Felix Salmon

Remember the stress tests? The baseline scenario had unemployment in 2009 at 8.4%, rising to 8.9% under the more adverse scenario. Well, we’re only up to May, and already it’s at 9.4%.

The good news: Bank of America has ousted its chief risk officer. The bad news: Bank of America has replaced her with Greg Curl, who oversaw the acquisition not only of Merrill Lynch but also of Countrywide, which was run fraudulently (according to the SEC) by Angelo Mozilo. Some risk management there.

Curl is a dealmaker, not a risk-management professional; he’s also far too close to senior management, and far too invested in prior strategic decisions, to effectively serve in his new role. The choice of Curl is an atrocious one, and I hope that BofA’s regulators are making their displeasure known in no uncertain terms.

Update: Matt Goldstein gets a great quote out of a BofA spokesman:

Robert Stickler, a bank spokesman, says people are more than free to question the promotion of Curl but to refer to him as a crony or confidant of Lewis is silly.

“This just shows how much you don’t know. Greg has been Mr. Outsider at the bank for years,” he said.

Which only raises the question: What on earth was Mr Outsider doing being charged with buying Countrywide and Merrill?

I’m glad that the FDIC, which is now invested to the tune of hundreds of billions of dollars in insuring Citigroup’s toxic assets, is taking its regulatory responsibilities seriously. Citi’s childish response, however, makes it clear that there’s something seriously wrong with its senior management:

Citigroup officials have argued that Ms. Bair is overstepping her authority.

“The FDIC is our tertiary regulator,” behind the Office of the Comptroller of the Currency and the Federal Reserve, said Ned Kelly, Citigroup’s chief financial officer.

This is jaw-dropping stuff, especially when we read later on in the article that, miffed about the Wachovia takeover, Citi executives, channeling their inner 13-year-old girls, refused so much as to talk to the FDIC for months.

But really, Ned, the OCC? Surely you can’t be serious. The OCC is a soon-to-be-abolished irrelevance.

I do understand that it’s frustrating for Citi executives to have to deal with far too many regulators — Kelly could easily have added the SEC to his list, for starters — but the FDIC’s billions are the only reason his bank is still alive, and the FDIC is clearly a much more important regulator than the OCC, whatever the official chain of priority says — just as the New York State attorney general turned out to be much more important when it came to conflicts in the research departments than any federal institution.

It also seems that the ultra-slow-motion defenestration of Vikram Pandit is inching along:

Federal officials have reached out to Jerry Grundhofer, the former U.S. Bancorp CEO who recently joined Citigroup’s board, to gauge his interest in the top job, according to people familiar with the matter. Mr. Grundhofer, who didn’t return calls seeking comment, is well-regarded in the industry for steering U.S. Bancorp to profitability while avoiding the risky lending that hurt Citigroup and many other banks.

The replacement of Pandit by Grundhofer would be a good idea, since Pandit seems to be better at announcing grand plans and shake-ups than he is at implementing them. Citi managed to emerge with a very small $5.5 billion hole from the government’s stress tests on the grounds that it was shedding huge amounts of “legacy” assets — but it isn’t, and the FDIC is getting understandably impatient.

One of the biggest issues here is that the FDIC is clearly minded to put Citigroup on its “problem list”, which is confidential — the agency only releases the aggregate assets of the banks on the list, and doesn’t release their names. Except the aggregate assets of the problem list right now are a fraction of Citi’s total assets, which means it would be obvious to everybody the minute that Citi was added. Once again, Citi has proved itself too big for traditional bank-fixing solutions. Zero Hedge is right: the market seems decidedly overoptimistic on the Citi front right now.

Pirates make it into SEC filings

“Peru’s extraordinary performance in financial markets was founded on its credible commitment to service its debt with guano“

“Nothing in this article implies that Bill Ackman of Pershing Square Capital should be compared to Dick Cheney“

Infoporn of the day: Where NYC marathoners dropped out

John Authers thinks that since emerging-market bourses have outperformed developed-market indices over the course of this stock-market rally, investors are betting on decoupling:

The underlying trend is clear; rightly or wrongly the market believes that China and the other emerging markets will pull the world through.

I don’t think that’s clear at all. Given the degree to which emerging-market stocks underperformed on the way down, it’s only natural for them to outperform on the way up.

