The Bank Calculator

ShipOfFools_web_07292016“Afterward Moses and Aaron went and said to Pharaoh,
Thus says the LORD, the God of Israel,
Let my people go, that they may hold a feast
to me in the wilderness.” (Exod 5:1 ESV)

The Bank Calculator

By Stephen W. Hiemstra

My transfer in 1995 to the economics department in the Comptroller of the Currency (OCC) initiated a period of intense learning, productivity, and networking. My particular unit, Global Banking and Financial Analysis (GBFA) developed a relational database in SAS to store and more easily retrieve call report data on commercial banks and thrifts and more generally tasked with financial analysis of community banks. Because most economists have some facility with using SAS, this database enabled our unit to undertake routine oversight of the financial condition of the banks.

My initial work in GBFA involved supporting advanced risk analysis research being undertaken by my colleagues, Tom and Swamy. Swamy developed an econometric approach at the Federal Reserve which was implemented in FORTRAN and ran on the UNIX operating system called the Stochastic Coefficients Estimation Program (SCEP). My task was to migrate this software over to run on Microsoft Windows and to make it accessible to researchers not familiar with FORTRAN. The migration to Windows was fairly straightforward. I then wrote a Windows program in C++ which prompted the user with menus to fill in the required variables and run the FORTRAN as a background process. The harder part was writing the hypertext documentation to explain to users how to understand and user the procedure.

This new program cut the time required to compete an estimation from weeks to a couple hours, making research substantially easier. Tom Lutton and Swamy Paravastu completed a number of journal-quality research papers over the next couple years. Meanwhile, I became acquainted with the procedure and became good friends with mathematician and programmer at American University, Ilok Chang, who had developed the FORTRAN program. Over nights and weekends during the next several years, we collaborated on development of an assembly language implementation of a matrix class for interval mathematics (1996-97).[1] As part of my validation work on this matrix class, I developed a small calculator program to speed up the computations.

In addition to our research work in GBFA, we were encouraged to support the work of the bank examination staff with both macro-economic reporting and financial analysis. For the most part, our macro-economic reporting was ignored, which was a source of much consternation because a monetary crisis was developing in Asia. At one point, we were called upon by a large New York City bank to assist with working on the Asia issue and traveled to New York to brief and be briefed on the issue, but there was little appetite in our office to follow up.[2] When several weeks later the Thai Baht crashed, the attitude about macro-economics did not change and we gave up on our reporting.

The support for financial analysis was different, in part, because everyone was convinced that they could do themselves, even if inadequately. The breakout project in financial analysis came when we were asked a second time to assist in reviewing liquidity risk. Liquidity risk kept coming up because there was an examiner with a special interest in liquidity issues who would periodically worry people enough to have management request an assessment. The first time this happened, we undertook a lengthy literature review and attempted to measure liquidity risk with a research effort—no one understood our work and it was dropped. The second time we received a request, I proposed a brief study of the liquidity ratings given by examiners to each and every national bank.[3] With our new data system, this study was easily undertaken, briefly summarized, and widely cited. This liquidity study was ignored by the economics staff, but was loved by management so we found ourselves fielding more questions about the financial condition of national banks.

Because of my background in agricultural economics and bank examination, I found myself undertaking quarterly studies of the condition of agricultural banks. In response to this requests, I developed a databook of all the agricultural indicators found in the call reports. This databook was warmly received and I was invited to participate in an agricultural oversight committee which met from time to time with examiners from across the OCC. Eventually, I was able to convince OCC managers that, unlike in the 1980s, agricultural banking no longer posed a systemic threat to the national banking system and routine reporting on agricultural banks went from quarterly to annually and then to being dropped. The largest agricultural portfolio in the nation was held by the largest bank, but for that bank it was less than one percent of assets—in other words, agricultural credit risks were being adequately managed.

Between our research work on bank risk taking and our reporting on the financial condition of banks, it became obvious that economic research seldom had an impact on the culture of regulation while financial analysis, even if indefensible in an empirical sense, was routinely influencing administrative decisions. This problem caused our team great consternation, because we believed that our work was both theoretically and empirically sound. In the midst of this frustration, I began to see a disconnect between the contractual risks (credit and interest rate risk, in particular) which regulators followed with great interest and threats to the firms’ survival (liquidity and failure risk) which were often neglected. I coined the term, whole bank risk, to highlight this disconnect.[4] Tom, Swamy, and I began to call ourselves the whole bank risk team.

The whole bank risk project had two primary components, one headed by Swamy and other I headed. My project involved improvements to a bank failure model which we developed in cooperation with the Federal Deposit Insurance Corporation (FDIC) and the Office of Management and Budget (OMB) using Swamy’s econometric approach. This initial failure model yielded a probability of failure which tracked the historical performance of commercial bank failures reasonably well, but the number was lower than FDIC was accustomed to seeing and they rejected the model. The model was accordingly written up and then ignored.

Later on, GFBA was tasked with developing new models for the OCC. A week-long series of meetings were planned in which staff unfamiliar with modeling sat and talked for days about how to develop models. This was extremely frustrating for those of us accustomed to modeling and being ignored. At that point, I had an idea—why not take our existing bank failure model and develop it into a Windows program which allowed the user to simulate bank failure probabilities in a calculator format, as I had done earlier with my interval mathematics validation? I skipped out of the meeting on Monday and returned on Wednesday to demonstrate my “Bank Failure Calculator” program.

The name changed to “Bank Calculator” to placate sensitivities, but the program itself was a great hit. Over the next 7 years, I spent about half my time estimating new failure models to add additional explanatory variables, validating the results, doing supporting studies, and porting the program to other computing environments, like SAS, Excel, and hypertext. I also gave demonstrations to numerous agencies across government interested in our approach. In its hay-day, the bank failure probabilities were updated for every bank in the national system and available along with supporting analysis to examiners across the OCC through the agency intranet.

