Felix Salmon

Exclusives, embargoes, and art indices

Felix Salmon
Apr 9, 2009 00:49 UTC

If it’s true, it’s great news that the WSJ is putting the kibosh on the ridiculous institution of respecting embargoes fed to them by PR agencies. For something as important as a national data release, I can see why it’s a good idea to implement such a thing. But when it’s just some private-sector flack trying to orchestrate a publicity drive, there’s zero reason for large publications to play along.

One of the weirdnesses of the news business is that its practitioners — journalists — care greatly about who broke any given story: who published it first. Readers, by contrast, generally don’t care at all. The only time they do care is (a) when the story is market-moving; (b) when they’re active participants in that market; and (c) when they actually see the story within seconds of it coming out. The chances of all three things happening are so slim that one would think that no one would spend too much effort on such occurrences; one would be wrong.

Nick Ragone says that the WSJ’s new policy is “probably going to reduce the number (and quality) of exclusives that they break”. Fine. Big deal. Journalists should care much more about the quality of what they write, and much less about whether or not they have an exclusive. Indeed, having an exclusive is a bit like having a “get out of jail free” card: quality, in that case, is always Job Two, and often goes by the wayside.

Not to pick on any particular story, but I just happen to have this one open in a browser window:

Art prices plunged during the first quarter of the year as cash-strapped collectors looked to unload works by postwar masters that had earlier boomed in price along with the stock market.

The Mei Moses index, set for release today, shows art prices fell 35 per cent in the first quarter, having held up during earlier months of the financial crisis.

The key phrase here is “set for release today”: to inside-journalism cognoscenti, what that means is that the journalist in question got the exclusive, and in return the Mei Moses people saw their story on the front page of the FT. Similarly, if you’re a household-name corporate CEO and you grant an interview to the FT, they’re pretty much guaranteed to turn it into a front-page news story, even if you commit no news at all.

In any event, the art-price story is a little bit confusing, and doesn’t even attempt to clear up the weird inconsistencies in the Mei Moses data, such as the fact that the All Art index fell by 35% even as no individual component fell by more than 33%.

A closer look at the Mei Moses news reveals that it’s basically little more than a publicity stunt: the Mei Moses index comes out annually, not quarterly, precisely because — well, let me quote the quarterly report itself:

To obtain statically meaningful results, we have found an annual time period to be the shortest time period that is feasible.

In other words, the 35% figure is based on just one quarter of the period of time considered the minimum to be statistically meaningful. What’s worse, it turns out that the 35% figure is also based on something called the All Art index, which specifically excludes all of the London sales in the first quarter — thereby becoming even less statistically meaningful.

Essentially, the 35% figure is derived from the sale of artworks (a) at auction; (b) in New York; (c) which have been sold at auction in New York in the past. Do you think that there were enough such sales to be able to derive a useful datapoint? I don’t. But given the opportunity to get some front-page publicity by putting out a largely-meaningless quarterly report, the Mei Moses people found themselves unable to resist. Maybe if the FT joined the WSJ in rejecting artificial exclusives, such things might not get the play they currently do.

(Thanks to crack Reuters media reporter Robert MacMillan for pointing me to the Ragone blog entry.)


I think you’ve got this exactly backwards. The point of the WSJ refusing embargoes is precisely so they get *more* exclusives, not less.

If offered something on an exclusive basis, maybe they’ll be interested, maybe not. If given something on an embargo basis that will be reported by all the rest of the proles at the same time, they’re not interested.

They’re trying to make it even more likely that they’ll get “first pick” of stories, and more on an exclusive basis than otherwise.

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Wednesday links have second thoughts

Felix Salmon
Apr 8, 2009 17:01 UTC

Assessing Treasury’s Strategy: Six Months of TARP: A monster 151-page report from Elizabeth Warren.

How To Think About The Great Consumer Debt Plunge

Welcome to Fuffland! In our economy, value goes down even as payments go up.

Red Ink in the Rearview Mirror: Local Fiscal Conditions and the Issuance of Traffic Tickets: It will come as little surprise to learn that traffic tickets are used to raise revenues, rather than merely for traffic-control purposes.

The PUMA: GM Has a Good PR Day: But doesn’t actually change anything.


your posts are always the most interesting! Good job!
Bye bye from Italy

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Subscription website datapoint of the day

Felix Salmon
Apr 8, 2009 16:58 UTC

The NYT gets some subscriber numbers out of the FT’s Rob Grimshaw:

The Web site of The Financial Times, FT.com, had more than one million registered users in 2001…

“After a year, we had 50,000 subscribers,” said Rob Grimshaw, managing director of FT.com. Eight years later, the figure is up to 109,000, he said, a small portion of the number of readers who visit the site.

In other words, it took the FT one year to get its first 50,000 subscribers; it took another eight years to get its second 50,000 subscribers. And that’s despite arm-twisting tactics: if you think that the subscription firewall is high in the US, just wait till you see what it looks like in the UK.


If you live in the UK, your monthly quota of articles before you’re forced to cough up for a subscription has now fallen to just 10. Talk about incentivizing your readers to try their hardest to stay away from the site!

