Felix Salmon

Where’s the pessimism?

Felix Salmon
Apr 28, 2009 21:50 UTC

At last year’s Milken Global Conference, the mood was one of pervasive worry and uncertainty. This year, I had some hope that the assorted plutocrats would evince some measure of contrition in the wake of their precious “financial innovation” being revealed to have been the proximate cause of the largest financial and economic crisis in living memory.

Fat chance.

Instead, there’s lots of bellyaching about the increased role that government is playing in the economy, there’s lots of unthinking boosterism when it comes to the abilities of unfettered markets to make the world a better place, and there’s enormous quantities of finger-pointing: everybody seems to be agreed that this was all everybody else’s fault.

Partly, this is the worst form of survivorship bias: the people who obviously screwed up have no inclination to come to this conference, even if they were invited, which they probably weren’t. But a lot of it just sounds delusional. If I were being charitable about these things, I might concede that it’s really hard to change the basis of one’s entire worldview in the space of a few months. But I do tend to be unconvinced by proposed solutions which invariably seem to be rehashes of the very things which caused the problem in the first place.

At the very least, I had hoped that this conference would have more debate than usual, and less respect for authority, given how atrociously the experts managed to get things wrong. But I’ve been disappointed on that front, too: if anything, the panelists have been increasingly prone to retreating to their own narrow areas of expertise, resulting in little in the way of substantive disagreements.

This weird combination — of failing to revisit fundamental assumptions while also failing to question self-appointed experts — lends a certain air of unreality to the whole conference, the general theme of which can probably be summed up in the idea that things have got so bad that they’re bound to start getting better soon. The quintessentially Californian can-do spirit of optimism has achieved many great things in the past, but I find myself, here in Beverly Hills, pining for much more in the way of bearishness and dissent.

Update: Barry Eichengreen does a good job of diagnosing the problem, and says that the solution lies in increasingly empirical economics. I’ll believe it when I see it.

How can community lenders survive?

Felix Salmon
Apr 28, 2009 18:03 UTC

At a panel this morning on community development finance, there was lots of talk about capital constraints and liquidity constraints and in general the way in which the funding for community development lending has completely dried up, despite the fact that such lending has massively outperformed most of the credit product out there.

The problem as I see it is that much of the funding has historically come through trying to be just a little bit too clever in terms of taking advantage of the more conventional banking system. Lots of community development finance has come from banks looking to get into compliance with the Community Reinvestment Act; or investors with taxable profits looking to buy things like low-income housing tax credits; or foundations looking to help provide leverage without risk by using the tools of structured finance, with securitization giving them the opportunity to invest in securities carrying a triple-A rating.

Today, of course, banks have much bigger things to worry about than CRA constraints; they don’t have taxable profits which need to be offset with tax credits; and faith in the tools of structured finance is at an all-time low. But the panelists still felt that they had to continue to push the old model — “none of us would be here”, said the moderator, Betsy Zeidman, were it not for the tools of structured finance being repurposed to what are often called “double bottom line” institutions.

This makes sense: there’s really no alternative out there able to provide the billions of dollars in funding which has flowed into the community-development space from the broader financial sector. On the other hand, with the broader financial sector shrinking, alternatives are going to have to be found somehow. There was talk about letting community development financial institutions borrow from the Federal Home Loan Banks on the same terms currently available to commercial banks — that seems like a good idea to me, so long as the Federal Home Loan Banks are up and lending (they have big problems of their own).

But it was clear that over the long term there’s a big need for community development financial institutions to get smarter and leaner about how they operate, by outsourcing a lot of the back-office and risk-management operations which are often at the moment performed haphazardly by institutions far too small to do them well. The problem is how do we get there from here — we don’t yet have the kind of institutions capable of providing efficient back-office services to a large number of small and largely non-profit lenders. Any laid-off bankers care to try founding one?


Your point about the need for small community-based institutions to get smarter and leaner in their operations and share resources is exactly right. In answer to the parting question: Yes, there is a group of ex-financial-types working on this kind of project – the company is called oFlows. oFlows is a SaaS loan origination and risk management technology platform that delivers an end-to-end paperless loan origination and risk management system to credit unions and community-based lenders with no big up-front investment and pay-as-you-go pricing that is actually cheaper than printing and mailing paper files. So any size institution can afford to go paperless and implement best practices for operations, risk management, and fraud detection. Check it out at oflows.com.

Ponta Negra crashes

Felix Salmon
Apr 28, 2009 16:24 UTC

Here is a blog entry I wrote on March 18 but never published. John Hempton was chasing a Ponzi scheme called Ponta Negra, but the fund’s lawyers forced him to take down his entries and I thought it was worth doing some real reporting before flying into the teeth of those selfsame lawyers. I talked to the marketer for Ponta Negra, Jared Toren, who promised to fly up to New York from Texas to show me the fund’s audited accounts.

That meeting never happened: a couple of hours before it was due to take place, I got a voicemail from Toren saying that he couldn’t meet me after all. I was annoyed, and kept on meaning to follow up, but what with the new job and everything I never quite got around to it. Thankfully, however, the SEC was paying attention as well, and now the fund has been busted.