Emerging-market stocks are high-beta assets, and in times of general volatility, as we’ve seen over the past couple of years, they exhibit really high volatility. You need a strong stomach to invest in them, and you’re likely to get whipsawed quite a lot. But as a result, trying to extrapolate a big-picture global macroeconomic forecast from a relatively short-term movement in emerging-market stock indices is a fool’s game. I don’t think that EM stocks have ever been good forecasters of anything; there’s certainly no reason to believe they’re demonstrating something in particular right now.

Alistair Barr reports that the SEC is “cautious about imposing a broad pre-borrow requirement as a way of limiting manipulative short selling because the costs could outweigh the benefits”. This confused me: isn’t naked shorting precisely what happens when you short a stock which you haven’t borrowed? And isn’t it illegal? Why all this fuss about a rule which forces shorters to borrow the stock in question first? If they don’t borrow the stock in advance, aren’t they shorting it nakedly?

Turns out, it’s a bit more complicated than that, thanks to the T+3 settlement system. On the day that you short a stock, you don’t need to borrow it, you just need to locate it. That means looking it up on an “easy to borrow” list, or phoning up a dealer and asking for a locate. Once you’ve got a locate, you can then go ahead and put in your sell order, even if you haven’t actually borrowed the stock. In fact you don’t actually borrow the stock until three days later, when the trade settles.

It’s not easy to work this stuff out, amid all the talk of “interim final temporary rules” and the like. But basically the debate comes down to a simple question: do you borrow before you sell, or do you only borrow when you settle? The SEC doesn’t want to force people to borrow stocks before they sell, because they say, and I believe them, that doing so would increase borrowing costs and hurt liquidity — all in the service of addressing a problem (naked shorting, which results in people not providing the shares at settlement) which is not obviously much of a problem at all.

Still, in some real sense nearly all short sales are naked short sales, in that the person doing the sale doesn’t actually have the stock to sell: they only borrow it three days later, at settlement.

Economics of Contempt labels me an “idiot journalist” for saying that the SEC is charged with regulating securities but not derivatives. As he points out, the SEC does too regulate securities — specifically, it regulates options on stocks, which are certainly derivatives, as well as exchange-traded options on foreign currency.

My bad. When I think derivatives, I think of swaps and futures in Chicago, rather than exchange-traded stock options — basically, I think of the kind of things which are either regulated by the CFTC, or not regulated at all (like CDS). But yes, there are some derivatives which are regulated by the SEC. My feeling is that all derivatives should be regulated, and that none of them should be regulated by the SEC, which should stick to securities. But of course I shouldn’t get ahead of myself, and for the foreseeable future it is indeed the SEC, and not the CFTC or anybody else, which is in charge of regulating a large chunk of the options market.

Jim Ledbetter switched the RSS feeds at The Big Money from truncated to full. What happened?

Earlier this year, TBM moved from a headline RSS to a full-feed. Jing Gu, our tireless director of technology, tells me that satisfying the needs of active bloggers was a crucial consideration in that decision. And, certainly, TBM traffic is up dramatically since the beginning of the year-not to say that’s because of the full-feed RSS, but no one here holds the opinion that it has hurt us.

This is obviously consistent with my view that switching to full RSS increases, rather than decreases, web traffic. There have been other publishers who have made the switch; I’d love them to weigh in with their own experiences, because the one thing which is sorely lacking here is empirical data.

Within TBM’s own organization, WPNI, there seems to be confusion on the issue: some feeds (TBM’s, Ezra Klein’s) are full, while most of the rest (Slate, the other WaPo bloggers) are truncated. Over at the Economist, the Free Exchange blog went from truncated, to full, to truncated again — I’d love to see what that did to its traffic. (I, for one, have pretty much stopped reading it since it retruncated itself.)

I’m hoping that the ad recession will help push publishers towards full feeds: with excess inventory rampant, we’re move away from the Holy Pageview as the only thing that publishers care about. Instead, there is — or should be — much more emphasis on building a strong relationship with a large and loyal readership. Full RSS is a great way of doing that, even if it doesn’t increase pageviews (and, to reiterate, I’m still pretty sure that it does increase pageviews).

That said, RSS has always been a pretty marginal technology, and I’ve never said that it will make an enormous difference one way or the other. “I suspect that before RSS truly revolutionizes the use of the Web,” says Ledbetter, “something else will come along to surpass it.”

