The news that the government is issuing stronger warnings about acetaminophen and possibly banning its use in some products is long overdue. Because of my own experiences, I have been mystified by perceptions of the safety of this drug for years. To me the medical community appeared as oblivious as the public.
Like most people, I believed acetaminophen to be very safe drug. In 2003 I had an illness with a high fever that continued for more than a week. I had never in my life, before or since, been so sick. The fever was so debilitating that to stay lucid I found myself taking the maximum recommended dose of acetaminophen each day. The chills and sweats came back as soon as each dose wore off and every six hours I popped more pills.
After a week elapsed with no improvement I went to see a doctor. He examined me and said that I appeared to have hepatitis. Blood work would be necessary to confirm the diagnosis. He drew the blood and sent me home.
How could I have hepatitis? I immediately started to read about the disease to learn more about the different types and causes. Hepatitis is a general term that refers to an inflammation of the liver. It is not a single disease because there are a number of causes of liver inflammation. If the condition continues untreated it can lead to liver failure.
After learning about the different viral causes of hepatitis I started reading about chemical causes. A number of drugs can inflame the liver but the most common drug-induced hepatitis is caused by acetaminophen.
Learning that fact caused the science part of my brain took over. What hypotheses can I form given the data and how can each be tested. I could construct two cause and effects narratives to fit the data.
1. I have hepatitis that caused a fever and in response I took acetaminophen.
2. I have a fever that caused me to take acetaminophen and in response I developed hepatitis.
The doctor had jumped quickly to testing the first hypothesis. But, given my unlikely exposure to any viral form of the disease, it occurred to me that the second hypothesis was the most plausible. I stopped taking acetaminophen and in a few days the hepatitis symptoms went away. The doctor called back to say that I tested negative for all the viral forms of the disease. He never asked about acetaminophen or mentioned its use as a potential problem.
I eventually recovered from the illness. It took almost a month before I felt completely well. To this day I don’t know what I had. Most likely it was some random viral infection that it took my immune system a long time to eliminate.
A few months later I crossed paths with a colleague who I had not talked to in a while. We inquired about each other’s families and he told me about a health crisis with his adult son. He began a story with remarkable parallels to my own. His son had an unexplained fever that went on for more than a week. The doctors did not know the cause and advised him to take acetaminophen to control the fever. But then his son’s experience took a harrowing divergence from my own. Following the doctor’s advice he continued to take acetaminophen for the fever and found himself hospitalized with liver failure.
My colleague said to me: “We had no idea acetaminophen could cause liver failure. We thought it was safe drug because the doctors kept telling him to take it.”
The makers of acetaminophen products—Tylenol, Nyquil, etc.—insist the drugs are safe when used as directed. But, I am skeptical about directions that include just two dosage variations—adult and child. There must be more variation in acetaminophen tolerance within the adult population. A one size fits all number for the recommended dosage for adults does not make sense.
For example, I am an almost exactly average adult male—5-feet 10-inches, 185 pounds, right-handed. That means almost all personal products—furniture, cars, homes, etc. and yes, drug dosages—are designed for me. All other people have to make adjustments when they use these products because I’m the person everything is designed for.
But, the dosing instructions for acetaminophen are too much for me to metabolize. Does that mean I have a less than average tolerance for the drug? How many other people are like me? What about the female half of the population? The current dosage instructions address none of these questions. Given the dangers of acetaminophen those questions should be addressed and the government is right to require warnings.
The most important lesson I learned from my experience is to ask these questions early and do independent research. Do not blindly follow dosing instructions on a package or follow “expert” advice from doctors who cannot think through all the possibilities in the short 10-minutes they allot for an exam. It took me some time and effort to figure out what was happening but the insights saved me from potentially dangerous complications.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
Thursday, July 2, 2009
Saturday, June 13, 2009
Dropping the SAT Requirement at Loyola College
The announcement by the school where I teach, Loyola College, that it would no longer require SAT scores for applicants brought a vitriolic response from recent alumni that the Baltimore Sun published. That opinion piece generated a heated discussion on blogs that the Baltimore Sun published two days later.
I found deeply troubling the arguments made by the alumni for keeping the SAT requirement at Loyola and the tone of their reaction to the news disturbing. The assertion made in the opinion piece that making SAT’s optional for admission will “financially depreciate” the bachelor's degrees granted by Loyola is based on two underlying assumptions that are false.
First, admission to Loyola is not a guarantee of a degree from Loyola. Students have to do the work required to earn the degree. Admission standards should not be confused with academic standards. I am never told the SAT scores, high school grades, or any of the reasons the Loyola admitted the students in my classes. Honestly, I am not interested in any of that information.
I teach my subject to the students enrolled in the class and assigned grades based on performance expectations that have not changed throughout my career. SAT scores have no bearing on the criteria I have established for passing my courses.
I also serve on Loyola’s academic standards committee. At the end of each semester that committee is charged with reviewing student grades and dismissing any students who are not making satisfactory progress towards a degree. Again it is grades earned at Loyola that are reviewed, not the reasons the students were admitted. SAT scores have never entered into these discussions.
Second, college degrees have no “financial value” so it is not possible for them to “depreciate.” A degree is a non-transferable status that cannot be bought or sold. I know this seems like a strange assertion given the wide disparity between the average lifetime earnings of college graduates compared to those without college degrees. But students are mistaken if they believe that degrees are the cause of the higher income typically earned by college graduates.
No employer pays a person because he or she has a college degree. Employees are paid for the performance of work if it has sufficient value that it becomes in the financial best interest of the employer to pay. It happens that the knowledge, skills, and insights that are acquired through the process of obtaining a college degree often results in the ability to perform work that is of greater value to employers. But there are people without degrees who are highly paid because they perform valuable work. It is work that causes payment, not the abilities associated with the degree. Graduates who cannot establish themselves as productive workers will find that their degrees mean very little financially.