[1] We envisioned this project accelerating the Human Genome project computations (https://www.genome.gov/12011239). However, in my validation work I discovered a weakness in the Pentium processor which would have required years of effort to resolve. At that point, we abandoned the project.

[2] Frustrated by the response but intrigued by the developing storm, I opened a commodity account and taught myself options trading and technical analysis nights and weekends.

[3] Bank examiners rate banks with 5 indicators each year: capital, assets, management, equity, and liquidity (CAMEL).

[4] Other people talk about enterprise risk.

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Late One Night

ShipOfFools_web_07292016“Blessed are those servants 

whom the master finds awake 

when he comes.” (Luke 12:37)

Late One Night

By Stephen W. Hiemstra

The day my son, Stephen Reza, was born, August 19, 1992, I was scheduled to give a nationwide, video presentation at the Farm Credit Administration (FCA). It was an important speech, in part, because I had been RIFed (reduction in force) two months prior and my job was on the line. Maryam knew the position I was in that day so I drove her to the Inova Fairfax hospital, got her checked in, and kissed her goodbye as I left to give my presentation, as my office was only about three miles down the road from the hospital.

My office was surprised to hear my situation; I was allowed to give my presentation without delay; and I returned to hospital. As a dutiful wife, Maryam, waited for me and, when I arrived, we went immediately into the delivery room. Stephen Reza was born without mishap and, to my horror, he began life by pissing all over the doctor’s face. The doctor, who had delivered all three of my kids, did not complain. He just took off his glasses, wiped off his face, and continued his inspection of the placenta and umbilical cord. When I asked him what he was looking for, he responded saying that placenta and umbilical cord provide insights into some forms of birth defects that are otherwise hidden.

The days went by quickly that fall. Having been assigned to the McLean examination team, I was on the road from Monday morning to Thursday evening, normally assisting with association examinations in rural Virginia. Because I was gone half the week and following the custom in Iran, Maryam kept Reza’s crib in the our bedroom, making late night feedings easier. When Reza went into convulsions on that Friday evening in October, we woke up and called 911.

The emergency medical team (EMT) arrived promptly and took Reza’s vital signs. Nothing seemed out of the ordinary, but Maryam insisted that the EMTs transport him to Fair Oaks Hospital. Lab work was taken and his blood chemistry was all messed up with no indication of why. Early Saturday morning he was transported to Inova Fairfax Hospital which has a pediatric intensive care unit where he stayed until Sunday afternoon. At that point, the attending physician noticed that his urine bag was empty and ordered a sonogram. The sonogram showed that Reza was born with only one kidney and the duct off of his existing kidney had folded over on itself. Emergency surgery was required to relieve the buildup of urine so he was transported to Georgetown University Hospital and scheduled for surgery late Sunday night.

Sunday evening Maryam and I found ourselves exhausted from lack of sleep and nearly hysterical from all the uncertainty and stressful events. At one point I found myself alone with Reza in his hospital room. His labored breathing was the only sound to be heard. On my knees and beside myself with grief, I offered myself in prayer for my son’s life: “Lord, do not take him, take me.” About ten years later, I was reminded of my prayer and began to consider seminary.

Pastor Rob stopped by to offer comfort later that night as we waited for the surgeons to complete their work. We were otherwise alone because my parents were living in Indiana at the time and few others were around to offer comfort.  In the surgery, the surgeons inserted a catheter into his kidney duct to drain the urine, but opted not to perform surgery—at ten-week of age he was simply too small. The catheter was invasive enough.

We had enough on our minds because after surgery Reza screamed all night. Because of the problems of estimating drug dosage on a young child, the standard medical practice is not to offer pain medication to infants. Similarly, three months later in January, we came back to have the catheter removed and corrective surgery was performed—again, we watched helplessly afterwards while Reza screamed. Screaming: I mostly remember the endless hours of screaming.

Monday morning I drove to an association examination in Norfolk Virginia. When my office learned later that morning what I was dealing with at home, they called me back to the McLean office for a period of weeks when I was graciously reassigned to a research project so that I would be closer to home.

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Land of BOS

I am the LORD your God, ShipOfFools_web_07292016
who brought you out of the land of Egypt,
out of the house of slavery.
You shall have no other gods before me.
(Exod 20:2-3)

Land of BOS

By Stephen W. Hiemstra

In January 1993, I applied for a position in the Comptroller of the Currency (OCC) which was the office in the U.S. Department of Treasury responsible for national bank supervision.[1] This particular office was called the office of Bank Organization and Structure (BOS) and it oversaw national bank applications for organizational changes (licensing), like new bank charters, conversions from state to national charter, mergers, failures, and opening of new automated teller machines (ATMs). I had a rough idea of BOS’ business function from my work in bank examination in the Farm Credit Administration (FCA), but it did not matter to me. They needed a financial economist and I wanted to get back into economics. My work on the McLean Team in FCA in examinations required more travel than was consistent with my family situation—my son had had surgery the previous October and required follow up surgery in January.

The interview process for this position went quickly. I met with my supervisor and, after that, my second level supervisor took me to lunch. They were pleased to have an economist, like myself, with experience both with computers and with working in examinations. My position involved financial reporting based on a customized licensing database—a network database which required queries in the structured query language (SQL) and the ability to read a data schema. Only one other member of the staff was able to request data from the system and she was not an economist able to interpret the data. Missing from my interview was an opportunity to visit with the staff.

The lack of staff input into the hiring process should have been a red flag. In prior interviews in the Economic Research Service, in USDA, for example, an interviewee might be required to visit with the review committee, managers, and each member of the staff, and to make a presentation to the entire department. This sort of intense vetting process was also typical for many firms and academic departments that hire economists, in part, because of the extensive need for team work. However, FCA also did not require this type of extensive interview so I was off my guard in interviewing at OCC. In fact, I was relieved not to have to deal with a lengthy process, in part, because of the stress at home with my son’s medical situation and having two other kids in diapers.

