As the share price goes, so goes the company

Citigroup's share price has plunged over the past week, from an already abysmal $10 to about $4. This gives it a market capitalization of $20 Billion, for a bank with $2 trillion in assets. This same behavior precipitated the takeover of Bear Stearns, Fannie/Freddie, and as I've written about before, in the UK.

Bloomberg has an article speculating on the takeover of Citi by the federal government:

The U.S. government may step in to rescue Citigroup Inc. after a crisis in confidence erased half the bank’s stock-market value in three days, according to investors and analysts.

The only possible justification for this would be Citi becoming insolvent. If any company is too big to fail, it's the the ginormous financial behemeth which is Citigroup.

But what the hell does the share price have to do with anything? Really? The only problem is if they don't have enough capital on hand to cover immediate obligations. As a fractional reserve bank they're vulnerable to bank runs, even if they're solvent (in theory). The shareholders would get wiped out, so if people were worried about Citi going under it would make sense to sell.

It doesn't work the other way, though. If the market thinks Citi is insolvent, so everybody sells their shares, that doesn't affect the capital they have on hand to meet liabilities. At all. A drop in share price could trigger other things, like creditors recalling loans, which would affect the capital ratio, but the share price itself is not something the government should care about.

Error rating: 7. MARKETS FLUCTUATE

-Enginerd

In a controlled, unrealistic setting, people behave differently

The Sydney Morning Herald had an interesting story a few days ago. Everybody knows that thin models are the way to sell things. But apparently, empirical evidence disagrees:

Phillippa Diedrichs created a series of mock ads, using regular models - typically size eight - and so-called "plus size" models, about size 12. She then presented three ads - for a hair-care product, a party dress and underwear - to 400 young people. She found there was no difference between their responses, with those who viewed the larger models reporting themselves just as interested in buying the goods as those who were presented with the skinnier women.

Got that? People rated themselves as no more likely to buy something? Well I guess that settles that.

Anybody who's ever had to study people knows that what they say they're going to do is different than what they actually do. The Bradley Effect is one example, Malcolm Gladwell in The Tipping Point also documents a case where showing people the effects of rabies made them say they were more likely to go to the health center to get a shot, but not more likely to actually do it.

The idea behind the experiment is a good one, but it would have to be structured in such a way as to see whether test subjects actually would spend money on the products. This is a faulty experiment from the get-go.

Error rating: 2. Hearts in the right place, but come on now. This is just a rookie mistake.

-Enginerd

Voting rights are sacred

There are 4 senate races still to be decided. Wired has a good article summarizing:

Voting machines that recently failed pre-election accuracy tests in Michigan are at the center of a disputed U.S. Senate race in Minnesota that hangs in the balance over fewer than 500 votes at press time.

It really amazes me that after 200 years we can't get elections right. In fact, we seem to have gone backwards. That's not really what I wanted to talk about though. The closing line:

Oregon uses mail-in paper ballots statewide that are read by a variety of optical-scan systems from ES&S and Sequoia Voting Systems. It's the first state that's gone entirely postal.

Lolz. There must've been a better way to phrase that. On the other hand, perhaps that was the best way.

Error rating: Either 0 or 4, depending on your sense of humor.

-Enginerd

I don't like it, so I choose to believe it can't happen

Well, Barack Obama will be the next president of the united states. I speak for about 52% of the country (and who knows how much of the rest of the world) when I say w00t! Now onto the criticism.

The Vancouver Sun just published a column explaining that Obama can't possibly deliver on all of his promises. I tend to agree that even with Obama's proposed taxes he can't possibly deliver universal health care, alternative energy, and a puppy in every house, the Sun seems to believe that he can't even raise taxes:

His plan to raise capital gains taxes, the first such tax increase since 1986, is a non-starter. Similarly, he will have to moderate his proposed tax increase for households with incomes above $200,000.

Um, what? He will have to moderate his plan to repeal the historic tax cut of 2001, which is set to expire in 2010 without renewal? Why, exactly will he have to do that? And what about raising the capital gains tax is a "non-starter"? A faulty spark plug, or a vague, unspecified problem which has yet to determined but will nonetheless ruin everything?

You know what else is a "non-starter"? Limiting executive pay. But it passed in the bailout.
In fact, the bailout itself was a non-starter according to Pelosi. While it's true the government put in some oversight, the plan that passed was pretty similar to his proposal.

Error rating: 3. This whole article is saying "no, that won't work" without saying why.

-Enginerd