So do I think Loyola should become an SAT-optional school? I am in agreement with the new policy. I find the entire concept of “scholastic aptitude” that the SAT purports to measure suspect. Readiness for college depends on acquiring the necessary language, writing, and math skills necessary for college-level work. These are not “aptitudes” that a single test can measure, rather, these are skills acquired through study and practice.
Once in college success is more dependent on attitude than aptitude. Students will do well if they attend class, do the assigned work, and major in a subject that interests them. That sounds simple and trite, but my experience on the Academic Standards Committee has revealed that students who fail in college haven’t mastered those basic practices.
SAT scores were meant to provide a level playing field for college admission by putting students from all backgrounds on equal footing. But, as it usually happens when a number is substituted for judgment, inordinate amounts of time, effort, and expense are allocated toward manipulating the number. Witness the entire test preparation industry that has grown up because of the SAT. Spending thousands of dollars on SAT prep classes defeats the original purpose of a level playing field. It’s time to retire the number.
For recent graduates entering the workforce, college reputation and courses of study are important because it is all employers have as a basis for judging competence and abilities. But within four to five years of graduation it will be performance on the job that counts. For me it has now been 32 years since I entered college and 28 since I graduated. I no longer remember my SAT scores and if my alma mater, the University of Rochester, changes its SAT policy there would be no impact on my life—financial or otherwise.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
I found deeply troubling the arguments made by the alumni for keeping the SAT requirement at Loyola and the tone of their reaction to the news disturbing. The assertion made in the opinion piece that making SAT’s optional for admission will “financially depreciate” the bachelor's degrees granted by Loyola is based on two underlying assumptions that are false.
First, admission to Loyola is not a guarantee of a degree from Loyola. Students have to do the work required to earn the degree. Admission standards should not be confused with academic standards. I am never told the SAT scores, high school grades, or any of the reasons the Loyola admitted the students in my classes. Honestly, I am not interested in any of that information.
I teach my subject to the students enrolled in the class and assigned grades based on performance expectations that have not changed throughout my career. SAT scores have no bearing on the criteria I have established for passing my courses.
I also serve on Loyola’s academic standards committee. At the end of each semester that committee is charged with reviewing student grades and dismissing any students who are not making satisfactory progress towards a degree. Again it is grades earned at Loyola that are reviewed, not the reasons the students were admitted. SAT scores have never entered into these discussions.
Second, college degrees have no “financial value” so it is not possible for them to “depreciate.” A degree is a non-transferable status that cannot be bought or sold. I know this seems like a strange assertion given the wide disparity between the average lifetime earnings of college graduates compared to those without college degrees. But students are mistaken if they believe that degrees are the cause of the higher income typically earned by college graduates.
No employer pays a person because he or she has a college degree. Employees are paid for the performance of work if it has sufficient value that it becomes in the financial best interest of the employer to pay. It happens that the knowledge, skills, and insights that are acquired through the process of obtaining a college degree often results in the ability to perform work that is of greater value to employers. But there are people without degrees who are highly paid because they perform valuable work. It is work that causes payment, not the abilities associated with the degree. Graduates who cannot establish themselves as productive workers will find that their degrees mean very little financially.
So do I think Loyola should become an SAT-optional school? I am in agreement with the new policy. I find the entire concept of “scholastic aptitude” that the SAT purports to measure suspect. Readiness for college depends on acquiring the necessary language, writing, and math skills necessary for college-level work. These are not “aptitudes” that a single test can measure, rather, these are skills acquired through study and practice.
Once in college success is more dependent on attitude than aptitude. Students will do well if they attend class, do the assigned work, and major in a subject that interests them. That sounds simple and trite, but my experience on the Academic Standards Committee has revealed that students who fail in college haven’t mastered those basic practices.
SAT scores were meant to provide a level playing field for college admission by putting students from all backgrounds on equal footing. But, as it usually happens when a number is substituted for judgment, inordinate amounts of time, effort, and expense are allocated toward manipulating the number. Witness the entire test preparation industry that has grown up because of the SAT. Spending thousands of dollars on SAT prep classes defeats the original purpose of a level playing field. It’s time to retire the number.
For recent graduates entering the workforce, college reputation and courses of study are important because it is all employers have as a basis for judging competence and abilities. But within four to five years of graduation it will be performance on the job that counts. For me it has now been 32 years since I entered college and 28 since I graduated. I no longer remember my SAT scores and if my alma mater, the University of Rochester, changes its SAT policy there would be no impact on my life—financial or otherwise.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
Friday, April 10, 2009
The Neglect of Probability Bias: What is normal for the market?
The failures of large investment and insurance houses—Bear Sterns, Lehman Brothers, AIG, Freddie Mac, Fannie Mae—demonstrate that the models these companies used to manage risk were deeply flawed. The defense offered by many on Wall Street is that market events of the past year have been so extreme, so far from the norm, no one could have predicted or planned for such as financial catastrophe. Repeatedly financial and political leaders have compared the past year to events of the Great Depression. It appears that the risk models failed because market contractions of the current magnitude were not considered a possibility.
Extreme events by definition have low probabilities of occurrence. But low probability does not equal zero probability. Was it reasonable for the financial analysts to consider current events in the markets so far outside the norm that they would not occur? I keep hearing that current market conditions are not normal. But, in reflecting back over the past few decades I’m hard-pressed to think of any time that was “normal.”
During the mid-1990s stocks increased so fast that investors not making 20% per year felt left out of the boom. At the beginning the bull market in 1995 the Standard and Poors 500 index increased 34% in that year alone. From 1995 to 1999 it had returns in excess of 19% for each of those 5 years, more than doubling its overall value. Plenty of warnings were sounded that those market conditions were not normal and would not last. The crash at the end of the decade revealed that many companies simply made up numbers on earnings reports to drive the increase in stock prices. High-flying companies of the 1990s such as Enron, Global Crossing, Worldcom became synonyms for fraud and a number of their top executives are still in prison.