Even so, the FT doesn’t seem to be able to increase its subscriber base very much. It’s worth noting that if you subscribe to the physical paper in the US, the marginal cost of a website subscription is zero. And if you can only grow your subscriber base by 10% a year when you’re giving those subscriptions away, I’m not convinced that you’ve hit on a particularly clever business model.


Where does it say a UK registered subscriber’s monthly quota is now only 10 articles? I thought it was 30, but your claim spurred me to check on ft.com. To my slight surprise it said the quota is 20! So I was wrong, but on my data you are too!

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Housing market datapoint of the day

Felix Salmon
Apr 8, 2009 15:51 UTC

It’s a familiar story, but it’s told well:

If ever a city stood as a symbol of the dynamic U.S. economy, it was Detroit… Detroit cared less about how it looked than about what it did—and it did plenty. In two world wars, it served as an arsenal of democracy. In the auto boom after World War II, Detroit put the U.S. on wheels as it had never been before. Prosperity seemed bound to go on forever—but it didn’t, and Detroit is now in trouble.

Detroit’s decline has been going on for a long while… In the past seven years, Chrysler, the city’s biggest employer, has dropped from 130,000 to 50,000 workers.

The story is from Time magazine, and it’s dated Oct. 27, 1961. Which is why it’s not the right-hand side of this chart which shocks me, so much as the left-hand side:


What was it that caused home prices in Detroit to double between 1996 and 2003? It wasn’t an explosion in subprime loans: those came later, after Detroit house prices had already started declining. And I don’t think it was US monetary policy, either. In any case, Detroit has been on a steady decline for a good 50 years now. Why then have the past five years in particular seen such an enormous decline in house prices?

We’ve seen how relatively small changes in supply and demand can have enormous effects on the oil price — you don’t need to explain it away by blaming speculators. Maybe the same is true of the housing market too. But what’s clear is that this chart should be very sobering for anybody elsewhere in the world who thinks that property prices might be bottoming out. They probably thought that in Detroit, too, in 2005.



I think it’s related to oppurtunities available around the area in terms of jobs & prosperity..

Decline in jobs, leads to flight of consumers and sub-prime just added fuel to the fire…

Regulatory arbitrage datapoint of the day

Felix Salmon
Apr 8, 2009 15:16 UTC


This chart comes from an excellent new publication by Goldman Sachs, called “Effective Regulation: Avoiding Another Meltdown”. On the left hand side is the amount of capital that a bank would need to have if it had $100 of mortgages on its balance sheet: 5%, or $5. Once it securitizes those mortgages and they become RMBS, however, the capital needed drops to $4.10.

Of the $4.10, 40 cents is comprised of capital provisions against the triple-B tranche of the RMBS. But if the bank then repackages that triple-B tranche into a CDO, that capital requirement drops still further, to 35.5 cents.

In all these cases, the total amount of risk in the bank is unchanged — we’re assuming the bank is just repackaging, here, and not actually selling anything. But just by dint of structuring and repackaging, if you turn a loan into an RMBS and then a CDO, you manage to reduce your capital requirements — and thereby increase your return on equity — substantially.

Goldman has four principles it would like to see implemented so as to avoid a repetition of the current disaster; they all make perfect sense. The first is for regulators to spend a significant amount of time looking at the system as a whole, rather than just the individual institutions within it: one big cause of the current crisis was that while the system could cope with any one institution’s assets going bad, no one realized how high correlations were, and that if one institution’s assets went bad, hundreds of other institutions’ assets would all be going bad as well, all at the same time, with systemically-devastating consequences.

The second principle is simple, and tries to prevent the regulatory arbitrage in the chart above:

Securitized loans should, in aggregate, face the same capital requirements as the underlying loans would if they were held on bank balance sheets.

The third and fourth principles are essentially the converse of the second: if you treat securities like loans, then you should treat loans like securities. That means marking them to market at origination, both in commercial banks and at investment banks.

None of this would be sufficient to prevent another crisis, but it’s a good start. And well done to Goldman for being out in front on this, as far as the banking industry is concerned, even as many other banks are still lobbying for mark-to-market regulation to be repealed.


The minimum capital requirements for banks based on risk assessments by third parties is the greatest interference ever in the risk allocation system of the market and is much better scrapped altogether

The US banking system’s terrifying balance sheet

Felix Salmon
Apr 8, 2009 11:16 UTC


This is a spectacularly good piece of information design, from Tyler at Zero Hedge. It repays a lot of looking at, and manages to encapsulate both the scale of the US banking system and the scale of the solutions which have been announced or implemented to date.

On the asset side of the US banking system’s balance sheet, the $4.8 trillion in mortgages is a problem — but there’s another $3.1 trillion in bank loans and consumer credit which is looking increasingly shaky. Against that there’s less than $1 trillion in common stock, supporting over $12 trillion in liabilities.

Meanwhile, Tyler has neatly lined up the government’s support programs along with the relevant parts of the right-hand side of the banking system’s balance sheet. Add them all up, and they come to just over $9 trillion, or 67% of the banking system’s total assets. It’s an absolutely astonishing amount of support, and it brings home the scale of the problem facing the government.

