Felix Salmon

How can we de-risk the economy?

Felix Salmon
May 5, 2009 14:27 UTC

The first panel at the New Yorker Summit featured Nassim Taleb and Bob Shiller. Shiller was placed, uncomfortably, in the role of defender of the status quo, saying that experts can be useful, that economics is a good thing, and that even the SEC has good people who are actually succeeding in making the world a better place.

Taleb, of course, has no time for such things: he said that economists crashed the economy, and that one shouldn’t give them the opportunity to crash it again. In a nutshell, Taleb says that we have far too much debt: “our level of debt is an indication of our faith in experts”, he said, adding for good measure that “debt creates instability and wars”.

Taleb’s solution is a massive conversion of debt to equity, not only in the corporate world but also in the world of housing. That, he says, “would restart the economy on a solid basis”, and he’s even weirdly hopeful that it wouldn’t make investment banks rich.

Shiller liked that idea, and said that there is a proposal out there that systemically important financial institutions issue regulatory convertible debt, which automatically converts to equity on a regulatory event. Is that related to Steve Waldman’s IACCPE? I think they’re close cousins, in any event, and that more thinking along these lines is a very good idea.

But Taleb goes much further. He said that bank runs are much more dangerous now than they were in 1980, because they’re much more instantaneous, and that therefore even 1980 levels of debt “are intolerable today”:

We have to be a lot more careful going forward, because we have globalization, the internet, and operational efficiency — which cannot accommodate debt.

It’s a compelling story, which has zero chance of being adopted by bankers, regulators, politicians, or CFOs. Taleb’s a very useful person to have around, taking a corner position, but the likes of Shiller and Waldman are better at being more constructive when it comes to sketching out how we can react in the real world.


You mean in the “real world” of too big or too connected to fail? Economists serve to rationalize the existing money flows to the top 1/2% of richest criminals. I’m sure Taleb knows railing against the stupid but highly remunerative status quo is pointless, but bless him for trying.

“Give me control of a nation’s money and I care not who makes her laws.”
Mayer Amschel Rothschild

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Overconfidence and the financial crisis

Felix Salmon
May 5, 2009 13:54 UTC

Malcom Gladwell kicked off this morning’s New Yorker summit with a talk about the causes of the financial crisis in general, and of the collapse of Bear Stearns in particular, and started provocatively, by saying that if his diagnosis of the problem is correct, then really “there aren’t any solutions”.

Gladwell’s diagnosis is simple: massive amounts of overconfidence, as revealed by its two most common symptoms, miscalibration and the illusion of control. Both of which can be seen in spades in the person of Jimmy Cayne, whose interviews with William Cohan for House of Cards show a man who’s really very deluded about what Cohan, and Cohan’s readers, are going to think of him.

More generally, said Gladwell,

What’s going on on Wall Street isn’t the result of experts failing to act as experts: it’s the result of experts acting exactly like experts act. It’s not a result of incompetence, it’s a result of overconfidence.

When we look for evidence of miscalibration in people, he said, we find it overwhelmingly in experts. We find it when people are in conditions of great stress and complexity and competitiveness. And we find it overwhelmingly with older, more experienced people, doing difficult things which they feel very strongly about.

Jimmy Cayne, said Gladwell, is the picture of overconfidence — and he’s quite typical when it comes to heads of Wall Street banks. And so, Gladwell concluded:

Our goal is not to enhance the expertise on Wall Street. Expertise they have in spades. Our goal is to rein in the expertise on Wall Street. Wall Street needs to be slower, less competitive, and a lot more boring.

This is undoubtedly true — the difficult thing, of course, is how to legislate it, in a world where banks are falling over themselves to repay TARP funds and start taking on lots of risk again. Here’s Matthew Richardson and Nouriel Roubini write in the WSJ this morning:

Consider also recent bank risk-taking. The media has recently reported that Citigroup and Bank of America were buying up some of the AAA-tranches of nonprime mortgage-backed securities. Didn’t the government provide insurance on portfolios of $300 billion and $118 billion on the very same stuff for Citi and BofA this past year? These securities are at the heart of the financial crisis and the core of the PPIP. If true, this is egregious behavior — and it’s incredible that there are no restrictions against it.

