Monday, July 30, 2012
Climate Change in the news
The Greenland thaw in Lowell's handout was just one of several news items on climate change. There was also this New York Times article on how the heat is threatening our infrastructure, including nuclear power plants. We talked about how the severe storms are knocking out our power grids, but this recent study shows that the storms also hurt the ozone layer.
Monday, July 16, 2012
Understanding Interest Rate Swaps
The recent LIBOR scandal has revealed yet another way the bank gamed the system, this time by manipulating interest rates. Here is a video by the SEIU, Service Employees International Union, which explains how interest rate swaps have hurt local governments.
Update 7/17/12:
The SEIU video only explained how a proper interest rate swap should work, not what the banks actually did. As in Norm's commented below, it seems like the cities made a fair bet with the banks and lost, and they should not be crying because they got what they wanted, a fixed interest rate. The only loss was the opportunity of a lower interest rate.
I added a comment which referenced an article which explains what really happen. But the article is hard to understand, so I am going to try to explain what was missing in the SEIU video that was clarified in the article.
The video implied that the banks and cities simply swapped interest payments. But what actually happened was that the cities bought a kickback which should have offset their variable interest payments. There are actually three payments involved.
a) The variable payments made by the cities to the investors who bought their municipal bonds.
b) The fixed payments from the cities to the banks to entitle them to a variable kickback
c) The kickback from the banks to the cities which should have cancelled the variable interest payments of (a).
But in reality (c) did not cancel (a) because (a) was based on SIFMA, the benchmark rate for municipal bonds, while (c) was based on LIBOR. LIBOR rates went down but SIFMA rates stayed high. So the cities had to pay both (a) and (b) but was not compensated by (b). By manipulating LIBOR the banks was able to squeeze more money from the cities.
The article says that interest swaps were horrible for the cities in other ways:
1) The cities could prepay the bond holders, as they would normally would do when interest rate fall dramatically. But they still had to keep paying the banks for the worthless kickbacks.
2) Had the banks gone bankrupt, the cities would still have to pay the banks even though they would not be getting any kickbacks.
What this shows is that the cities were totally conned by the banks. Had they understood how the interest rate swaps really worked, they would never have taken the deal. This was not a fair bet; it was rigged in favor of the banks.
Update 7/17/12:
The SEIU video only explained how a proper interest rate swap should work, not what the banks actually did. As in Norm's commented below, it seems like the cities made a fair bet with the banks and lost, and they should not be crying because they got what they wanted, a fixed interest rate. The only loss was the opportunity of a lower interest rate.
I added a comment which referenced an article which explains what really happen. But the article is hard to understand, so I am going to try to explain what was missing in the SEIU video that was clarified in the article.
The video implied that the banks and cities simply swapped interest payments. But what actually happened was that the cities bought a kickback which should have offset their variable interest payments. There are actually three payments involved.
a) The variable payments made by the cities to the investors who bought their municipal bonds.
b) The fixed payments from the cities to the banks to entitle them to a variable kickback
c) The kickback from the banks to the cities which should have cancelled the variable interest payments of (a).
But in reality (c) did not cancel (a) because (a) was based on SIFMA, the benchmark rate for municipal bonds, while (c) was based on LIBOR. LIBOR rates went down but SIFMA rates stayed high. So the cities had to pay both (a) and (b) but was not compensated by (b). By manipulating LIBOR the banks was able to squeeze more money from the cities.
The article says that interest swaps were horrible for the cities in other ways:
1) The cities could prepay the bond holders, as they would normally would do when interest rate fall dramatically. But they still had to keep paying the banks for the worthless kickbacks.
2) Had the banks gone bankrupt, the cities would still have to pay the banks even though they would not be getting any kickbacks.
What this shows is that the cities were totally conned by the banks. Had they understood how the interest rate swaps really worked, they would never have taken the deal. This was not a fair bet; it was rigged in favor of the banks.
Monday, July 9, 2012
A Universe From Nothing
The Higgs Boson, predicted by quantum physics, was finally confirmed. The same quantum physics has been used to model the universe. Such is the case in the book "A Universe From Nothing" by Lawrence Krauss. Krauss's thesis is that the scientific explanation of the Universe is so complete that God is no longer needed to fill in the missing parts. He also makes the case that the science so beautiful that we really won't miss the theological explanation. His book originally came from this talk he gave in 2009 at AAI, a conference sponsored by the Richard Dawkins Foundation. So does mean that the religious right has to deny quantum physics as we'll as evolution?
Update 7/21/12:
Here are two short videos that actually explain what the Higgs Boson is all about. These were the best explanation that I found so far. Part 1 explains why the Higgs Boson was predicted. Part 2 explains how Higgs imparts mass. There seems to be a Part 3 in the works.
Update 7/21/12:
Here are two short videos that actually explain what the Higgs Boson is all about. These were the best explanation that I found so far. Part 1 explains why the Higgs Boson was predicted. Part 2 explains how Higgs imparts mass. There seems to be a Part 3 in the works.
Monday, July 2, 2012
Hot enough for you?
I heard that is got pretty hot back in Maryland this week. I was in Virginia but I was caught in the same weather system. I was on my way down on Friday when the lightning storms hit. It was the most lighting I ever seen, though I must admit I don' get out much. Anyway this gives me an opportunity to bring up the climate change issue. Here is a TED talk by NASA scientist James Hanson, who has not given up trying to warn of the danger we are in.
Update 7/21/12:
Is it possible that the Climate Change issue can be revived? Climate Parents is a new movement which focuses on the climate legacy that we will leave to our children. The movement was given air time last Friday on Democracy Now.
This is a new movement, but not a new idea. Here is a moving 2007 TED Talk about a venture capitalist who was moved to act because he was challenged by his daughter.
Update 7/21/12:
Is it possible that the Climate Change issue can be revived? Climate Parents is a new movement which focuses on the climate legacy that we will leave to our children. The movement was given air time last Friday on Democracy Now.
This is a new movement, but not a new idea. Here is a moving 2007 TED Talk about a venture capitalist who was moved to act because he was challenged by his daughter.
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