I started work late in January. The office seemed congenial enough because both my supervisor and his boss were both economists. My opinion was frequently asked in staff meetings and all seemed copacetic as I learned my new position. But everything was not as it seemed.

In early February, my supervisor announced that he was leaving. He was quickly replaced with a professional OCC manager who was not an economist and was new to the group. The staff was icy cold in their interactions with me because my departing boss had brow-beat them for years complaining about their lack of analytical skills. When I was hired and brought those skills to the group, their silent resentment was given a concrete focus—me. The new manager picked up immediately on the staff resentment and offered me no shelter from the storm. I was alone in the group and persona non grata. My new station in life became even more conspicuous when the office was invited to a dinner party at the old supervisor’s home and I found myself there with my wife, Maryam, and shunned the entire evening. Maryam picked up on the tension that evening and came away distraught knowing, as a stay-at-home mom, that our entire livelihood was in jeopardy with nowhere to run. The darkness in my life grew darker still when soon thereafter Maryam was diagnosed with breast cancer.

The emotions associated with breast cancer pillage both husband and wife, but the sympathy and care extended focuses on the wife. Most people close to you offer sympathy and assistance for a few weeks, but after that you are on your own. Others close to you shut down emotionally and withdraw having no reserve to draw on to lend to you. Maryam quickly went through a lumpectomy with radiation and was put on a hormonal treatment tamoxifen. I felt shamed and abused by doctors examining and diagnosing my young wife with no outward appearance of disease and by being robbed of the prospect of having more children. While I did not miss a day of work, at one point I had a bad day in the office only to find my boss threatening to fire me—these were cold, hard days.

Still, I had an unexpected ally at OCC from early in my tenure. The Comptroller of the Currency distinguished himself as being a lawyer who was computer literate and brought a laptop to meetings. This created a big stir in an agency that prided itself on teaching bank examination conducted with nothing other than a legal pad. One morning I helped a man with a brief case and a laptop to get on the elevator. Seeing the laptop, I knew immediately who it was, pushed the button to the top floor, and introduced myself to Eugene Ludwig, the Comptroller of the Currency, for the first time.

After the Comptroller of the Currency himself, I was the second one in the building (in an agency of about three thousand) to request and receive a 486 desktop computer. My computer skills became well-enough known in the office that my second level supervisor asked me to upgrade him to Windows 3.1, while the computer support personnel remained in the MS DOS world, even though new computers came with Windows installed (they un-installed it). This embarrassed them enough that they refused to offer me any technical support. When I requested additional computer memory, they simply dropped the memory cards on my desk and walked away. I ended up loading my own copy of MS Office on my office computer, in part, because the computer support simply refused my request.

Nevertheless, my computer skills continued to open doors. At one point, my second-level supervisor was tasked with organizing a fundamental re-organization of the OCC from top to bottom. Being a pariah in the office, I volunteered to assist with this re-organization and quickly found myself assisting teams from across OCC in process-mapping their business functions. Over the next several months, I constructed roughly 150 process maps covering every single business activity deemed important and worked closely with the rising stars in the agency who would soon form the new senior management structure. Because of these insights and connections, I was soon offered a transfer to the economics department to work for a very ambitious female manager with a data management background and a need for programmers who were comfortable building financial models.

According to Shakespeare, all’s well that ends well. Yet, the scars of those days remain. Maryam cannot shake the memory of family members who remained aloof during her breast cancer episode; I buried myself in my work and, when I was not working, I was adding to my programming skills. After learning Windows programming in C, I went on to become expert in C++, FORTRAN, and assembly. My programming skills gave me the prospect of earning more money as a programmer than as an economist, but I stuck to building financial models where I increasingly became known as a financial engineer.

[1] A national bank is a bank with a federal charter and identified by having a name including the term, national bank or national association (NA). Banks are financial institutions that take deposits and make loans.

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Why Finish College?

ShipOfFools_web_07292016“Jesus said to him, No one who puts his hand to the plow
and looks back is fit for the kingdom of God.” (Luke 9:62)

Why Finish College?

By Stephen W. Hiemstra

During my sophomore year in college (1973) I held some interesting jobs and it was not altogether clear that I would continue my studies as I explored quitting school to take full-time work.

In my work with the Indiana Public Interest Research Group (INPIRG), I worked as a community organizer attending local groups in the western side of Bloomington—on the other side of the railroad tracks—which did not get a lot of attention from local politicians.

The example of this work that stands out in my mind was a house that burned down in a neighborhood which stood just over the city limits. The structure was left in the condition that remained after fire-fighters put out the blaze—the basement was flooded and local kids were using the place as a informal pool, floating inner-tubes in the debris and generally using the property as a playground. I took photographs of the place down to city hall and spoke with officials about it one day. Hiding a tape-recorder under my jacket, I recorded a city attorney who said nothing could be done because the place had been abandoned by the owners and was in any case outside the city limits; he then proceeded to lecture me about the need for better childcare among concerned parents. I later led a community demonstration in front of city hall and brought a delegation to testify before the next city counsel meeting.

My life as a community organizer came to an end later when I interviewed unsuccessfully for a position as a local community organizer.

Another attempt that I made to find work brought me to respond to an ad in the paper for a job as a telemarketer for a local police organization. The job involved sitting in a room at a table with a bunch of telephones and calling everyone in the telephone book, one after another. With each call, we were instructed to ask for the man of the house, perhaps, with the logic that men would be more inclined to offer donations to the policy organization. However, this instruction proved to be difficult to implement because many men over the years had died in accidents working in local rock quarries. When you would ask for the man of the house, the man’s widow would just break out in tears right there on the phone. After about a week of tearful phone calls, I quit.