But if there were restrictions against this behavior in particular, the same banks, or other banks, would find other ways to chase risk, just because they’re so confident that they can make billions of dollars — and get themselves out of their present hole — by doing so. They might even be right: 95% of the time, they probably are right. But that’s the Rubin trade: it works until it doesn’t. And although it’s the easy solution to the problem, it’s also a very worrying solution to the problem, because it just sets up yet another inevitable meltdown at some unknown point in the future.


I, too heard MG speak on the psychology of overconfidence and, while I think his books are masterfully supported and I subscribe to his philosophies and tenets on a daily basis, I find his view of ‘overconfidence’ somewhat flawed.
I think it would be difficult for MG to argue against the idea that what he calls overconfidence is actually just sheer hubris and arrogance. These are qualities hardly worth analysis, so MG calls it overconfidence and it becomes a relevant topic.
If you look at the examples he cites – most notably the guys on Wall Street and General Hooker in the Battle of Chancelorsville – these are clearly examples of hubris getting the better of an individual.
The difference is really a matter of timing. What would be called confidence is only dubbed ‘overconfidence’ when it yields a negative result. For instance, everyone know Mohammed Ali for his confidence before his fight with Frasier. Had Ali lost, we would be talking about his overconfidence… Overconfidence can only be identified in the light of the result. Patton, Montgomery, Ali and Ruth all displayed the sort of confidence that we hope our children will aspire to. Had they lost, they’d be the subject of MG lectures.

Also, in his lecture, MG touches on the inability or unwillingness to listen to those around you as one of the hallmarks of overconfidence as he sees it. Again, this is arrogance, not overconfidence. I’m quite sure that more than one person told Edison that the quest for artificial light was something better left behind. Also, there were enough people telling Chamberlain to negotiate with Hitler that he took their advice.

Bottom line is that while Malcolm Gladwell has given us some really great social analysis in his books, his current lecture is revealed as deeply flawed with a short objective glance. If I subscribed to the tenets of his argument, i might suggest that MG has become so successful at the contextual analysis of social phenomenon that he’s come to believe that any passing connections he makes between cause and effect are, in fact, brilliant by simple virtue of him having thought of them. Overconfidence? I’ll let you decide.

Monday links ditch the conventional wisdom

Felix Salmon
May 5, 2009 05:43 UTC

Goldman arm shuns ratings with new credit strategy: Having an “investment-grade” mandate based on credit ratings is increasingly anachronistic.

How David Beats Goliath: Another classic Gladwell piece.

Schapiro’s FINRA Dumped Debt Early: Ryan Chittum finds a scoop buried in a Bloomberg snorer.


Is the GSAM approach to ratings really the way forward? The problem with using market prices as a signal for any market action is that it tends to encourage herding by making any market movement self reinforcing. So if a company’s spread widened (or its stock price fell) then investors would react, say by selling its paper, which would then presumably lead to a further credit downgrade. There was a credit agency (it belonged to one of the big ones) that adopted this approach and was blamed for some of the death spirals (or near death spirals) in bank equities in the autumn of 2002 (Commerzbank, etc). So GSAM’s idea is neither original nor conspicuously successful..