In a nutshell, the problem is the classic one: on the left-hand side nothing is right, and on the right-hand side nothing is left, at least absent government intervention. Says Tyler:

As the government has the best information about the true sad state of affairs, it is likely that as more and more information about the weakness of the financial system comes to light, more of these support guarantees will become utilized to their full extent. This also means that the asset side of the balance sheet is potentially “inflated” by almost 75% and the net result could be the most dramatic collapse in a banking system’s assets in recorded history as over $8 trillion in “assets” are reevaluated.

This doesn’t need to be probable to be terrifying: it just needs to be possible. And Tyler’s point is that the government has put all of these programs in place precisely because it’s possible. So: fear is entirely rational here.


This is why the government is effectively going to guarantee trillions of dollars in loans. We don’t have to nationalize the banks, just guarantee their commitments. Not only has the government paid off AIG’s bad bets, but they have taken over their credit swap business.

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Taleb’s necessary and impossible wish-list

Felix Salmon
Apr 8, 2009 09:56 UTC

I hate listicles. But every so often, one comes along which is utter genius, and Nassim Taleb’s list of “Ten principles for a Black Swan-proof world” is one of those cases.

Yves Smith calls it a must read, and one which she is “highly confident will never be implemented”; she’s right on both counts. But in many ways that’s the strength of this piece: it both must be implemented and can’t be implemented at the same time. Which constitutes a massive policy dilemma.

Taleb’s first principle is that “nothing should ever become too big to fail”. But all economies have too-big-to-fail institutions; they always have, and they always will. Looking at the rest of the list, how on earth do you stop the financial sector from awarding its employees bonuses, or creating complex products? Derivatives are, at heart, bilateral contracts: how can you ban two consenting adults from entering in to such a contract?

Taleb’s big idea, these days, is that we of necessity are moving into a world with vastly less debt than we’ve been used to. I’m not entirely clear on what his timeframe for this is. A quote from my (boss’s boss’s) boss, Tom Glocer, seems germane here:

“I’ve met a lot of smart people in my life, and they’re the ones who are eventually always right and they always know where things are going [and] they always underestimate friction in the world and how long it takes to get there.”


Diving deeper into the contents of Taleb’s Ten Principles, I believe that the rot goes much deeper into a “diseased” Western Civilization that transgresses any geographical boundaries. I wrote an article recently on the Derailment of Western Civilization- Does it need a bail-out? It may be worth a read in context of the diabolical intent of guys like Larry Summers and Tim Geithner at the helm of affairs. http://journals.copperstrings.com/UserCo nsole/ViewJournal.aspx?Title=The_Derailm ent_of_Western_Civilization_-_Does_it_ne ed_a_bail-out%3F&ArticleID=1304

The great Greg Newton

Felix Salmon
Apr 7, 2009 14:30 UTC

In the wake of the global financial and economic meltdown, I wrote a big article for Wired magazine about how it was largely enabled by something called the Gaussian Copula Function. But the whole article was written, naturally, with hindsight. Who saw it coming? Greg Newton, for one, who blogged the Gaussian copula back in September 2005, and concluded:

Fast-growing, leveraged, interest-rate sensitive and largely untested derivatives have been conspicuously present at the center of numerous potentially-systemic train wrecks. Tick, tick, tick…

Greg Newton was also the publisher of the famous MAR/Hedge report on Bernie Madoff in 2001 — another case of being presciently early to a huge story. And his blog, Naked Shorts, was one of the very first must-read econoblogs, bringing perspicacity and great good humor to the normally-bone-dry world of finance.

Tragically, Greg died on April 1, just as he was about to start a new life in Florida; the closest thing to a memorial board is this blog entry at Seeking Alpha, where Greg was a contributor.

As Paul Murphy says, Greg single-handedly disproved the notion that bloggers couldn’t be aggressive reporters. He was an irreplaceable role model to us all; the econoblogosphere has lost a true pioneer.


Terribly saddened by this news, which I only heard this morning from Cassandra. He will be missed.

My condolences to Greg’s family.

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The option value of coinage

Felix Salmon
Apr 7, 2009 13:46 UTC

Is that a coin in your pocket, or is it a unit of long base metal with an embedded American put option with infinite time to maturity? According to a new paper by Espen Haug and John Stevenson, it’s both. And what’s more, that embedded put is highly volatile:

The value of modern currencies has recently gone from deep in-the-money through at-the-money to deeply out-of- the-money to deep in-the-money again, making the lack of sound analytical treatment all the more surprising.

Haug and Stevenson conclude that central banks should bone up on their option theory before minting new coins:

If the US Mint and other central banks had been fully aware of the embedded option they are issuing in their physical money they may have acted differently in the past.

Don’t they know that they’re giving these options away?


“Here academics in their famous models” — ah so it’s actually a cod-science paper. Did you think you were going to fool us? Did you think none of us would get as far as the third page?

I’m no economist and no historian, but I do recall that when people starting melting down coin of the realm, and when the sovereign responded by debasing the coinage, things usually ended badly for that particular sovereign….

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