At the end of my sophomore year, I returned to Virginia to work in construction for a month to earn money to attend summer school and, after my attempt to transfer to William and Mary College did not work out, I returned to construction work while I waited for Iowa State University’s winter quarter to begin in December. During the months of September, October, and November I worked in at a number of sites—I helped lay pipe in the McLean House (McLean, Virginia), I did general labor build the Mitre Building (torn down a couple years back to build the Capital One building) in Tyson’s Corner, I picked apples for a couple weeks in Vermont, and I worked both as a helper to a finishing carpenter and a painter, also in McLean.

At most construction sites in McLean during this period, my co-workers were mostly colorful transplants from West Virginia. My boss at the Mitre job, for example, played poker on Fridays until all the paychecks of those foolish enough to play with him disappeared—I am sure that he provided the beer! One weekend he ended up in jail for having shot up a trailer. His idea of having fun was passing rumors about me with some of the young toughs just to see what might happen, which certainly freaked me out. Still, he had a heart and after the job was done he advised me on how to find a better job, which I did that same day. In this way, I graduated from day labor to become a carpenter’s helper.

The only co-workers that I had who were not from West Virginia were two African American guys from Washington DC—one was noisy and the other quiet. The noisy one used to brag loudly about being a kind of Leroy Brown—I thought that his performance was a hoot and I teased him to the point where he would pull out a razor and chase me around the room. The quiet one never said anything, but one morning we came to work and the police had surrounded the entire building—apparently he had robbed a bank overnight at gunpoint and the police came by to pick him up.

Violence was always a veiled presence on these construction sites. When I worked as a painter, for example, my co-worker was a young fellow from West Virginia who refused to horse around with me. When I asked him why he treated me with such deference—because he routinely horsed around with other guys—he said that it was okay to fool around with the drop-outs, but the college guys (like me) were too quick to escalate into gun violence when a real misunderstanding would arise. By contrast, our boss was more cunning in his gun talk—he always brought a pistol to work on paydays. After he cheated me out of 50 cents an hour one week, I figured out why.

By November of that year, I had earned enough pay working construction that I was able to buy my first car—a baby blue, 1967 Volkwagen beetle. In December, I packed that beetle full of clothes and drove to Iowa State University where I began studying economics like my dad. After my work experiences the prior year, I never again gave any serious thought to dropping out.

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New Church Plant

ShipOfFools_web_07292016“Now those who were scattered
went about preaching the word.”
(Acts 8:4)

New Church Plant

By Stephen W. Hiemstra

Maryam and I worshiped Sundays at Lewinsville Presbyterian Church in McLean, Virginia after we were married there in 1984, commuting for two years from Shirlington and then from Centreville where we purchased our first home. The half-hour commute from Centreville, however, became tedious and made participation in activities after work during the week difficult. When we received a circular in the mail about a new Presbyterian congregation being organized in Centreville, we were eager to check it out.

The circular directed us to Chantilly National Golf and Country Club on Braddock Road, about 2 miles down the road from our home on Shipley Court. On that Sunday morning on January 18, 1987, we had wet slushy snow so we were happy not to have to drive to McLean. The meeting room was in the back, down a long, narrow hallway past a small bar with patrons sitting on the stools who turned around and gave us the eye as we walked past. While Maryam would normally turn heads when she walked by, I was not used to such attention—even in my suit. The meeting room was packed with 40-50 people, most of whom we had never seen before.

The pastor that morning, Richard (Dick) G. Hutcheson, Jr., was an experienced and stately speaker, a retired Navy chaplain who had attained the rank of Admiral. I remember the elegant pacing of his voice and his ability to employ rhetorical flourishes when he spoke. I do not remember what he spoke about, but the group was quickly hooked and most of those in attendance returned the following week, in spite of being relocated to a drafty, neighborhood clubhouse in Little Rocky Run.

The relocation took place because the congregation was dis-invited by the country club. Apparently, the patrons at the bar were not excited about having church folks see them tipping beers on Sunday morning. It is most ironic that this Centreville mission began its corporate life by being kicked out of a country club.

Ben recruited me that first Sunday in Little Rocky Run to join the pastoral search committee, but what made my commitment meaningful was Pastor Hutcheson, who had been drafted by Vienna Presbyterian Church (VPC) out of retirement to launch this church plant. Unfortunately, Dick’s heart was set on writing a book, not on pastoring another church so he stayed for six months and left. Left to fend for ourselves week after week, we were subjected to supply pastors of all stripes, some better than others, but most not willing to get involved in the hard work of organizing a church. Within a few weeks of Hutcheson’s departure, Sunday morning attendance dropped to under 20. Along the way I was invited also to join both the steering committee and the choir, in part, because there really wasn’t anyone else available.

The choir normally met in Mary’s townhouse, just off Newton Patent Drive. Being good friends with Mary, Maryam used to come with me, but she did not sing. Other choir members included Ken and Cathy, Jean, and our pianist, Sherry. We had a good time practicing hymns and choral music borrowed from other local churches. On a good Sunday, the choir made up as much as half the congregation and the choir was also well-represented on the steering committee.

This early steering committee worked rather informally relative to a formal session, in part, because few in the group had a Presbyterian background—I was one of the few—and, in part, because two-thirds of the committee represented other churches. Things happened a bit mysteriously because business got done somewhere other than in Centreville, either in VPC or National Capital Presbytery (NCP). The absence of a permanent pastoral moderator contributed to this informal operational style and to the rise of Ben, a charismatic Centreville volunteer, as a key leader in the steering committee.