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The inefficient financial sector

Felix Salmon
May 4, 2009 19:43 UTC

Jim Surowiecki thinks that the rise in the size of the financial sector — at least until this decade — makes perfect sense:

The desire to bring back the boring, small banking industry of the nineteen-fifties is understandable. Unfortunately, the only way to do that would be to bring back the economy of the fifties, too. Banking was boring then because the economy was boring. The financial sector’s most important job is channelling money from investors to businesses that need capital for worthwhile investment. But in the postwar era there wasn’t much need for this…

The corporate world was transformed by revolutionary developments in information technology and by the emergence of new industries like cable television, wireless, and biotechnology. This meant that the economy became, and has remained, far more competitive, while corporate performance became far more volatile. In the nineteen-eighties, companies moved in and out of the Fortune 500 twice as fast as they had in the fifties and sixties. Suddenly, there were lots of new companies with big appetites for outside capital, which they needed in order to keep growing. And it was Wall Street that helped them get it… Thomas Philippon, an economist at N.Y.U., has shown that most of the increase in the size of the financial sector in this period can be accounted for by companies’ need for new capital.

I’m sure it’s true that the economy’s capital-raising needs grew sharply between the 1950s and the 1990s. But why does that mean that the financial sector should have grown commensurately? After all, there was just as much “innovation” going on in finance as there was elsewhere; the technology revolution was in many ways driven by the needs of the financial sector. Wouldn’t you expect, in that case, that financial companies would have become more efficient at intermediating between companies and investors? Shouldn’t it have been much easier and much cheaper to issue a billion-dollar bond in 1998 than it was in 1968?

Famously there was something quite cartel-like during the dot-com boom, when the big investment banks all managed to continue to charge an eye-watering 7% underwriting fee for IPOs despite the fact that most of the companies pretty much sold themselves, and similarly-sized bond issues were coming to market at the same time for underwriting fees of about 0.1% or less. And when the likes of Bill Hambrecht tried to break the big banks’ iron grip on the market, they generally failed pretty miserably.

Even so, one would hope and expect that between sell-side productivity gains and a rise in the sophistication of the buy side, any increase in America’s financing needs would be met without any rise in the percentage of the economy taken up by the financial sector. That it wasn’t is an indication, on its face, that the financial sector in aggregate signally failed to improve at doing its job over the post-war decades — a failure which was then underlined by the excesses of the current decade and the subsequent global economic meltdown.

On this view, the seven-, eight-, and nine-figure salaries pulled down by Wall Street folks aren’t a sign of how efficient they are at doing their jobs, but are rather a sign of how inefficient their companies are. As Ryan Avent says:

When you have a few people taking home billions, that’s a sign of either very good luck or some brilliant new strategy. When you have a lot of people in finance taking home billions, then something has gone badly wrong. Either something unsustainable is building, or there are some serious inefficiencies in the market.


Thank you.

Dubious statistic of the day, Nigerian email edition

Felix Salmon
May 4, 2009 17:58 UTC

How much do Nigerian email scammers make? According to Jeffrey Robinson, it’s the kind of money which would make a CEO blush:

Investigators in the U.K. who are tracking him note that, since Dec. 1, 2008, Macjon has targeted 13.5 million Americans with the work-at-home e-mail scam. Investigators estimate his success rate at around 0.1%. That’s 13,500 victims from whom he’s stolen as much as $40.5 million.

That’s $40.5 million in 150 days, which works out at about $100 million a year. Nice! But also complete bullshit.

Macjon’s scam is highly elaborate. All such scams involve a long series of emails going back and forth to set things up; this one culminates in forged checks being mailed to the mark’s house to be deposited into his bank account. And Robinson reckons that Macjon is doing this at a rate of 630 people a week? Of course he doesn’t really think that, he’s just happy to pull a random 0.1% number out of thin air and extrapolate it into some multi-million-dollar headline figure.

This is a Barron’s article, not a scholarly paper, so I’m not asking Robinson to provide footnotes. But I am saying that the 0.1% figure doesn’t pass the smell test, and that if Robinson had bothered to ask where it came from, he probably would have been very surprised at how sketchy it really is. Frankly, I don’t have much faith in the “13.5 million” number either, or, for that matter, the implication that the average mark has lost $3,000.

It would be nice, just for once, for dubious numbers such as these to come with some kind of warning sticker attached. But journalists are always loathe to admit that they don’t know everything, and as a result we get ludicrous results like Nigerian email scammers making $100 million a year each. Depressing.