The recession of 1991-92 was so deep it cost President George H. W. Bush his job. Despite winning a popular war, he was unseated by Bill Clinton’s laser-like focus on economic problems. Everyone remembers “The economy, stupid” sign hung at his campaign headquarters.
In 1987 the stock market lost 25% of its value on a single trading day. At today’s valuation levels that would be the equivalent of a one-day drop of 2000-points.
During the mid-1980s certificate of deposits paid double-digit interest rates. I remember owning a one-year certificate of deposit that paid 10% annual interest. I also remember a life insurance salesman running a projection on the future value of a whole life policy that he was trying to sell me. Based on just small premiums (about $100 per month) he calculated an impressive future value of over a million dollars by the time I would retire in 40 years. Of course his calculation assumed an annual interest rate of 12% in perpetuity—a laughable projection given that annual rates on money market balances today are less than 1%.
The recession of 1981-82 resulted in unemployment greater than 10%, a rate we have yet to reach in the current recession.
I could extend this list of extreme economic events and conditions indefinitely back in time. But, the above reflection on events over the past 30 years shows that it is a fallacy to believe extreme events are outside of the “norm” and unlikely to happen. Instead it is apparent that extreme events are the norm. History is not going to stop and economic conditions, whether part of a boom or bust, never continue indefinitely.
But, I have noticed a tendency for financial planners and prognosticators to assume that economic conditions of the moment—whatever conditions are at that moment—will continue indefinitely. Much of the financial advice on buying, financing, and investing in homes over the past decade was all based on the assumption that prices in the housing market would only go up. This belief mirrors beliefs in the mid-1990s that stocks could only go up. The same thinking led my life insurance salesman in the mid-1980s to argue that interest rates on savings would be in the double digits forever.
The future is always uncertain and psychologists who study how people make decisions under uncertainty have identified a long list of “cognitive biases.” A bias refers to a repeated and predictable flaw in judgment that results in making less than optimal choices. For example, if you don’t know the future, optimal choice requires acting on the basis of the most probable outcomes. But the “neglect of probability bias" results in instances where people disregard probabilities when considering future outcomes.
Failure to use seat belts is an example of the neglect of probability bias. Car crashes are low probability events. You can drive for years, even decades and never be in a car crash. But, because the probability of crashing a car is not zero and consequence of even one crash potentially catastrophic, seat belts should be worn. The fact is car cashes occur with a rate predictable enough that auto insurance companies remain financially solvent. Evidently it is not that difficult to correctly price auto insurance.
Executives in banking and investing should consider devising something akin to a “financial sea tbelt.” Rather than assume market crashes are too far outside the norm to worry about, they should accept the fact that market crashes have happened in the past and will happen in the future. They should have restraints in place ahead of time to limit the damage.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
Extreme events by definition have low probabilities of occurrence. But low probability does not equal zero probability. Was it reasonable for the financial analysts to consider current events in the markets so far outside the norm that they would not occur? I keep hearing that current market conditions are not normal. But, in reflecting back over the past few decades I’m hard-pressed to think of any time that was “normal.”
During the mid-1990s stocks increased so fast that investors not making 20% per year felt left out of the boom. At the beginning the bull market in 1995 the Standard and Poors 500 index increased 34% in that year alone. From 1995 to 1999 it had returns in excess of 19% for each of those 5 years, more than doubling its overall value. Plenty of warnings were sounded that those market conditions were not normal and would not last. The crash at the end of the decade revealed that many companies simply made up numbers on earnings reports to drive the increase in stock prices. High-flying companies of the 1990s such as Enron, Global Crossing, Worldcom became synonyms for fraud and a number of their top executives are still in prison.
The recession of 1991-92 was so deep it cost President George H. W. Bush his job. Despite winning a popular war, he was unseated by Bill Clinton’s laser-like focus on economic problems. Everyone remembers “The economy, stupid” sign hung at his campaign headquarters.
In 1987 the stock market lost 25% of its value on a single trading day. At today’s valuation levels that would be the equivalent of a one-day drop of 2000-points.
During the mid-1980s certificate of deposits paid double-digit interest rates. I remember owning a one-year certificate of deposit that paid 10% annual interest. I also remember a life insurance salesman running a projection on the future value of a whole life policy that he was trying to sell me. Based on just small premiums (about $100 per month) he calculated an impressive future value of over a million dollars by the time I would retire in 40 years. Of course his calculation assumed an annual interest rate of 12% in perpetuity—a laughable projection given that annual rates on money market balances today are less than 1%.
The recession of 1981-82 resulted in unemployment greater than 10%, a rate we have yet to reach in the current recession.
I could extend this list of extreme economic events and conditions indefinitely back in time. But, the above reflection on events over the past 30 years shows that it is a fallacy to believe extreme events are outside of the “norm” and unlikely to happen. Instead it is apparent that extreme events are the norm. History is not going to stop and economic conditions, whether part of a boom or bust, never continue indefinitely.
But, I have noticed a tendency for financial planners and prognosticators to assume that economic conditions of the moment—whatever conditions are at that moment—will continue indefinitely. Much of the financial advice on buying, financing, and investing in homes over the past decade was all based on the assumption that prices in the housing market would only go up. This belief mirrors beliefs in the mid-1990s that stocks could only go up. The same thinking led my life insurance salesman in the mid-1980s to argue that interest rates on savings would be in the double digits forever.
The future is always uncertain and psychologists who study how people make decisions under uncertainty have identified a long list of “cognitive biases.” A bias refers to a repeated and predictable flaw in judgment that results in making less than optimal choices. For example, if you don’t know the future, optimal choice requires acting on the basis of the most probable outcomes. But the “neglect of probability bias" results in instances where people disregard probabilities when considering future outcomes.