The pastor search committee shared this same three-group structure, but, because VPC financed the Centreville mission, a quiet, fundamentalist from VPC, Sam, chaired the search committee. The already Byzantine call process outlined in the Presbyterian Church’s Constitution, known better as the Book of Order, plus the three-way political divide within the group made the pastoral search process long and hard. After about 18 months of reviewing personal information forms (PIFs) and interviewing selected candidates, the committee narrowed the list to three candidates—one for each of the groups. NCP volunteers supported a local female pastor who had previously organized a local church; VPC volunteers were enamored with a pastor from Indiana; and Centreville volunteers focused on a well-educated pastor, not unlike Pastor Hutcheson.

The committee decided, on my recommendation, that each of these three pastors be called in the above order until a candidate accepted our call. The NCP candidate refused the call because the vote was not unanimous; the VPC candidate refused the call over because of the financial terms; the Centreville candidate, Horace Houston, was the only one to respond to the call and he accepted. News that the search committee had called a pastor gave hope to the long-suffering congregation, exhausted by poor-quality, supply pastors—Sunday morning services, already meeting in Cub Run Elementary School for over a year at that point, were so weak that even members of the steering committee stopped attending and several left the group never to return. This announcement freed up members of the committee, like myself, to devote time and energy to other pressing needs in the group.

Still, I was exhausted. As a member of both the steering and pastoral search committees, I was only able to keep up at that point in my career only because Maryam and I delayed having children until I moved into finance and my career began to take off.  As my career began requiring more time and effort, the temporary lull in work in the Centreville mission was short-lived. Ben and Horace did not get along. When Ben’s wife volunteered to take over the group’s finance setting up the prospect of further conflict, I proposed that the sterling committee divide finances between receipts and disbursements, making it necessary then to volunteer to serve a treasurer. Horace quietly planned his own departure which he announced on the anniversary of his arrival, sending the mission into crisis—I was not the only volunteer at the point of exhaustion.[1] Pastor Peter James at VPC sensed the threat to the group and convinced NCP to initiate an accelerated call process to replace Horace.

When the new pastor was properly installed, Maryam asked me to take a breather from church leadership for three years. Taking Maryam’s request seriously and sensing the need to give the new pastor breathing room, I divested myself of the jobs that I held at the time—membership on the steering committee, the treasurer’s job, writing the annual report, chair of the chartering committee—and focused on singing in the choir.

References

Hutcheson, Jr. Richard G. 1988. God in the White House: How Religion Has Changed the Modern Presidency. New York: MacMillan Publishing Company.

General Assembly of the Presbyterian Church (U.S.A.). 1985. The Constitution of the Presbyterian Church (U.S.A.): Part II, Book of Order. New York.

[1] Horace preached an excellent sermon on Psalm 103 that Sunday in June.

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Love and Marriage

ShipOfFools_web_07292016“Let the young woman to whom I shall say,
‘Please let down your jar that I may drink,’
and who shall say,
‘Drink, and I will water your camels’
…let her be the one whom you have
appointed for your servant Isaac.”
(Gen 24:14)

Love and Marriage

By Stephen W. Hiemstra

After Iranian New Years in 1982 and after I was able to buy a car later that spring, Maryam and I got together weekly on Sunday afternoons. Although we had initially doubled dated before I was able to buy a car, we later got together on our own primarily just to spend time. At first, I took her to various restaurants around Detroit, as in Greek Town or the revolving restaurant in the Renaissance Center[1]. Later, however, Maryam learned that I was running up my credit card account treating her to dinner and she refused to eat anywhere other than Denny’s restaurant. While Denny’s was certainly not my favorite restaurant, I took Maryam’s concern about expenses as a sign that she was serious about our relationship. I also noticed also that she lost weight after we started going out, although she still denies that was true.

Later in August of that summer, my parents and I traveled to meetings of the American Agricultural Economics Association in Logan, Utah. On the way back, we stopped at Dinosaur National Park[2] and later visited the Denver Art Museum[3], where my dad bought my mother a necklace. Taking a page from my father’s playbook, I bought Maryam a necklace with alternating gold-plated brass and black stone pieces strung together. It was the first jewelry that I had ever purchased for her (or anyone else).

In the fall of that year, I was on the road almost constantly on the road visiting cattle slaughtering plants, meat processors, and innovative retailers—first in Detroit’s Eastern Market, then elsewhere in Michigan, and finally across the Midwest, traveling as far as Colorado. Managers were surprisingly open to have graduate students, like myself, visit and take plant tours. Union representatives for the plants were also eager to share their stories. It was a troubling time for cattle slaughters because vacuum packaged beef coming from huge firms on the high plains had recently started competing with locally slaughtered cattle which drove many smaller operations out of business. These interviews formed the core of my dissertation work which was eventually entitled: Labor Relations, Technological and Structural Change in U.S. Beef Packing and Retailing (May 1985).

Being on the road so much meant that Maryam and I had less time together. At one point, she traveled to East Lansing to attend one of my soccer games and to meet my friends in a gathering afterwards. I also remember visiting her after Thanksgiving and presenting her with a ceramic pheasant stuffed with dried flowers for her birthday.[4] The Internationals took the gold cup that season, but I was frequently unable to play and received my gold cup as manager in absentia.

With my survey work completed by December, the financial support from my department came to an end and I returned home to start the New Year (1983) in Virginia without my degree, without a job, and without much savings. Maryam was still living in Detroit with her brother and sister so it was difficult finding time and money to travel for visits. So when I needed to return to Michigan State University periodically to visit with my doctoral committee, I would also stop in Detroit for a visit.

This was a lean year, in part, because the federal government had a hiring freeze and, in part, because my parents moved in August to West Lafayette, Indiana where my dad joined the faculty of Purdue University. From August on that year, I continued to live my parents’ home in Falls Church with my sister, Karen, but I later rented an apartment in Shirlington.