First off, you cannot extrapolate for figures here. The scammers takings are totally very random. They could make nothing for weeks and then suddenly make loads the next.

Further, you really don’t know who sends each mail, because the same emails messages are used by so many different scammers.

Third, most of the mails may carry names of real Nigerian officials, who may or may not be involved in some scandal, however the emails are NEVER written or sent by them.

And while your all at it, anyone who falls for some scam involving stealing money from the Nigerian government, should end up in jail as well for attempted grand theft.

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Improving the Kindle

Felix Salmon
May 4, 2009 17:15 UTC

I subscribe to three daily newspapers: the WSJ and NYT get delivered on dead trees to my door, while the FT gets delivered electronically to my Kindle, ever since I got given the Amazon reader for my birthday last month. I also read all three on the web. But when it comes to off-web weekday reading, the Kindle is trouncing the dead trees, at least in terms of the amount of my attention it’s getting. It’s much smaller and lighter and more convenient than a newspaper — it’s easy to dip into on the subway or in other pockets of dead time.

With a larger Kindle coming this week designed specifically for newspapers, I share a certain amount of hope that newspapers will be able to take full advantage of this new medium. On my wishlist: that the paper is updated more than just once a day; that the Kindle subscription can be bundled with paper and online subscriptions; that a mechanism can be found to easily email stories to oneself or to friends; and that there be some way of searching a newspaper for a story without having to try and work out which “issue” of the newspaper that story appeared in.

As for the Kindle more generally, my number-one gripe is its draconian whitelist policy when it comes to emailed books. At the moment, I can give you my kindle email address, and you can send me your book in electronic form, but that won’t do any good unless and until I add your email address to my whitelist. If you’re not on my whitelist, you don’t get a bounce message saying that the book wasn’t received, and I don’t have any ability to retrieve your book from some kind of spam filter. Instead, it just disappears. Once I add your email to my whitelist, any books you sent me before I added your email still won’t arrive.

The Kindle is a great way of sending books to journalists, who tend to have desks and bookshelves piled up with unsolicited books they’ll never lug around with them and read . On the other hand, if they’re easily accessible on the Kindle, they’re much more likely to be read. What’s more, if you email an unprotected PDF file to my kindle address, I can’t copy it or email it to anybody else: the book is perfectly secure that way. But because I have no way of turning Amazon’s whitelist feature off, you can’t just send me that book, because it’ll never arrive. With luck Amazon will fix this problem soon, and the publishing industry generally will start spending a lot less time and money sending out physical books to people who don’t want them and didn’t request them.


Re Kindle and newspapers, I have a question I hope you might be able to answer to help me work out if I want a Kindle.
If a newspaper doesn’t generate all of its own articles, and instead carries stories from Reuters, AP, AFP, Bloomberg etc alongside its own journalists’ stories, does it have the right to reprint all of the stories that appear in each day’s edition on Kindle? Or does it strip out all the wire stories, leaving white space/nothing where the wire stories went? Are there ways around this copy right problem for newspapers?

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Reading the stress-test leaks

Felix Salmon
May 4, 2009 16:46 UTC

Trying to do a stress test on a trillion-dollar bank is such a major undertaking that it can’t really be kept completely secret. So it’s hardly surprising that some stress-test results seem to be leaking:

Citi, which has already been bailed out three times by the authorities, could need an extra $10bn or more if the economy worsens. BofA, which has had $45bn in government aid, was found to need well in excess of $10bn, people familiar with the matter said.

Regional lenders Wells Fargo and PNC Financial were also among the banks that would need to raise more capital unless they could persuade the authorities their findings were wrong, said people close to the situation.

But it’s a bit rash to take anything to do with the stress tests, including this report, at face value. A couple of questions spring to mind:

  • Stress test results are material non-public information, so who would be so foolish as to leak these things — especially when the leaks seem to be coordinated in a tactical manner? (The WSJ and the NYT had almost identical stories on Saturday saying that Citi would need to raise $10 billion, both citing completely anonymous sources.)
  • Why is Bank of America now officially denying the FT story? How can it possibly be a good idea to deny that you’re looking at ways to raise capital, especially when you don’t have the official results of the stress test yet, and there’s a good chance that you will have to raise capital after all?