Failure to use seat belts is an example of the neglect of probability bias. Car crashes are low probability events. You can drive for years, even decades and never be in a car crash. But, because the probability of crashing a car is not zero and consequence of even one crash potentially catastrophic, seat belts should be worn. The fact is car cashes occur with a rate predictable enough that auto insurance companies remain financially solvent. Evidently it is not that difficult to correctly price auto insurance.
Executives in banking and investing should consider devising something akin to a “financial sea tbelt.” Rather than assume market crashes are too far outside the norm to worry about, they should accept the fact that market crashes have happened in the past and will happen in the future. They should have restraints in place ahead of time to limit the damage.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
Tuesday, March 17, 2009
Stewart versus Cramer: Is the world completely upside down?
The confrontation between John Stewart and Jim Cramer last week illustrated just how upside down and surreal the U. S. media has become. The Stewart versus Cramer dust-up actually started when Rick Santelli of CNBC made an on the air rant blasting the Obama administration’s proposal to help homeowners facing foreclosure. Santelli said in his tirade “the government is promoting bad behavior,” and referred to homeowners facing foreclosure as “losers.”
In response Stewart ran a montage of clips showcasing consistently wrong CNBC financial predictions over the past year. The “experts” at CNBC urged viewers to buy the stocks of Bear Sterns, Lehman Brothers, Merrill Lynch, and AIG, in the months before these companies imploded. A particularly embarrassing clip showed Jim Cramer on CNBC recommending Bear Stearns as a buy just weeks before the company went under.
Stewart’s point is that if the “experts” dispensing advice are so completely wrong about the future, how are average homebuyers suppose to know the future? After all, many of the “loser” homeowners went broke taking advice from “experts” like Santelli and his ilk in the financial services industry.
The feud reached a climax last Thursday night when Cramer appeared as a guest on Stewart’s show. Stewart conducted a pointed interrogation interspersed with previously unaired video clips from December 2006 of Cramer explaining to someone how to make money from short positions by spreading rumors about companies. Referring to the video, Stewart said: “I want the Jim Cramer on CNBC to protect me from that Jim Cramer.”
Cramer defended himself by claiming that the CEOs of the companies he recommended lied to him. When Stewart suggested that he not take at face value what CEOs say Cramer responded with a bizarre defense. He said: “I’m not Eric Sevareid. I’m not Edward R. Morrow. I’m a guy trying to do an entertainment show about business for people to watch.”
At this point in the interview I realized what has gone so wrong in the media. The irony of this exchange is breath taking.
John Stewart bills himself as a comedian and works for a network called Comedy Central. His show—The Daily Show—is presented as a spoof of network news broadcast. Jim Cramer bills himself as a financial news reporter and works for a news network CNBC. His show—Mad Money—is promoted as serious financial analysis and investment advice.
But, when Cramer shows up as guest on Stewart’s comedy show, he is bombarded with tough, pointed, serious, questions about the soundness and ethics of the advice he dispenses. Cramer defends himself by asserting that he needs to entertain an audience that would tune out if his talk became too technical.
So a comedian is asking relevant questions while a news reporter pleads that he doesn’t ask questions because he needs to entertain. Has the world gone completely upside down? If I want real news reporting I need to watch “fake” news on the comedy channel. The “real” news people are too busy entertaining to do actual investigative reporting.
The over arching point that Stewart stressed throughout the 15-minute interview with Cramer, is that the financial reporters at CNBC are not fulfilling their responsibilities as journalists. The role of a free press is to investigate and question those in authority, not simply serve as a mouthpiece.
Much has been made of the failure of the regulatory agencies such as the SEC in the current financial meltdown. But where was the press while all of this was happening? Bernie Madoff ran a $50 billion Ponzi scheme for more than a decade while a financial analyst sent warning letters to the SEC that were ignored. No one at CNBC bothered to investigate and ask questions.
No reporter investigated or questioned AIG issuing more credit default swaps than it could ever possibly payout on. Bear Sterns, Lehman Brothers, and Merrill Lynch all used massive amounts of leverage, in some cases more than 30 to 1, to artificially inflate their investment returns—a reckless strategy that again no reporter questioned. Instead stocks in these investment firms were touted as good buys.
While all of this was happening the reporters at CNBC were concerned about “entertaining” their viewers. Stewart said: “I understand that you want to make finance entertaining, but it’s not a fucking game.”
No it’s not a game. Real money and real livelihoods are on the line. Real hard-earned wages went into now decimated 401k and pension plans. Real tax dollars are being spent to hold off collapse of the financial system.
I believe that if the financial reporters would do their jobs they would find criminal culpability on the part of many of the executives who ran these failed companies. I don’t believe that a blow up of the entire financial system to the tune of a trillion dollars happened without actual fraud taking place. With dollar amounts that large it should not have been that hard for the so-called “experts” to figure out what was going on.
Much has been made of the need for more oversight and regulation in the financial services sector. But, the government needs to take a hard look at possible criminal violation of regulations already in place. And the journalists need to get back to holding the government and CEOs accountable by investigating and asking questions. Leave the entertaining for the comedians.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
In response Stewart ran a montage of clips showcasing consistently wrong CNBC financial predictions over the past year. The “experts” at CNBC urged viewers to buy the stocks of Bear Sterns, Lehman Brothers, Merrill Lynch, and AIG, in the months before these companies imploded. A particularly embarrassing clip showed Jim Cramer on CNBC recommending Bear Stearns as a buy just weeks before the company went under.
Stewart’s point is that if the “experts” dispensing advice are so completely wrong about the future, how are average homebuyers suppose to know the future? After all, many of the “loser” homeowners went broke taking advice from “experts” like Santelli and his ilk in the financial services industry.
The feud reached a climax last Thursday night when Cramer appeared as a guest on Stewart’s show. Stewart conducted a pointed interrogation interspersed with previously unaired video clips from December 2006 of Cramer explaining to someone how to make money from short positions by spreading rumors about companies. Referring to the video, Stewart said: “I want the Jim Cramer on CNBC to protect me from that Jim Cramer.”