The truth is that RSS won’t revolutionize the use of the Web, and anybody who thinks it will is doomed to disappointment. Already Twitter is replacing it to no little degree. That’s fine. The point is that publishers should maximize the value of RSS to their site, even if that maximal value is not as large as they might hope. And the way to do that is to serve up full feeds.

Update: Remy discovers a useful hack:

What wpni doesn’t get is that in letting Ezra have a full text feed they gave away their secret. The same address that gives the full text feed for Ezra’s blog (voices.washingtonpost.com/ezra-klein/fa st.xml) gives it for any other Post blogger. Just append /fast.xml to the end of any Post blog’s homepage and you get the full text rss feed.

So The Hearing, for instance, the WaPo blog from Simon Johnson and James Kwak, has a full RSS feed here. Good to know!

After reading Zach Goldfarb’s 1,800-word article on Mary Schapiro‘s attempts to rebuild the SEC, I’m more convinced than ever that rebuilding the SEC is a bit like running Citigroup: the organization is too broken, and the job simply can’t be done — by anybody.

All organizations, regulators included, are focused first and foremost on self-perpetuation, so it’s pretty obvious why Schapiro is trying her hardest to make the SEC powerful and relevant. But I see no reason to bet on her succeeding, especially when there doesn’t seem to be anybody in Treasury who is thinking about a revamped SEC as the centerpiece of a new regulatory infrastructure. To the contrary: the SEC was the centerpiece of the old regulatory infrastructure, and failed miserably. It’s time to move on.

Mark Wolfinger asks a great question:

How can GM expect to sell ANY cars now when they are promising better cars soon?

It’s a bit like living in a country with deflation: no one buys anything because it’s going to be cheaper tomorrow. And yes this is going to be a hard circle for GM’s communications people to square: how to get across a message of a company building fabulous cars for tomorrow, without implicitly denigrating the product line they’ve been bequeathed today.

Proof that you don’t need elaborate CDS conspiracy theories to find lenders trying to drive borrowers into default:

Some of the largest lenders to the private equity groups that led the $23.8bn buy-out of Clear Channel Communications intend to turn down a proposed debt exchange, hoping to drive the radio and outdoor advertising company towards default.

The company, taken private in a leveraged deal that came to symbolise the excesses of the buy-out boom, has proposed a swap of some parent company debt for debt in Clear Channel Outdoor Holdings…

However, some of its largest senior creditors say they would rather wait, in the hope the company will violate its lending agreements, enabling them to force a default and to take control of its equity at a steep discount.

This might have been part of the game plan all along, for the junior lenders. In a highly-leveraged deal such as this one, the chances of default are quite high — and the junior lenders, being junior, are generally well aware of the downside risk. But at the same time they’re also well aware of possible upside: if the company violates its covenants and the junior lenders take control of the company, they can actually end up making more money than if Clear Channel simply made all of its debt payments in full and on time. As ever, the closer you are to equity in the capital structure, the more like equity your investments behave.

Fights within the confines and around the edges of bankruptcy can be extremely brutal and dangerous, even when there’s no CDS complication, and both risks and potential returns are very high in these situations. Expect much more of this kind of thing over the next five years or so, as leveraged loans mature with little if any chance of being rolled over easily.

A lot of fortunes will be made and lost within the private-equity and hedge-fund industries, but thankfully the systemic consequences are likely to be minimal. After all, in nearly all of these cases the underlying companies are still very profitable, assuming they can get their debt load down to a reasonable level. So we’re not going to see all that much in the way of damaging liquidations. And in fact if the companies do emerge from these fights with lower debt loads, that will help them borrow and invest more going forwards, which should help, rather than hurt, the economy.

Willem Buiter maps the path to inflation, and says that if we end up going there, Larry Summers will be our guide:

The only credible commitment a government can make that it will not try to inflate its debt away in the future, is to issue only index-linked debt and indeed to retire all nominally denominated debt and replace it with index-linked debt. Neither the British nor the US authorities show any sign of doing so. In fact the opposite is the case. This reluctance to issue index-linked debt is consistent with a policy of keeping the inflation option open…

In the US, this would present no serious problem. The Fed is the least independent of the leading central banks. I believe Bernanke takes price stability seriously and would resign rather than accept responsibility for a high inflation strategy forced on the Fed by the Treasury. With Larry Summers waiting in the wings to be the next Chairman of the Fed, however, the solvency-through-inflation route would be wide open.