Hempton is now, naturally, all over the story — and he is pushing hard what seems to me to be a rather tenuous connection to the Biden family. But he does get credit for seeing this thing and calling it, long before the SEC indictment came down. I can only hope that more Ponzis will be uncovered this way — and that bloggers and journalists, including myself, will be less cowed by legal threats than they were this time around.

Update: Maybe the Biden connection isn’t as tenuous as I thought, I’m still looking into that.


Obama is owned by Wall Street? Felix, I’m shocked! This is inconceivable news!

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The importance of narrative

Felix Salmon
Apr 28, 2009 15:10 UTC

Jim Ledbetter gets high-minded in his Portfolio obit:

If Lipman could have collected a dollar for each time one of her staff members talked about the importance of “narrative,” she probably would have collected more than the magazine got in subscription revenues. Narrative is a lovely and often helpful literary tool, but the fact that it works in Condé Nast magazines like Vanity Fair and The New Yorker does not mean narrative is what the business journalism audience wants.

Actually, any audience wants narrative, especially a business audience. It’s not only newspaper articles which are referred to as “stories” — talk to any investment banker about selling a bond or a loan, and he’ll immediately start talking about the “story” of the company in question. Meanwhile, all investors have to train themselves not to get beguiled by stories, and to look hard for counternarratives.

The fact is that narrative is the way that humans communicate information: whether it’s a book or a screenplay or a magazine story, if there isn’t a narrative there, virtually no one will read it, and when they do they will read without pleasure, complaining about how “dry” it is. So if you’re a journalist — if your job is to make stuff that people want to read — then yes, you need narrative.

Insofar as I had a problem with the Portfolio approach to magazine journalism, it wasn’t with the emphasis on narrative, so much as it was with the emphasis on conflict. There was a strong desire for every story to have a protagonist and an antagonist and to be able to boil things down into two opposing camps, when finance is of course generally much more subtle and complicated than that. Financial journalism should try hard not to oversimplify matters, especially when you have the luxury, as Portfolio did, of long lead times and lots of space. But yes, of course it should also tell stories.


I spend most of my time trying to block what Taleb calls the “narrative fallacy” and trying to keep my monkey brain on the data. Calculated Risk, for example, shows how properly illustrated data can be far more interesting than shallow narrative.

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Monday links get laid off

Felix Salmon
Apr 28, 2009 07:38 UTC

Debt revamps hindered by credit default swaps: The Deal weighs in.

Nostalgia, Entitlement and Murdoch’s ‘Journal’: Keeping the decline of the leder in perspective.

The Big Takeover: Now that Taibbi’s piece has been truncated on Rolling Stone, you can read it in full on Alternet.


…and how do we email you these days…?

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Orszag on Geithner

Felix Salmon
Apr 28, 2009 03:13 UTC

From Ryan Lizza’s long article about Peter Orszag in the New Yorker, here Orszag is talking to Jon Stewart in the Daily Show green room:

“I’m just the budget guy.” He added, more seriously, “I have to be more constrained, because it really is Geithner’s—so the more we talk budget the more free I can be.”

“He’s the bailout guy?”

“He’s the bailout guy,” Orszag said with a smile. “He gets sensitive about that.”

I’m sure Orszag was smiling, but I’m equally sure he wasn’t joking.

There are good reasons why Geithner would want to be Bailout Guy: the bailout is complicated enough when one person’s trying to explain it. If you get the likes of Orszag and Summers weighing in on it every time they’re asked, it becomes essentially impossible to keep message discipline.

On the other hand, testiness in a Treasury secretary is never a good thing, especially since it cuts against the no-drama-Obama administration vibe which never really survived the transition, especially not on the economic front. With Larry Summers in the White House there’s more than enough in the way of thin-skinned policy wonks already, we don’t need any more. The good news is that Orszag and Bernanke both seem self-assured. But Geithner, not so much.

Monetizing antiquities (without selling them)

Felix Salmon
Apr 28, 2009 02:22 UTC

The Milken discussion this afternoon on leveraging developing countries’ antiquities resources didn’t quite live up to the promise of its title (“Preserving the Past to Build the Future: Antiquities as an Economic Development Resource for Emerging Nations”) but was very interesting all the same. It was based on a publication full of provocative ideas about how countries can take advantage of the antiquities market and the world of museums, rather than fighting them the whole time.

In true Milken style, the answers had a tendency to look like this:


The problem with this, of course, is the arrows going to the left: while it’s very easy to get excited about the arrows going to the right (“tapping into the U.S. and international investor market could open the door to unprecedented capital resources”), you can be sure that very few governments would be very happy about turning their antiquities into an income stream and then sending that money abroad, especially when a major component of the size of that return “would be determined by the market price of the objects” found at archeological development sites.

That said, the present system is clearly broken — it basically involves equal parts looting, on the one hand, and jealous sniping between countries and institutions on the other. To give you an idea of how broken the system was, the only real progress made on the looting front has been the invention of eBay — which made faking antiquities more profitable than looting them.