Cramer defended himself by claiming that the CEOs of the companies he recommended lied to him. When Stewart suggested that he not take at face value what CEOs say Cramer responded with a bizarre defense. He said: “I’m not Eric Sevareid. I’m not Edward R. Morrow. I’m a guy trying to do an entertainment show about business for people to watch.”
At this point in the interview I realized what has gone so wrong in the media. The irony of this exchange is breath taking.
John Stewart bills himself as a comedian and works for a network called Comedy Central. His show—The Daily Show—is presented as a spoof of network news broadcast. Jim Cramer bills himself as a financial news reporter and works for a news network CNBC. His show—Mad Money—is promoted as serious financial analysis and investment advice.
But, when Cramer shows up as guest on Stewart’s comedy show, he is bombarded with tough, pointed, serious, questions about the soundness and ethics of the advice he dispenses. Cramer defends himself by asserting that he needs to entertain an audience that would tune out if his talk became too technical.
So a comedian is asking relevant questions while a news reporter pleads that he doesn’t ask questions because he needs to entertain. Has the world gone completely upside down? If I want real news reporting I need to watch “fake” news on the comedy channel. The “real” news people are too busy entertaining to do actual investigative reporting.
The over arching point that Stewart stressed throughout the 15-minute interview with Cramer, is that the financial reporters at CNBC are not fulfilling their responsibilities as journalists. The role of a free press is to investigate and question those in authority, not simply serve as a mouthpiece.
Much has been made of the failure of the regulatory agencies such as the SEC in the current financial meltdown. But where was the press while all of this was happening? Bernie Madoff ran a $50 billion Ponzi scheme for more than a decade while a financial analyst sent warning letters to the SEC that were ignored. No one at CNBC bothered to investigate and ask questions.
No reporter investigated or questioned AIG issuing more credit default swaps than it could ever possibly payout on. Bear Sterns, Lehman Brothers, and Merrill Lynch all used massive amounts of leverage, in some cases more than 30 to 1, to artificially inflate their investment returns—a reckless strategy that again no reporter questioned. Instead stocks in these investment firms were touted as good buys.
While all of this was happening the reporters at CNBC were concerned about “entertaining” their viewers. Stewart said: “I understand that you want to make finance entertaining, but it’s not a fucking game.”
No it’s not a game. Real money and real livelihoods are on the line. Real hard-earned wages went into now decimated 401k and pension plans. Real tax dollars are being spent to hold off collapse of the financial system.
I believe that if the financial reporters would do their jobs they would find criminal culpability on the part of many of the executives who ran these failed companies. I don’t believe that a blow up of the entire financial system to the tune of a trillion dollars happened without actual fraud taking place. With dollar amounts that large it should not have been that hard for the so-called “experts” to figure out what was going on.
Much has been made of the need for more oversight and regulation in the financial services sector. But, the government needs to take a hard look at possible criminal violation of regulations already in place. And the journalists need to get back to holding the government and CEOs accountable by investigating and asking questions. Leave the entertaining for the comedians.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
Tuesday, March 10, 2009
Interest-only Mortgages by Another Name
After all the carnage in the mortgage industry over the past few years, I am still amazed that many in the financial services industry still do not understand the number gimmicks that led to the mess. An op-ed piece published in the February 27, 2009 Baltimore Sun by Sim B. Sitkin a professor of management at Duke University, advocated extending mortgages to 50 or even 100 years as a way to make houses more “affordable.” That sounds like an impressive proposal for lowering monthly payments. However, whether the mortgage term is for 50, 100 or even 1000 years, monthly payments can never fall to an amount less than the interest due on the first month of the loan. In the limit of extremely long loan terms, the loan effectively becomes an interest-only agreement.
Of course Mr. Sitkin didn’t use "interest-only" as a descriptor. That label now has a negative connotation given the millions of homeowners with interest-only loans currently underwater because home prices went down while their debt did not. But lets look at how much 50 and 100-year loans differ from interest only loans. I’ve constructed tables below with some examples. Scroll down to view the tables.
Here are some numerical facts from these tables.
First note that a 100-year mortgage proposed by Mr. Sitkin is for all practical purposes an interest-only loan. No significant debt reduction will take place in the borrower’s lifetime.
Second any advantages that a 50-year loan would have over a 30-year loan in reducing monthly payments diminishes at higher interest rates. The difference in monthly payments been a 30-year and 50-year mortgage decreases as interest rates increase. Also the amount allocated towards principal in the early years of the mortgage becomes less for both 30 and 50-year loans at higher interest rates.
Mr. Sitkin used 5% as an example interest rate. However, I pointed out in a letter to the editor that the Baltimore Sun published that “to get a lender to commit to so long a loan would probably require paying a higher rate than the historically low 5 percent mortgage rate used in the example. In that case, the numbers get much worse for the borrower.”
My published letter provoked a response from Mr. Richard T. Webb, CEO of Atlantic Financial Federal Credit Union, that the Baltimore Sun published on March 8. In his letter he made two statements I find puzzling. In response to my assertion that interest rates would be higher for a 50-year loan compared to a 30-year loan he wrote:
“And from the point of view of the lending institution, I'd rather own a long-term 5 percent loan than have a bankruptcy judge cram down a mortgage payment.”
This prompted me to check the loan rate page on his credit union’s Website. I found the same pattern for interest rates on that page that I find at every other financial institution—the longer the loan’s term the high the interest rate. On the Baltimore Sun’s business page today, the average rate for 15-year mortgages rate is 4.76% and for 30-year mortgages 5.17%. Although those numbers fluctuate daily, every single day the 30-year rate is greater than the 15-year rate. I have no reason to believe that the pattern of higher rates for longer loans would not continue for loan terms beyond 30 years.