There’s clearly a huge amount of pretty agitated negotiations going on just out of view right now, in a game where we, the newspaper-reading public, only get to see a few ripples on the surface. The newspaper stories might be a way for Treasury to “anchor” expectations: now that the $10 billion number is ingrained in the public mind, the banks will know that anything much lower than that will seem insufficient, and therefore it’s now easier to persuade them that they have to raise that sort of money. Alternatively, there could be another explanation entirely. With no indication in the newspaper stories as to who is leaking these stories and why, it’s best to take them all with a very large grain of salt.


I would find the opinion of anyone who refers to Wells Fargo as a “regional bank” suspect. They have the largest amount of bank branches of any bank in the US covering 39 states. Additionally, they have Wells Fargo Financial offices (the other large source of their lending) in all 50 states.

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Time for Chrysler’s bondholders to man up and move on

Felix Salmon
May 4, 2009 15:44 UTC

Joe Weisenthal is upset that the UAW seems to be getting the upper hand over hedge funds and vulture investors:

If we’re thinking about the future, we’d much rather ensure that the notion of bondholder seniority and the rule of law is preserved rather than ensuring that institutions of industrial workers known as unions are preserved.

I could go on at some length about how unions really are necessary to the continued survival of the Detroit auto industry, even if they haven’t been used at Japanese-owned car factories in southern states. But really it’s easier to just quote TED:

Here’s a clue for the novices in the room: It’s called politics, you fucking morons. Stop being such a bunch of whiny pansies.

The holdouts didn’t sway the Obama administration, and it doesn’t look like they’re going to have much more luck in bankruptcy court, either: holders of fully 90% of Chrysler’s bonds are now on board with the government’s deal. It’s over. You lost. Move on.


Defender of the corrupt UAW, even after essentially admitting its corrupt ways- Felix Salmon at Reuters. I have been watching an interesting back and forth between Business Insider blogger Joe Weisenthal, and Felix Salmon from Reuters. Essentially Felix Salmon has been arguing on the UAW’s side, saying that Chrysler bondholders should just “man up” and take the hit while the UAW should be allowed to jump ahead of the technically senior bondholders. A few days back Mr. Salmon said the following:

I’m frankly surprised at the amount of pushback against the entirely sensible notion that Chrysler’s creditors (and, by implication, GM’s as well) should accept an enormous haircut on their failed investment.

And in response to Mr. Weisenthal arguing that the Chrysler situation would make anyone think twice about lending to any company with a large union in the future, Mr. Salmon followed with:

Oh come on. When Detroit raised debt capital in the past, its lenders weren’t operating on the assumption that they would be paid off in full before the UAW got a penny — and if they were, they were being foolish in the extreme.

Thus Mr. Salmon says that creditors were being foolish to believe that their contractual rights would be honored. What a chaos business would be if only fools were expected to trust contract law.

The UAW, after all, is necessary for the continued existence of the company: they’re doing the equivalent of putting new money in to the operation, in the form of their labor going forwards. I don’t see the creditors offering to put up any new capital.

This is hilarious. Chrylser would have loved to toss this union out years ago. They are not necessary for the continued existence of the company, but rather they continue the problems Chrysler faces. New money in the form of labor going forwards? They are getting paid salaries, this isn’t some act of charity. And frequently they are getting paid at rates higher than what could be achieved by workers who don’t operate as a institutionalized mafia, such as US workers for Toyota. They extort higher salaries and benefits than would be available on the open market for labor, thus they are actually sucking capital out of Chrysler, beyond what their labor is worth.

