Then we found a post by the Epicurean Dealmaker that destroys the study precisely on these arguments. As he says after presenting his points, “Perhaps one day some academic will actually make the effort to understand how my industry works before they design a study to explain it”. And as he says, we also yearn for a good study into the subject.

The second article in the Financial Times tries to tack the same “double standards” theme onto Germany, given its treatment of the heavily-indebted Eurozone members. It doesn’t work nearly as well, but for argument’s sake – and its use of Goethe quotes from Faust – it’s an interesting read.

Here’s the 3-minute video:

China

The real risks to China’s financial system – FT.com – Two articles supposedly debate the IMF report, but it turns out their opinions aren’t that much divergent. We’ve read calls for opening up the system, and we remind the readers that when the incentive systems of enough players are aligned towards a given direction – in this case, growth, then whether it’s centralized or open doesn’t matter as much. One such example was the US housing boom and subsequent bust: oversimplifying a bit, one can argue that all players were aligned towards growth: home owners, mortgage originators/ packagers/ distributors, banks, investors, credit rating agencies etc. – and, on top of them all, the government and its agencies. The fact that the system was open, competitive and so on didn’t help much. In China, the incentives to grow are still strong and the Central government is yet to pull on the reins strongly enough. It’s not necessarily true that an open system would be better incentivized to slow down.

Europe

Banks face funding stress – WSJ.com – European banks need funding, most of it nowadays comes from the ECB due to higher perceived risk. So banks needing collateral accepted by the ECB enter strange swaps with funds and investment banks to get such “risk-free” assets at a discount to the, well, not-collateral-level assets they’re swapping with the other players. Is this spreading the risk or creating even more connections where there shouldn’t be many?

UniCredit bombshell shouldn’t be the last one – Bloomberg – UniCredit, one of Italy’s largest lenders, has recognized 10.7 billion euros in asset writedowns in its latest report. Even so it’s still trading at 0.29x book value, and that book value is propped up by “useless” assets such as deferred taxes (good luck turning a profit to use this asset) and goodwill (good luck trading goodwill for cash). Other european banks trade at P/B multiples that suggest their credibility is also way down. However, the author argues the problem could be global and that, if banks start getting as candid as UniCredit, things could get rather unpredictable.

USA

Fitch’s warning spooks investors – WSJ.com — AND — US Banks face contagion risk from European debt – Bloomberg – Credit rating agency Fitch has issued a report (for subscribers only) on the “serious risk” that US banks may face if the situation in Europe deteriorates much further. As in France being at risk, for instance. While again it’s a case of “not much new information”, the fact that they chose to go on record – even though they didn’t change the ratings of any of the US banks mentioned – has spooked investors (US banks down by 3-4% as we write, with the notable yet unsurprising exception of Wells Fargo – still down by 1%).

Why not break up Citigroup? – NYT’s Economix blog – Simon Johnson, former IMF chief economist, links to the Dallas FED president’s speech on “too big to fail” banks and agrees with him that such institutions should be broken down into smaller pieces. He suggests starting with Citigroup.

‘Aloha’ to a new fix-it job – WSJ.com – coincidentally, the WSJ.com has a profile of Michael O’Neill, the new Chairman of Citibank N.A. (not Citigroup, “just” the bank – i.e. 70% of Citigroup’s assets). Certainly an impressive profile, but we’re reminded of Warren Buffett’s axiom: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

Global

Finance job losses near 200,00 as BNP, Citigroup trim employees – Bloomberg – Well, partially playing to Mr. Johnson’s wishes above, the banks are reducing their size – does involuntary reduction count?

“Culture eats strategy for breakfast”: if that was MF Global’s risk management culture, not even the world’s most powerful, accurate, on-time risk management systems – programmed and run by the world’s best minds – could save them. Because “he was from Goldman Sachs”, because of the “Goldman halo effect”, bad decisions were overlooked, too much risk was piled on, and a market shakeout took the firm down.

We wrote just days ago, regarding the “key people” aspect of an investment or company (or whatever): “Ultimately, in investments or revolutions, it’s all about the key people (…) – it’s vital to understand their real motivations, aspirations, personalities and incentive/moral systems. Not what they say it is, what it really is.” (we added emphasis for this post). Finding out about a given company’s true culture (which tends to emanate from its key people anyway, at least over time) is just as difficult and time consuming, and as we can see in this example, just as important.

This NYT story highlights that some financial instruments are too untested to trust completely. Apparently there’s enough leeway built into the CDS contract for this “voluntary” deal (to take a 50% haircut on Greek debt) NOT to be considered a default on the terms of the CDS, meaning people who bought “insurance” get nothing. Another thing that captures our attention is that there’s a committee that decides whether or not this is an event of default – and it would seem like a one-sided committee in favor of CDS investors. However, the big banks’ incentives are more aligned towards making the agreed debt deal come through – to save 50% and perhaps avoid a larger meltdown. Not surprisingly, this committee has already indicated that this “voluntary” swap does not constitute default…

And this Bloomberg story addresses the counterpart risk issue: in this immensely interconnected financial system, it just may be that too much risk-spreading actually increases the chances of “contagion” or “viral spread” of troubles. If that happens with a over-the-counter, not-centrally-cleared instrument such as the CDS, there could be big consequences.

BusinessWeek profiles anthropologist David Graeber, who they call “the Anti-Leader of Occupy Wall Street“. Despite coming from a business magazine now owned by the Bloomberg family of companies, it’s pretty sympathetic. That said, his ideas on debt and government systems don’t seem feasible at all.

Elizabeth Warren doesn’t seem to mind such “manners” and says she’s created “much of the intellectual foundation for what they [OWS] do“. That she’s seeking the Democrat nomination to run for a Senate seat in Massachusetts should be no surprise.

Finally, the Rolling Stones’ Matt Taibbi explains what the OWS movement “is all about”, but more importantly what is it not about. This is an enjoyable read at first, a rant that, again, appears “right” yet it’s dreadfully wrong – especially when it implies that all of the success in Wall Street is due to cheating.

Bonus (and finally explaining the title Occupy the Classroom): It’s an article by Nicholas Kristof of the New York Times, begging for such a movement for revolutionizing Education – beginning at the earliest possible stages. In fact, his latest article also tries to explain what OWS really is about, not necessarily because their “creators” thought and think of it this way, but because that’s how it can be useful: as a reminder that capitalism is built on the foundations of accountability. That’s an interesting way to frame it, one we can relate to.

Our usual cautionary notes – about great writers sometimes skimping over a bit too much evidence for the sake of an argument – apply.