The other puzzling assertion he made is that I failed “to consider the length of time most homeowners keep a mortgage.” He wrote:
“It's highly unusual for a homeowner to keep a mortgage for 30 years. The average time a mortgage is held is around seven to nine years. Extending the repayment period would achieve the desired effect of reducing the monthly mortgage payment. Wouldn't it make sense to be making smaller payments on a longer-term loan when the chances of staying in a house for 30 years are small?”
But isn’t that the reason why a homebuyer should avoid a 50-year loan? Again look at the numbers in my table above. Homebuyers who don’t pay down debt are at the whim of the market when it comes to refinancing or selling. If home prices rise they can sell or refinance. But, if prices fall homeowners have negative equity. No bank or lending institution will finance a home with negative equity. If rates fall, homeowners cannot refinance to take advantage of the lower rate for homes with negative equity.
Events of the past few years have shown that the assumption that home prices can only rise over time is false. But financial institutions are still dispensing advice based on that underlying assumption.
I still stand by my concluding paragraph in my letter to the Sun. Focusing only on monthly payments with no long-term plan for paying down the debt is one of the root causes of the housing crisis. Homebuyers would be better served with monthly payments that allow them to build equity, even if it means scaling down or deferring their homebuying choices.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
Of course Mr. Sitkin didn’t use "interest-only" as a descriptor. That label now has a negative connotation given the millions of homeowners with interest-only loans currently underwater because home prices went down while their debt did not. But lets look at how much 50 and 100-year loans differ from interest only loans. I’ve constructed tables below with some examples. Scroll down to view the tables.
| 30-Year $200,000 loan | 5% | 7% | 9% |
| Monthly Payment | $1073 | $1330 | $1609 |
| Interest paid in the first month | $833 | $1166 | $1500 |
| Principal paid in the first month | $240 | $164 | $109 |
| Time to pay 10% of loan (years) | 6 | 7.7 | 9.6 |
| 50-Year $200,000 loan | 5% | 7% | 9% |
| Monthly Payment | $908 | $1203 | $1517 |
| Interest paid in the first month | $833 | $1166 | $1500 |
| Principal paid in the first month | $75 | $37 | $17 |
| Time to pay 10% of loan (years) | 15 | 20.5 | 25.4 |
| 100-Year $200,000 loan | 5% | 7% | 9% |
| Monthly Payment | $839.04 | $1167.75 | $1500.19 |
| Interest paid in the first month | $833.33 | $1166.66 | $1500 |
| Principal paid in the first month | $5.71 | $1.09 | $0.19 |
| Time to pay 10% of loan (years) | 55 | 67.2 | 74.4 |
Here are some numerical facts from these tables.
First note that a 100-year mortgage proposed by Mr. Sitkin is for all practical purposes an interest-only loan. No significant debt reduction will take place in the borrower’s lifetime.
Second any advantages that a 50-year loan would have over a 30-year loan in reducing monthly payments diminishes at higher interest rates. The difference in monthly payments been a 30-year and 50-year mortgage decreases as interest rates increase. Also the amount allocated towards principal in the early years of the mortgage becomes less for both 30 and 50-year loans at higher interest rates.
Mr. Sitkin used 5% as an example interest rate. However, I pointed out in a letter to the editor that the Baltimore Sun published that “to get a lender to commit to so long a loan would probably require paying a higher rate than the historically low 5 percent mortgage rate used in the example. In that case, the numbers get much worse for the borrower.”
My published letter provoked a response from Mr. Richard T. Webb, CEO of Atlantic Financial Federal Credit Union, that the Baltimore Sun published on March 8. In his letter he made two statements I find puzzling. In response to my assertion that interest rates would be higher for a 50-year loan compared to a 30-year loan he wrote:
“And from the point of view of the lending institution, I'd rather own a long-term 5 percent loan than have a bankruptcy judge cram down a mortgage payment.”
This prompted me to check the loan rate page on his credit union’s Website. I found the same pattern for interest rates on that page that I find at every other financial institution—the longer the loan’s term the high the interest rate. On the Baltimore Sun’s business page today, the average rate for 15-year mortgages rate is 4.76% and for 30-year mortgages 5.17%. Although those numbers fluctuate daily, every single day the 30-year rate is greater than the 15-year rate. I have no reason to believe that the pattern of higher rates for longer loans would not continue for loan terms beyond 30 years.
The other puzzling assertion he made is that I failed “to consider the length of time most homeowners keep a mortgage.” He wrote:
“It's highly unusual for a homeowner to keep a mortgage for 30 years. The average time a mortgage is held is around seven to nine years. Extending the repayment period would achieve the desired effect of reducing the monthly mortgage payment. Wouldn't it make sense to be making smaller payments on a longer-term loan when the chances of staying in a house for 30 years are small?”
But isn’t that the reason why a homebuyer should avoid a 50-year loan? Again look at the numbers in my table above. Homebuyers who don’t pay down debt are at the whim of the market when it comes to refinancing or selling. If home prices rise they can sell or refinance. But, if prices fall homeowners have negative equity. No bank or lending institution will finance a home with negative equity. If rates fall, homeowners cannot refinance to take advantage of the lower rate for homes with negative equity.
Events of the past few years have shown that the assumption that home prices can only rise over time is false. But financial institutions are still dispensing advice based on that underlying assumption.
I still stand by my concluding paragraph in my letter to the Sun. Focusing only on monthly payments with no long-term plan for paying down the debt is one of the root causes of the housing crisis. Homebuyers would be better served with monthly payments that allow them to build equity, even if it means scaling down or deferring their homebuying choices.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
Saturday, February 28, 2009
Lifetime Promotional Credit Card Rates from Chase: Responses
My previous post on Chase Credit Card Services reneging on agreements for low promotional rates prompted several comments, including one from a Chase employee. The comment from the Chase employee is very telling about the mindset of the credit card industry both for what it says and what it doesn’t say. That person wrote:
“I work for Chase Credit Card Services and thought I should inform you that we didn't just announce these Changes in Terms last week. We actually sent notifications to effected card members back in November, so they were informed 45-60 days in advance. If you are going to writing an article from a negative standpoint and try to preach to other people, at least make sure you have your facts straight.”