My old office in the Economic Research Service, USDA was eager in 1983 to bring me on board, but the hiring freeze did let up until late in the year. My official start date was the first day of the last pay period in 1983 which meant that I was eligible to remain in the Civil Service Retirement System (CSRS) which was eliminated on January 1, 1984 with the inauguration of the Federal Employees Retirement System (FERS). It was a gift to be able to work; because of my eligibility for the old retirement system, I later learned that the gift was much larger than initially aware.

In the spring of 1984, Maryam came to visit. Towards the end of her visit, we stopped by Bailey, Banks, and Biddle, an upscale jeweler in Tyson Corner shopping center, and picked out an engagement ring on credit. I bought a much better ring than I could afford to let her—and all her friends and family—know that I was serious about our relationship. My investment paid off. After she returned home, her brother, Ghasem, announced that he was getting married in June in Detroit. Maryam and I later set our wedding date for November 24, back in Virginia.

[1] http://www.coachinsigniadetroit.com.

[2] https://www.nps.gov/dino/index.htm.

[3] http://denverartmuseum.org.

[4] Her official birthday is in December on the same day as mine, but we only learned that years later when she had to get an official translation of her birth certificate when she became naturalized.

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Stress and Stress Modeling

ShipOfFools_web_07292016“When I look at your heavens, the work of your fingers,
the moon and the stars, which you have set in place,
what is man that you are mindful of him,
and the son of man that you care for him?”
(Ps 8:3-4)

Stress and Stress Modeling

By Stephen W. Hiemstra

At some point in 1991, the Office of Financial Analysis (OFA) in the Farm Credit Administration (FCA) was re-organized and placed under the Office of Examination (OE). The objective of the economics group shifted from policy research to risk analysis and support for the examination function. To facilitate this transition, OE offered examination training to anyone interested in taking it and I signed up for all the training that I could get. Because I knew nothing about the examination function, I could only support it if I learned what it was. Over the next year, I spent as much as two weeks a month taking training courses offered both internally by examination supervisors and externally, often at the Federal Deposit Insurance Corporation’s (FDIC’s) L. William Seidman [training] Center.

While policy research focused heavily on legislative and regulatory performance, examination focused on the financial performance of Farm Credit System associations and banks. A typical association examination might last 2-3 weeks, depending on the chief examiner’s off-site risk analysis. Because the primary business of the associations was making agricultural production and farm real estate loans, much of this time was devoted to reviewing individual loan files to see if they conformed to association policies and FCA regulations, and rating loans as to their credit status. FCA examiners were typically credit and interest rate experts, knowing the business of agricultural lending almost as well as the lending officers themselves.

By contrast, FCA economists typically focused on market conditions and financial performance in the aggregate, not being nearly so focused on the business side of the associations. Assigning us to support the examination function was hugely educational, but it was also forced us to play by unfamiliar rules with unfamiliar staff. My plunge into examination training, of course, helped alleviate this problem, but the threat of failure was ever-present and my own paranoia was stroked when we were assigned interior offices half the size of the offices we were accustomed to.

One morning in June 1992, a stranger walked into my office and announced that I had been RIFed. RIF stands for reduction in force and usually meant that your position had been eliminated. In the middle of this stressful conversation, he told me that when human resources reviewed my file they discovered that I had more examination training than many of their professional examiners. Consequently, while my economics position was eliminated, I was being offered a position in the McLean examination team at my current salary and I had two years to complete certification as an examiner. If I completed the certification, I would retain my salary and begin a new career as an FCA examiner. So with two kids in diapers and my wife, Maryam, six months pregnant with my son, that morning I began a new career in examination. I ended up traveling about 80 percent of the time.

At the time when this RIF occurred, I was working as an analyst attached to a new Office of Secondary Market Oversight (OSMO), tasked with supervising Farmer Mac. OSMO consisted of a director, an analyst (me), and a secretary. OSMO’s budget was cut roughly in half that year leaving no room for an analyst at a critical time—OSMO was tasked with building a stress model for Farmer Mac which by law had to be made available for public review. While I built a balance sheet and income statement model in Excel for this purpose, public release suggested a more formal approach. Consequently, I proposed to program this stress model in the C programming language built on the Windows operating system. The director liked this proposal and sent me out for training in C and in Windows programming.

My RIF initially slowed progress in developing a Farmer Mac stress model, but after a time on the road it became obvious that van travel consumed a substantial portion of the work week on examination. And what do you do in the evening in a hotel? I proposed to the OSMO director to program the stress model during such down-time and the director arranged for me to get one of the first laptops available in FCA. At the time, even exam managers did not have laptops and my laptop was the envy of my new peers and managers. The first version of the Farmer Mac stress model was completed while riding in the back of a van in rural Virginia.

After several months of examination work in the McLean team, I applied for a licensing position in the Office of the Comptroller of the Currency (OCC) in the Department of Treasury. I succeeded in interviewing for the position because the position required working closely with licensing analysts who were typically certified national bank examiners. Ironically, my credit experience working as an FCA examiner helped me land this new position.

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Farmer Mac

ShipOfFools_web_07292016

“Answer me when I call, O God of my righteousness!
You have given me relief when I was in distress.
Be gracious to me and hear my prayer! O men,
how long shall my honor be turned into shame?”
(Ps 4:1-2)

Farmer Mac

By Stephen W. Hiemstra

Once I began to focus on the work of Finance and Tax Branch in Rural Economy Division (RED) in 1986, I was asked to undertake research on the Federal Agricultural Mortgage Corporation, commonly known as Farmer Mac. Farmer Mac was new and exotic and largely incomprehensible for researchers focused on retail lending. As the new kid on the block, I enjoyed an interesting assignment with virtually no competition, making Farmer Mac research the ideal project.[1]

Farmer Mac’s authorizing legislation passed in 1987 as part of a broader bill to bail out the Farm Credit System (FCS), which had experienced serious losses during the farm financial crisis of previous year. Farmer Mac was authorized to garner support from community bankers for the FCS bailout under the premise that Farmer Mac would offer improved access to the bond market for the bankers similar to the bond market access enjoyed by FCS through their funding corporation.

