show
By Dan Zak
Washington Post Staff Writer
Sunday, April 8, 2007; Page M01


We were expecting a dozen or so entrants for our first-ever Peeps Diorama Contest. We got somewhere north of 350 from across the area and the world.

Who knew marshmallow treats inspired such creativity? Here, see some of the inspired entries from the first-ever Sunday Source Peeps Diorama Contest.
There were copious dioramas with antiwar or patriotic themes ("Give Peeps a Chance" and "George Washingpeep Crossing the Delaware," for example). Several chronicled Britney Spears's meltdown in front of the "Peeparazzi." Two dioramas adapted a classic Charlton Heston movie line: "Soylent Green is Peeps!"

There were some that stretched the boundaries of taste, such as the diorama titled "Dear Metrobus: Please Stop Running Over Our Peeps," which featured a cardboard bus with prostrated marshmallow bunnies in front of it. And an Army officer stationed in Kandahar, Afghanistan, crafted a diorama of Saddam Hussein's execution, with a purple bunny Peep hanging from a noose.

As we said: Wow.


I pulled out two local highlights:

"Rosslyn Metro Station, Friday 5 p.m."

Semifinalist: "We thought it would just be funny to show the world as most people see it on a Friday afternoon," says Maria McLeod, 27, a sales associate at Express who collaborated with her brother-in-law, Phil Bauer. The pair took some shots in a station with a digital camera and pasted the photos onto cardboard to create the train and the tunnel.

"Peepsamania at the National Zoo"

Semifinalist: "It's about the whole panda hoopla," says Jill Yutan, 45, a landscape architect who lives in Arlington. "I was kind of amazed by all the professional adults out there with their cameras watching Tai Shan's every move."

The rest of the Top 22 photos are here.

Friday, April 06, 2007

Enterprise Software Selection: The High Cost of an Incorrect Choice

Back in December, after our CMS proof-of-concept was over, I got the idea to write a paper for the Project Management Journal about the lack of a cohesive methodology for the selection and implementation of off-the-shelf software. There are dozens of commercial life-cycle methodologies for writing software, but none for buying software. In my opinion, part of what made our proof-of-concept for CMS successful was the process that we followed. I don't think the framework I've developed could be canned and sold per se, but I was hoping to start a discussion in the industry about this problem.

I submitted the paper to PMJ before Christmas, and finally got word back last week that the paper was rejected as-is. I spoke to the editor, and they liked the topic and the content, but would like less of a case study and more of a scholarly paper. Having worked at a scholarly journal for three and a half years, I'm not comfortable reworking the content to be longer and wordier without adding more substance just to have it published. The only value with that would be to do controlled experiments around the process, but I'm not Gartner: I'm not in a position (time, resources, money, projects) to do that.

I've decided not to rewrite the paper, so I'm publishing it as-is on my website. If you're interested in reading, here it is.

Special thanks to Kirsten, Amy, and Fred for letting me prod you with interviews; your input was invaluable.

Oh Shit...Sunday is Easter

I realized yesterday that this Sunday is Easter; I guess it's too late to give up something for Lent.

I don't have plans (my parents live 500 miles away), so I'm inviting my friends who are in the area without family to come by Sunday for dinner followed by the season premiers of the Sopranos and Entourage. I sent out some invites to people I didn't think had plans, but by all means if I missed you and you don't have plans shoot me an email.

Tasty pig will be served.

Tuesday, April 03, 2007

White Chicks and Gang Signs

You'll either laugh, or wish for that 90 seconds back.

Thanks to Mary for the spot.

CNN Delivers where Fox has Failed

I have always said that on a slow enough news day, Fox News would probably burn their own station down to have a story to sensationalize. Today, CNN beat them to the punch:

Two people were shot inside the CNN Center complex in Downtown Atlanta Tuesday, sending shoppers and network employees scrambling to find cover. A Grady Memorial Hospital spokesperson confirmed that one person was dead upon arrival.

Witnesses said a man and woman were involved in an argument when the man started to drag the woman by the hair up an escalator that goes to the Omni hotel before shooting her in the face. A Turner security officer responded and then shot the suspect. The hospital spokesperson would not confirm whether it was the gunman or the female victim who died.

Video footage showed the Turner security officer pointing his gun at the suspect, who was lying on the ground inside the building before his transport to the hospital. Atlanta police officers were also on the scene. Officer James Polite described the shooting as a "domestic situation."

I went to Atlanta in 2004 for the Lawson CUE conference, and the convention center is right next door. I didn't really make it to any of the exhibitions, but I spent a very hung over afternoon (after Charlie and Barney's) having a greasy lunch at the McCormick and Schmick's in the CNN building with Michael W.

And now that I've opened that door, I can post these never-before seen photos from that trip:

Michael and Matt (Random British Guy #1) (to whom we had to explain what "the shocker" was):

Jennifer (who correctly identified the shocker from 20 feet away):

Random British Guy #2 (Ian I think?); he worked for Watson-Wyatt:

British Matt again (who got along swimmingly with Jennifer -- they were pals):

Monday, April 02, 2007

Catholic League vs. Chocolate Jesus' creator on Opie & Anthony

This morning on Opie and Anthony, the boys had a somewhat impromptu get together between Bill Donahue from the Catholic League and Cosimo Cavallaro, the artist who created My Sweet Lord. There is a bit about it (including audio) on Foundry Music:

Bill Donohue from the Catholic League, who is now a friend of the Opie and Anthony Show, and Cosimo Cavallaro, who is known for creating imaginative pieces of art out of food, debate his 'Chocolate Jesus' statue. The six-foot display, playfully dubbed "My Sweet Lord," infuriated Catholics, including Cardinal Edward Egan, who described it as "a sickening display." Donohue had said it was "one of the worst assaults on Christian sensibilities ever."

This is just some amazing radio, and Bill Donahue wins line of the day: "Could it be art also if we had a chocolate figure of [Cavallaro's] mother, with genitalia exposed, and we asked everybody to eat her on Mother's day?"

Lifehacker's Time Machine Tip of the Day

This story on Lifehacker is about "Where's George?", a website that was cool when it first appeared in 1999.

I'm putting their RSS feed on probation. Another fuckup like that, and they're de-listed.