The commenter is correcting my use of the phrase “last week” twice in my February 16, 2009 post to set the timeline of events. I meant “last week” to refer to the publication of the newspaper articles I cited about Chase’s change to its credit card terms. Instead I made it sound that Chase changed its terms the week prior. Had I published the post in November it would have been correct. I should have used the ambiguous word “recently” which would have left wiggle room in setting the timeline.
This comment is telling in that it doesn’t address the question posed in my post: Whose lifetime was referenced when Chase offered a “lifetime” rate on a balance? As another commenter pointed out:
“If they gave 45 days notice, or just two, it's still false advertising, and a violation of the Truth In Lending Act: the terms of the loan were ‘fixed for the life of the loan.’ ”
But the mindset of the Chase employee is that the credit card agreement allows Chase to change the loan terms at any time, for any reason, as long as a minimum of 30 days notice is given. I believe that is why my use of the phrase “last week” stirred outrage. My usage implied more than 30 days noticed had not been given—a time period I regard as immaterial but to Chase is the only obligation they have under the terms of the agreement.
Like a magician—and many political and corporate leaders—the comment from the Chase employee uses misdirection. Their actions are to holler loud and long about minutiae and hope nobody notices what is actually happening.
As Dr. Robert Lahm commented:
“Imagine that, a company that has previously testified before Congress about playing fair and providing "opt outs" (none exists in this instance) correcting you in getting ‘facts straight.’ ”
Dr. Lahm has set up a protest/advocacy Website http://www.changeinterms.com to organize consumers to fight against abusive credit card practices. I applaud his efforts to call on Congress to force some semblance of fairness in credit card agreements.
Financial services companies are on the brink of collapse and many blame their failures on consumers. From the point-of-view of financial service providers, consumers spent too much, took out loans they could not afford, and were irresponsible in their use of credit. But, now Chase is disclosing that hundreds of thousands of its customers made rational decisions about credit and honored the terms of the agreement. These customers astutely saw that Chase offered them a loan with a favorable interest rate, borrowed the money and kept up payments under the terms of the loan agreement. Aren’t those the kind of informed, rational, financially responsible customers a credit card company desires? Apparently not.
I have a suggestion for Chase and all the other credit providers. Cut the enticements, the teaser rates, the cash back, the bonus points, the coupons, the gift cards, the air miles, the gasoline credits, the weekly bulk mailings, and all the other gimmicks. Offer consumers a credit card with a reasonable rate interest rate (less than 10%), a credit limit commensurate with income and credit history, and terms of use of that are fair to both parties. Events of the past year have demonstrated that the current business model for credit cards benefits no one.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
“I work for Chase Credit Card Services and thought I should inform you that we didn't just announce these Changes in Terms last week. We actually sent notifications to effected card members back in November, so they were informed 45-60 days in advance. If you are going to writing an article from a negative standpoint and try to preach to other people, at least make sure you have your facts straight.”
The commenter is correcting my use of the phrase “last week” twice in my February 16, 2009 post to set the timeline of events. I meant “last week” to refer to the publication of the newspaper articles I cited about Chase’s change to its credit card terms. Instead I made it sound that Chase changed its terms the week prior. Had I published the post in November it would have been correct. I should have used the ambiguous word “recently” which would have left wiggle room in setting the timeline.
This comment is telling in that it doesn’t address the question posed in my post: Whose lifetime was referenced when Chase offered a “lifetime” rate on a balance? As another commenter pointed out:
“If they gave 45 days notice, or just two, it's still false advertising, and a violation of the Truth In Lending Act: the terms of the loan were ‘fixed for the life of the loan.’ ”
But the mindset of the Chase employee is that the credit card agreement allows Chase to change the loan terms at any time, for any reason, as long as a minimum of 30 days notice is given. I believe that is why my use of the phrase “last week” stirred outrage. My usage implied more than 30 days noticed had not been given—a time period I regard as immaterial but to Chase is the only obligation they have under the terms of the agreement.
Like a magician—and many political and corporate leaders—the comment from the Chase employee uses misdirection. Their actions are to holler loud and long about minutiae and hope nobody notices what is actually happening.
As Dr. Robert Lahm commented:
“Imagine that, a company that has previously testified before Congress about playing fair and providing "opt outs" (none exists in this instance) correcting you in getting ‘facts straight.’ ”
Dr. Lahm has set up a protest/advocacy Website http://www.changeinterms.com to organize consumers to fight against abusive credit card practices. I applaud his efforts to call on Congress to force some semblance of fairness in credit card agreements.
Financial services companies are on the brink of collapse and many blame their failures on consumers. From the point-of-view of financial service providers, consumers spent too much, took out loans they could not afford, and were irresponsible in their use of credit. But, now Chase is disclosing that hundreds of thousands of its customers made rational decisions about credit and honored the terms of the agreement. These customers astutely saw that Chase offered them a loan with a favorable interest rate, borrowed the money and kept up payments under the terms of the loan agreement. Aren’t those the kind of informed, rational, financially responsible customers a credit card company desires? Apparently not.
I have a suggestion for Chase and all the other credit providers. Cut the enticements, the teaser rates, the cash back, the bonus points, the coupons, the gift cards, the air miles, the gasoline credits, the weekly bulk mailings, and all the other gimmicks. Offer consumers a credit card with a reasonable rate interest rate (less than 10%), a credit limit commensurate with income and credit history, and terms of use of that are fair to both parties. Events of the past year have demonstrated that the current business model for credit cards benefits no one.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
Monday, February 16, 2009
Lifetime Promotional Credit Card Rates: Whose lifetime?