As a conduit to the bond market, Farmer Mac had two business functions in its authorizing legislation. It was to securitize commercial farm mortgage loans and federally-guaranteed Farmer’s Home Administration mortgage loans. The commercial loan business was modeled after the home mortgage market securitizations of Freddie Mac and Fannie Mae, while the guarantee business was modeled after Ginnie Mae securitizations of Federal Home Administration guarantee mortgages. The parallels between Farmer Mac’s proposed business and the existing businesses in the home mortgage markets were incomplete, however, because farm loans are business loans and home mortgages are consumer credits—business loans are much riskier than consumer loans because their performance depends on business prospects while consumer loans rely on more stable salary income.

My initial research on Farmer Mac was a legislative review, Prospects for a Secondary Market in Farm Mortgages (1988), which took three of us about a year to complete. As subject-matter research in an agency more focused on disciplinary research (Hiemstra, 1991), the report got little attention in the building but was picked up by the farm press, the Farmer Mac board, and the board of directors at the Farm Credit Administration (FCA), which was tasked with Farmer Mac oversight. By 1989, when I gave a paper at the American Agricultural Economic Association conference in Baton Rouge, Louisiana, I was well-known enough to be invited to lunch by the FCA Chairman during the August conference and, later, was offered a promotion to join the FCA staff.

By September, however, the reality of my situation started to sink in.

The Friday of the week before I was to start work at FCA, I received a telephone call from my prospective supervisor. He asked: “Would I be willing to meeting him at J. Gilbert’s Wood-Fired Steaks and Seafood after work that day?” I responded: “No problem, but it would be no problem to swing by the office on the way home from work.” He returned: “No. Let’s get together at Gilbert’s.” Later, at Gilbert’s he proceeded to inform me that the FCA Chairman (who I had lunch with in Baton Rouge) was unhappy that an “aggie” (me) had been selected for that my position and he threatened my supervisor with a bad evaluation if he went ahead and hired me.[2] The punchline was: “Did I really want to work at FCA?” Yes . . . Absolutely . . . I needed the promotion, but the stress of my new position was now obvious even before I began work.

To deal with the stress and to celebrate my promotion, I bought a new Young Chang Studio Upright piano and began playing hymns daily.[3]

On Monday when I started work, I immediately left for Capital Hill. The agriculture committee was holding hearings on Farmer Mac and, as the resident FCA expert, it was a priority to attend. On Tuesday, the hearings were to continue and I planned to attend, but I got an early morning visit from a second-level supervisor who asked about my plans for the day. I replied: “I plan to attend the Farmer Mac hearings.” He responded that I could not attend as an FCA observer, but that I might take annual leave to attend. Dumbfounded, I asked why. Apparently, the FCA Chairman called from a conference in San Francisco to make sure that I did not attend the hearings.

Oh, by the way, welcome to the Farm Credit Administration!

References

Hiemstra, Stephen W. and Hyunok Lee. 1989. “Implications of Land Transfer Survey Data on Agricultural Mortgages for Farmer Mac,” Presentation at the American Agricultural Economic Association summer meetings in Baton Rouge. August .

Hiemstra, Stephen W., Steven R. Koenig, and David Freshwater. 1988. Prospects for a Secondary Market in Farm Mortgages. U.S. Department of Agricultural. Economic Research Service. Agricultural Economics Report No. 603. December. (Reprinted March 1989).

Hiemstra, Stephen W. 1991. “Production and Use of Subject-Matter Research in the Federal Service: Example of Research on Farmer Mac,” Agricultural Economics: The Journal of the International Association of Agricultural Economists. July. pp. 237-251.

[1] As a newly authorized financial intermediary, Farmer Mac was a start-up corporation without a staff or clear template for operations and most agricultural finance analysts had no experience with secondary mortgage markets.

[2] The issue was that the 1987 Act converted FCA from the head office of the FCS into an independent federal regulator. Agricultural economists (“aggies”) were considered too sympathetic to the FCS and not schooled in financial regulation. The preferred hires were accordingly bank examination personal from the Office of the Comptroller of the Currency in the U.S. Department of Treasury.

[3] The stress reducing effect of piano playing came to me from a story told to me by a roommate in college. His father was a station chief in the Central Intelligence Agency and could not discuss his work so he played piano to deal with the stress.

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To Postmodern and Back

ShipOfFools_web_07292016“But avoid foolish controversies, genealogies,
dissensions, and quarrels about the law,
for they are unprofitable and worthless.”
(Tit 3:9-11)

To Postmodern and Back

By Stephen W. Hiemstra

The influence of postmodernism on each of us is pervasive and ongoing because it provides the context within which we perceive our world. Yet, as a young person I identified with postmodernism as a movement with origins in the 1960s and liberal opposition to the Vietnam War. As an emotional influence, I started to realize that I was mistaken when I drove along the Berlin Wall in 1978 and noted the crosses marking where someone had been shot to death attempting to escape the “workers’ paradise” in East Germany. At that point, I realized that America stood for human rights not found anywhere else in the world, especially the communist countries of Eastern Europe.

The contrast between the U.S. attitude about human rights and that of the communists could not have been greater. The U.S. Constitution, which had been modeled after the governance system of the Presbyterian Church, recognized the Bible’s teaching that:

“So God created man in his own image, in the image of God he created him; male and female he created them.” (Gen 1:27)

In God’s eyes, human life has intrinsic value because humans are created in the image of God. This Christian teaching is hardwired into the U.S. Constitution and the U.S. attitude about human rights. For the communists, who were officially atheistic following Marx, human rights consisted of only the rights conferred by the state and God had nothing to do with it.

