Prieur’s readings (December 26, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• The Economist: A Ponzi scheme that works, December 17, 2009.
The greatest strength of America is that people want to live there

• John Gapper (Financial Times): Master of risk who did God’s work for Goldman Sachs but won it little love, December 23, 2009.

• J.W. Elphinstone (Associated Press via Yahoo News): Treasury removes cap for Fannie and Freddie aid, December 25, 2009.
The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac. The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors.

• Washington’s Blog: Princeton economist and computer scientists show that derivatives are inherently vulnerable to fraud, December 24, 2009.
As I have previously noted, credit default swaps are destabilizing for the economy. And the models used to evaluate financial instruments – such as the Gaussian copula formula for CDOs – are inherently flawed. Now, Princeton University economists and computer scientists have demonstrated that financial derivatives are also inherently vulnerable to fraudulent pricing.

• Economist’s View: Unemployment and excess capacity, December 24, 2009.
Excess capacity peaked in June of this year, and has been moving downward ever since. If the pattern in the two most recent recessions holds, those in 1990-91 and 2001, the peak in the unemployment rate will come between 16 and 19 months after the peak in excess capacity, i.e. around a year from today (though prior to 1990 the peaks were coincident).

• Elinor Comlay, Juan Lagorio, and Sakthi Prasad (Reuters): Buffett eyes GMAC’s ResCap, December 24, 2009.
Warren Buffett is in talks to buy the troubled residential mortgage company Residential Capital, a unit of GMAC, the New York Post said, citing sources.

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