Does Summers have enough force of personality to bully the rest of the FOMC members into taking the inflationary path? I doubt it — but given that there’s a strong case for keeping interest rates at zero for the foreseeable future, the question is probably moot. The macroeconomic future of the country is going to be determined by fiscal policy, not monetary policy — and Summers might well have more sway determining fiscal policy right now than he would have sway over monetary policy as Fed chairman.

My new colleague Matt Goldstein wonders today why it took so long to nail Allen Stanford:

Bryan Burroughs, in the most recent issue of Vanity Fair, does a good job detailing how just about every US investigative agency was on Stanford’s tail for more than 15 years…

I’m told Houston and New Orleans agents from DEA and IRS even considered running an ABSCAM-style sting on Stanford in 1998… The agencies planned to invite Stanford and some of his cronies to the party to see if he’d be willing to do business with the drug dealers… The sting never happened. It’s not entirely clear why.

Sure, a lot of the difficulty in going after Stanford stemmed from the simple fact that he kept the core of his operation in a tiny country, whose political leaders were all too cozy with the native Texan and dependent on his largess to fuel the nation’s economy. But there probably also was a simple lack of will on the part of the SEC, FBI, DEA and IRS to follow things through, in part because so many of Stanford’s banking customers were Latin Americans.

Or, as Burroughs describes, may be it was the aggressive lobbying by the investigative firm Kroll that tamed the authorities looking into Stanford.

The Kroll connection is fascinating. Here’s Burroughs:

Behind the scenes, Stanford was even more aggressive. as the company grew, he became renowned within law-enforcement circles for aggressive counter-intelligence. Stanford’s security chief was a former head of the FBI’s Miami office. But his greatest asset may have been a top security firm, Kroll associates, whose Miami office worked with Stanford for years. “Stanford was spending millions of dollars a year trying to figure out who was looking at him, and aggressively combating whoever it was,” recalls the former FBI agent. “Kroll was essentially running a propaganda campaign in defense of Stanford’s good name.

Kroll’s role in defending Stanford’s reputation, in both law-enforcement circles and the wider banking community, was an example of a controversial practice known within the private-security world as “reputational self-due diligence,” that is, vouching for a client’s good name… “It is, by all accounts, an exceedingly lucrative business… It is controversial, even inside the firm. Kroll is considered—how to say this nicely—well, they’re willing to take more controversial clients for this type of service.”

Kroll worked for Stanford for over a decade, and if it does turn out that they were running a regulator-quashing operation, this could turn out to be extremely bad for their reputation.

Incidentally, Matt’s still adjusting gingerly to the world of blog: like the careful reporter that he is, he’s still describing Stanford as “the man who allegedly ran an $8 billion Ponzi scheme”. My response to the ritual insertion of the word “allegedly” in such sentences is to say that you can’t be running an alleged Ponzi scheme if there’s no one doing the alleging. And I’m perfectly happy to be one of the people alleging that Stanford was a Ponzi, even if Matt isn’t quite there yet.

A few weeks ago I noticed an armed private security guard outside the new Bank of America tower on 42nd Street; today there were two, both sporting Wackenhut logos on their shoulders. These aren’t some paramilitary Hercules team sporting machine guns, they’re just guys with sidearms patrolling the sidewalk in front of a bank. Which might be normal in Charlotte, I don’t know, but is certainly not something I ever remember seeing in NYC. Any idea what purpose these guys are meant to be serving? And are they going to be there permanently?

Ryan Avent on the tyranny of economists in general, and cost-benefit analysis in particular

Clinton fails to sway the OAS, and Cuba’s allowed back in: “The cold war has ended today in San Pedro Sula”

Bernanke: Yields are rising because of “concerns” *and* “optimism.” Nice trick!

A good information-design debate here but the real genius response is here

Every country should have a UK-style statistics ombudsman

Why DirecTV’s CEO wants to be Murdoch’s sidekick

I love sardines!

DeLong reviews Posner. V good.

Will Orangutans be the new elephants? And where are Komar & Melamid?

Flattered? Yes, obvs. But OMGWTF?