Sure, the creditors might have a point about seniority if the firms were to be liquidated with the loss of all jobs. But let’s not forget that a huge part of the reason why they lent their money in the first case was that the US auto industry is systemically important, and that the government would never allow it to be liquidated. They were making a moral hazard play, and believed the car companies when they said that bankruptcy would be disastrous, and so they assumed that the government would keep the car companies out of bankruptcy.

Wrong again. A lot of creditors would have loved a normal bankruptcy without the government intruding its UAW-corrupt nose. The UAW has very little power in a normal bankruptcy, and the creditors have substantial power, as they should. (Which is why they have coerced the government to intervene)

So now I can barely believe it when the creditors start talking about how much they might receive in liquidation. For one thing, I don’t believe them. If GM and Chrysler liquidate, their assets are worth very little if anything at all: how are you going to monetize a mothballed production line?

Well let the creditors go ahead with it and find out. Its their money, its their risk, allow them to use their own judgement. If the liquidation value is less than they expect then they simply get less money.

After Mr. Weisenthal highlighted in a post that the UAW was in no way necessary to Chrylser and was actually very problematic, Felix came back and no didn’t defend his clearly collapsed arguments, but rather abandoned logic and went for the “that’s just the way its gonna be and you better like it” route.

I could go on at some length about how unions really are necessary to the continued survival of the Detroit auto industry, even if they haven’t been used at Japanese-owned car factories in southern states. But really it’s easier to just quote TED: Here’s a clue for the novices in the room:

It’s called politics, you fucking morons. Stop being such a bunch of whiny pansies.

The holdouts didn’t sway the Obama administration, and it doesn’t look like they’re going to have much more luck in bankruptcy court, either: holders of fully 90% of Chrysler’s bonds are now on board with the government’s deal. It’s over. You lost. Move on.

Thus by his failure to defend his original points with any form of reasonable argument, Felix makes it very clear that in the end, logic lost. Its just a bunch of corruption. And a corrupt UAW won. The same UAW Felix says is necessary. Please Felix, one day please do go at length about how the UAW is necessary for the survival of the auto industry. It will be an interesting piece in stark contrast with the reality recent history.

The power-journalism nexus

Felix Salmon
May 4, 2009 15:01 UTC

Yvette Kantrow has been combing Tim Geithner’s datebook, from his New York Fed days, not for meetings with bankers but rather for meetings with journalists. And it turns out that there were a lot of them, the vast majority completely off the record. Kantrow concludes:

The Times’ page 1 opus on April 27, co-written by lunchmate Morgenson, faulted Geithner for being too close and clubby with the financiers he was supposedly monitoring. But looking at his schedule, you can just as easily argue that the media was too close and clubby with him. And a club it was.

Most readers of the press I think are unaware of just how much off-the-record schmoozing of journalists goes on at the very highest levels of government. Geithner was by no means exceptional in this respect: if you’re a senior editor at a major news publication, you can expect regular meetings with VIPs up to and including heads of state, substantially all of them off the record.

The journalists are excited and flattered by all this attention, which amounts to capture of key opinion-formers by the very people being covered. (The VIPs wouldn’t do it if it didn’t work.) But of course no FOIA request will ever uncover the list of officials invited to lunch with the NYT editorial board, and the NYT itself keeps such information very close to its chest.

There’s a lot of complaining about “anonymice” in the media — people who are quoted but not named. My feeling is that if the war on anonymous sources continues, we’ll just see even more of this kind of thing: regular meetings with journalists which result in no direct quotations or attribution at all. Which would not be much of an improvement.


Even if we shift more towards journalistic capture, at least dismissing anonymice will move away from journalists using anonymous quotes to express their own views. That’s what blogs are for with their incumbent greater audience skepticism. It will also make it easier to ask ‘cui bono’ if anonymous quotes are used more sparely. Having higher standards for anonymous quoting may even help journalists themselves, if not to get quotes then to have a leg to stand on when they ask why someone has to be anonymous and the context of the leak. That helps to reduce manipulation of the media and can clue journalists in to what the bigger story might be, respectively.

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