The source of rights matters because people attempting to flee from communist rule were considered enemies of the state who had no rights and, if they were not shot, they were sent to work camps never to be heard from again. So, the crosses on the Berlin Wall evoked a strong and very basic emotional reaction in me. Rights conferred by the state can be rescinded by the state; rights conferred by God are eternal.

Later, traveling with my family through East Germany on the autobahn to Berlin reinforced this point; when I attempted to speak with an East German family in a restaurant, they were so frightened by prospect of visiting with an American that they shook visibly with fear. I returned from my year in Germany with a new attitude about America and a profound skepticism of any political movement influenced by leftist thought.

My emotional transition in Germany did not immediately influence other aspects of my thinking. After Vietnam, the Civil Rights movement, and women’s right legislation in the 1960s, I came to believe that the world was fundamentally different from the world that my parents had grown up in, a view reinforced by popular culture—particularly music and the arts. This idea that the world had changed influenced especially my attitude in my studies as a economist. I thought—why do I need to learn all these old ideas because everything is now different? Naive as that idea seems to me now, at the time it was a huge influence.

As I proceeded in my doctoral studies, I began to realize that the world was not so fundamentally changed as I had assumed. Logic was still logic; English was still English; mathematics was still mathematics. Old ideas, especially about religion and human sexuality, were not suddenly null and void. In fact, in the context of a rapidly changing world, many ideas were being questioned that were really quite important. My having dismissed so many really important ideas was not only naive; it set me back in my studies and stunted my relational development. Intellectual flexibility (pragmatism) was good; ethical relativism was not so good.

At a very basic level, I started to notice, especially in my work as an economist, how many people did not do their homework in approaching problem solving and research. The assumption that the world had fundamentally changed in the postmodern era prompted a new kind of subjectivism that was highly destructive of good relationships among people and of quality research in economics—if everything is relative, why can’t the world just revolve among me? Faith in God works quite differently because God’s view may not be like my own and, if I am to evangelize my neighbor, I need desperately to understand my neighbor’s point of view. In a godless, secular society, no such objectivity is required.

In a very real sense, those crosses on the Berlin Wall reminded me of the one cross that really matters.

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Mentor

Cover for Called Along the Way
Art by Stephen W. Hiemstra

“Two are better than one,
because they have a good reward for their toil.
For if they fall, one will lift up his fellow.
But woe to him who is alone
when he falls and has not another to lift him up!”
(Eccl 4:9-10)

Mentor

By Stephen W. Hiemstra

When I landed in the Finance and Tax Branch in Rural Economy Division (RED) in 1986, carryover work kept me busy for a number of months. Because of a thorough review process and a team of competent editors, carryover publications could take months or even a year to finish up. Still, I needed to get busy on the work of the new branch and earn my stripes in finance.

Although I had not been trained in technical finance, finance and the mechanics of trade worked hand-in-hand to affect agricultural exports. More importantly, U.S. agriculture required substantial investments in land, resources, and infra-structure that left it sensitive to changes in the financial environment. It’s funny—I never considered myself a derivatives expert, but my first lecture as a teaching assistant at Cornell University was explaining to my students in a retailing class how farmers could hedge their soybean crop in the futures market. I knew more finance than the typical economist, in part, because of my agricultural training.

My insight into the financial sensitivity of agriculture led me to have second thoughts about the Reagan Administration’s policy objective of dismantling agricultural support policies, particularly for grains and oilseeds, at a time in the mid-1980s when interest rates were both high and volatile—exchange rates were also volatile during this period and poorly understood in terms of their implications for agricultural trade. Rates of return on investment in land, for example, were about 1 percent during those years, yet interest rates had risen into the double digits as the Federal Reserve worked to tame inflation. Farm families were having trouble passing their farms onto a new generation, both because of these high interest rates and plummeting prices of grain. If price supports were then also removed, many farm families would be run out of business even faster than was already happening. In so many words, the Reagan policy seemed out of touch with their own republican base (most farmers at the time were republicans) and contrary to USDA own mission statement, as frequently and publicly espoused.

As I watched all this going on, I found myself repeating a rant about the financial implications of the Reagan policy initiative, even before I joined RED. After a while, I realized that this rant was both a real concern and could make a good policy analysis paper. Writing a paper critical of the policies of a sitting president was not, however, something to take lightly. In consulting with sympathetic colleagues, I was encouraged to go ahead and write the study. It was a relatively short paper with the title: Monetary Implications for GATT Agricultural Negotiations.

Because I had changed divisions in ERS, a finance paper would be reviewed by managers in RED, not International Economics Division (IED) where the policy implications would be more obvious. This meant that the paper would not be on people’s radar system during the review process and might potentially be published before critics would pay any attention—even if I offered to let them be reviewers!2/ It was important, however, to have administrative support when the critics finally woke up and began to raise questions.

My administrative support came in the form of a co-author. A friend and mentor had recently been promoted into a high visibility administrative position. He supported my critique and encouraged me to write the paper. In return, he became a co-author.

When my paper hit the news stands, the Reagan supporters went nuts and argued that the paper should be retracted from publication. A meeting was held; objections were noted; the paper went forward. In fact, the paper was so popular that it had to be reprinted twice. I was also invited to be a keynote speaker at a national conference with 6,000 in attendance[1] the week before the 1988 presidential election—I thought that my branch chief would pass out when I told him. As it turned out, that invitation was kicked up to the Secretary of Agriculture never to be heard from again.

Reference

Hiemstra, Stephen W., and Mathew Shane. Monetary Implications for GATT Agricultural Negotiations. USDA. ERS. Foreign Agricultural Economics Report No. 236. April 1988. (Revised reprint August 1988). 20 pp.

[1] My recollection was that it was the National Water Resources Association (http://www.nwra.org).

[2] As a mere economist, it was hard recruiting reviewers.

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