Brent Lane suggested that the right model wasn’t debt but rather equity, which made sense to me: if you use a venture-philanthropy approach, where all proceeds are reinvested and none are dividended out, then most of the objections simply evaporate. And Larry Coben gave lots of quite exciting real-life examples, from his work in Bolivia and Peru, of how sites with antiquities can, with very little in the way of funding, be turned into sustainable sources of income for the locals.

I was particularly heartened to see Turkey’s Consul General to LA in the room, being extremely receptive to the ideas being thrown around while also being very realistic about how difficult it will be to sell them to his bosses; Sharon Waxman added a grace note about how if anything was ever going to get done, the most important bit of any project would be to make sure that it never entered the bottomless bureaucracy that is Unesco.

The news of the day was the announcement of something called the Sustainable Preservation Initiative, which is trying to put a lot of these ideas into practice; the formal launch will come in a few weeks. With any luck, by the time this conference rolls around next year, there will be something on the ground to show for it; I’ll be fascinated to see what it is.


While the specific solutions in the Milken report may or may not be very workable, they do represent the right approach forward. The approach in the UK, based partly on incentives while encouraging reporting and study has clearly shown to be superior to the top down restrictions of many other governments. Sharon Waxman’s comment is also right on target.

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Picking on Geithner

Felix Salmon
Apr 27, 2009 22:18 UTC

The nut graf of the NYT’s massive Geithner article today is classic Gretchen Morgenson:

An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk-taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions.

Um, it’s the job of president of the New York Fed to be close to Wall Street. But more to the point, this kind of adversarial reporting, based largely on the results of a Freedom of Information Act request, has been instrumental in maximizing the hermeticism and paranoia of Treasury when it comes to relationships with Wall Street. Most worryingly, the perceived toxicity of anybody with Wall Street ties has made it much too difficult to hire senior Treasury staff. And while I don’t believe for a minute that Wall Streeters have any monopoly on solutions to today’s problems, I think it’s very silly to cut them out of the discussions altogether.

To be clear, I have no problem with the NYT’s FOIA request, or with the Fed with revealing Geithner’s diary. But just as UK intelligence “sexed up” a dossier on WMDs in Iraq, I think the NYT here is trying to squeeze altogether far too much scandal out of the inherently unremarkable fact that the president of the NY Fed met regularly with senior bankers. Indeed, as both Justin and Ryan have pointed out, the story could easily have been spun entirely the other way, as showing that Geithner was consistently (if insufficiently) ahead of the curve in terms of financial-sector regulation.

In short, there is no shortage of very good reasons why Tim Geithner should feel embattled right now. So let’s not add a bunch of bad reasons to the list — doing so does no good, and possibly a significant degree of harm.


Morgenson had to write the story that way. The main thrust of the article was for Rahm Emanuel to become aware that placing Tim Geithner in charge of the Treasury Department was like giving Al Capone the keys to all the banks in Chicago.

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When countries go to zero

Felix Salmon
Apr 27, 2009 19:11 UTC

I just had coffee with Mohamed El-Erian, who pointed out to me that he didn’t actually push the PPIP plan, as I said he did. He just said that the government needed a plan to deal with toxic assets, and that some plans made a lot more sense than others.

On the subject of PPIP, though, I did ask El-Erian about how much value there is in clipping tails. If the government promises to absorb all losses beyond the first 15 cents on the dollar, how much does that raise the amount of money you’re willing to pay for any given asset? I was trying, in effect, to come at a value for the FDIC guarantee in the PPIP plan, but I didn’t get very far.

The answer, you see, is basically “it depends”. Every asset has a different probability distribution, and if you think that there’s a good chance the asset is actually worth 90, the tail-clipping at 85 is much more valuable than if you think the asset in reality is more likely to be worth 110. In short, it’s a long and laborious process of looking at every asset individually determining a probability distribution, and doing some math on it. How many good credit analysts are out there and capable of doing that kind of analysis? I think it’s not nearly enough, but El-Erian is a bit more bullish on that front: he thinks that if you create the right incentives, people will start to work this stuff out.

We also talked a bit about the probabilities of a big secular shift into a whole new world of class warfare or even real warfare. El-Erian asked me what I thought the probability of that was, and I pulled a number out of thin air: 20% to 25%. After all, it’s simply a truism to say that historically speaking, long periods of peace and prosperity end with war and destruction. And the rise of global markets and economies since 1945 has certainly been a long period of time, which seems in many ways to be coming to an end.

El-Erian’s response was to say that probabilities that high aren’t remotely priced in to the market, which I think is undoubtedly true. People are happy talking about big-picture geopolitical risks, but they tend not to invest on that basis; instead, they habitually revert to thinking about “bottoms” and the like. Old emerging-market hands like El-Erian and myself are probably more prone to thinking about entire countries going to zero than most investors are — but I suspect that more and more people are going to be thinking along such lines over the coming months.


What Countries are likely to go to Zero? Ukraine? They’ve done it before and their people just shrug it off with Agrarian skills and Public Transport and much simpler living. If the USA should collapse along with it’s Dollar printing expedition, things would be a lot more interesting than most can imagine here.

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