The announcement last week from JP Morgan-Chase that some customers would be assessed fees on promotional credit card rates reminded me of a line from former St. Louis Cardinals baseball manager Whitey Herzog. It was back in the mid-1980s when the Cardinals were one of the top teams in baseball and Herzog widely lauded for his managerial skills. Gussie Busch, principal owner of the Cardinals and the Anheuser-Busch brewery offered Herzog a “lifetime appointment” as manager. Herzog’s response to the frail man well into his 80s: “Whose lifetime are we talking about?”
A valid question that looking back over the intervening 25 years was prescient. Gussie Busch died in 1989, Herzog is still alive today but quit managing the Cardinals in 1990, Anheuser-Busch sold the Cardinals in 1996, and in 2008 Anheuser-Busch itself was sold to the European conglomerate InBev.
What does this have to do with credit card fees? In recent years Chase credit card services has offered cash advances at low promotional rates under 5% to its credit card customers that promised the low rate for the “lifetime” of the balance. But, it happens that a “lifetime” for a typical customer is a long time on Wall Street where executives have trouble thinking beyond the end of the current quarter.
Chase now regards as problem customers those who took the bait but not the hook. Hundreds of thousands of customers thought “lifetime” referred to their longevity and have been in no hurry to pay back borrowed funds that accrue low finance charges. Chase never specified what it meant by “lifetime” in its promotional brochure and is now in the process of defining that time period as something considerable less than the numbers found in the actuarial tables for life expectancy.
Last week Chase announced that it would begin charging monthly “fees” to customers carrying balances with low promotional rates. Just how a “fee” differs from a “finance charge” has always been a mystery to me. To me money is money, but for Chase its new flat $10 per month fee is not a finance charge because it doesn’t use the same mathematical formula that it uses to compute finance charges. However, customers who called to complain about the monthly fee were told they could opt out of paying it if they would agree to pay a higher interest rate on the promotional balance.
Chase also changed the minimum monthly payment for these same customers from 2% of the balance to 5% of the balance. That means someone with a $10,000 balance will now need $500 to make the monthly payment instead of $200. Of course failure to make the minimum monthly payment on time results in forfeiture of the promotional rate and a default rate in excess of 25% immediately kicks in.
A spokeswoman for Chase, Stephanie Johnson, explained that the change only affects consumers with low promotional rates who have carried a large balance for more than two years and made little progress paying it off. So Chase’s answer to Whitey Herzog’s question is that “lifetime” means two years. Maybe Chase should only market promotional rates to customers in their late 90s.
A New York-base law firm, Giskan Solotaroff Anderson & Stewart, has brought a class-action lawsuit against Chase for changing the terms of the agreement. The terms of the promotional rate never disclosed that a $10 service fee would be applied after two years. It will be interesting to see how the lawsuit plays out. Most credit card agreements allow banks to unilaterally change the terms for any reason at any time. The agreements also require customers to waive their right to sue and must submit disputes to binding arbitration. I’ve always wondered if agreements with these kinds of provisions meet the legal definition of a contract. Hopefully this lawsuit will test the legality of bait and switch credit card agreements in a court of law.
By the way, JP Morgan Chase received over $25 billion in bailout money from taxpayers last year.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
A valid question that looking back over the intervening 25 years was prescient. Gussie Busch died in 1989, Herzog is still alive today but quit managing the Cardinals in 1990, Anheuser-Busch sold the Cardinals in 1996, and in 2008 Anheuser-Busch itself was sold to the European conglomerate InBev.
What does this have to do with credit card fees? In recent years Chase credit card services has offered cash advances at low promotional rates under 5% to its credit card customers that promised the low rate for the “lifetime” of the balance. But, it happens that a “lifetime” for a typical customer is a long time on Wall Street where executives have trouble thinking beyond the end of the current quarter.
Chase now regards as problem customers those who took the bait but not the hook. Hundreds of thousands of customers thought “lifetime” referred to their longevity and have been in no hurry to pay back borrowed funds that accrue low finance charges. Chase never specified what it meant by “lifetime” in its promotional brochure and is now in the process of defining that time period as something considerable less than the numbers found in the actuarial tables for life expectancy.
Last week Chase announced that it would begin charging monthly “fees” to customers carrying balances with low promotional rates. Just how a “fee” differs from a “finance charge” has always been a mystery to me. To me money is money, but for Chase its new flat $10 per month fee is not a finance charge because it doesn’t use the same mathematical formula that it uses to compute finance charges. However, customers who called to complain about the monthly fee were told they could opt out of paying it if they would agree to pay a higher interest rate on the promotional balance.
Chase also changed the minimum monthly payment for these same customers from 2% of the balance to 5% of the balance. That means someone with a $10,000 balance will now need $500 to make the monthly payment instead of $200. Of course failure to make the minimum monthly payment on time results in forfeiture of the promotional rate and a default rate in excess of 25% immediately kicks in.
A spokeswoman for Chase, Stephanie Johnson, explained that the change only affects consumers with low promotional rates who have carried a large balance for more than two years and made little progress paying it off. So Chase’s answer to Whitey Herzog’s question is that “lifetime” means two years. Maybe Chase should only market promotional rates to customers in their late 90s.
A New York-base law firm, Giskan Solotaroff Anderson & Stewart, has brought a class-action lawsuit against Chase for changing the terms of the agreement. The terms of the promotional rate never disclosed that a $10 service fee would be applied after two years. It will be interesting to see how the lawsuit plays out. Most credit card agreements allow banks to unilaterally change the terms for any reason at any time. The agreements also require customers to waive their right to sue and must submit disputes to binding arbitration. I’ve always wondered if agreements with these kinds of provisions meet the legal definition of a contract. Hopefully this lawsuit will test the legality of bait and switch credit card agreements in a court of law.
By the way, JP Morgan Chase received over $25 billion in bailout money from taxpayers last year.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy
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