Felix Salmon

The high frequency trading (HFT) debate continues today, fueled by a rather credulous Bloomberg article (elegantly fisked by Ryan Chittum) but, more substantively, moved along by Jon Stokes, who has a good article on the subject at Ars Techica. I asked him, via email, where he stood on all these questions; I think his answers are very good. Essentially, HFT turns out to be one of those “financial innovations” which lots of people like in theory but which only seem to benefit financial-market professionals in practice. I, for one, don’t think that there’s $20 billion worth of net societal benefit to it. Anyway, here’s the Q&A with Jon:

FS: Did you see today’s Bloomberg article?

JS: Yeah, and like the NYT article there is a slight conflation of flash orders with HFT. I don’t even mention flash orders in my article… I thought they were the least interesting aspect of HFT, at least to me as a computer guy. But clearly the idea of anyone getting market info ahead of anyone else touches nerves (at least among those who are getting the info second… the folks who are getting it first love it).

FS: Can you translate this, from the Bloomberg article, into English?

At Bats, the third-largest U.S. stock exchange, about half of its customers use flash orders, Chief Executive Officer Joe Ratterman said in an interview yesterday. The system is open to everyone and allows brokers to submit prices that are more competitive because the delay gives them a way to anticipate moves in the market, he said.

JS: This is actually a very good explanation of flash orders and the controversy around them.

As for the above, I can tell you what he’s trying to get across to the reporter, in the context of the currently bubbling controversy over flash orders and whether or not the NYSE will allow them in order to remain competitive with other exchanges and with dark pools: “this is no big deal, and doesn’t create a two-tiered market because any broker can use flash orders on our exchange to get a better price (than the people who aren’t using flash orders).”

Actually, my plain English rephrasing sort of crudely encapsulates the entire HFT debate. I.e., the argument of the “move along, nothing to see here” crowd on almost any HFT-related issue is something like:

“HFT does not create a multi-tiered market because anyone with enough money can move up to the highest tier by simply buying more speed and lower latency. So something with multiple tiers, where you can move to a higher tier if you can afford it, is not /really/ ‘multi-tiered’ because the tiers are open to everyone based on ability to pay. See how that works? No? Then go away, commie.”

FS: Can you tell me whether you think that, at the margin HFT improves liquidity? I’ve heard the opposite argued: that because HFT orders tend to be small and fleeting, they actually act against liquidity. That’s one reason why dark pools had to be invented — they’re the only way of trading in size without moving the market.

JS: At this point, you have to speak in more specifics about what you mean by “HFT.” Are predatory algos improving liquidity? I can’t see how one could claim they are for any reasonably useful definition of “liquidity”.

Are stat arbs and AMMs improving liquidity? Yeah, they are when they’re actually in the market. But they have no obligation to provide liquidity, so when things get choppy (i.e. when you need liquidity the most) they can just bail and take all that liquidity with them.

Are flash orders improving liquidity? I have to think way more about it to answer that.

FS: If HFT makes $20B a year, whose money is that?

JS: On one level, the answer to this question is easy for most of what goes on under the heading of “HFT”: the money is coming from whoever is buying stocks that are marked up a penny or so because they were down a rung on the speed/latency ladder. This could be pension funds, retail investors, or anyone else in the world. So it’s coming from the market participants.

(Of course, on some level, the guy who bought Cisco in March of 2000 is “down a few rungs on the speed/latency ladder” from the guy who bought it in August of ’99. But I think it’s important to draw a line here between what HFT is doing and what went on in a lower-frequency age, the same way that we all recognize a line between “speculation” and “investing” that’s drawn based on the time period that you hold an asset. Much of the debate in HFT is over the drawing of these kinds of lines.)

But to justify this $20B/year “fee” you have to make the case that the market system as a whole is getting something of value to all the payers in return. So supporters will say that it’s the price of liquidity and innovation, and, besides, they’ll argue, everyone who has been participating in the markets for decades has been paying these hidden liquidity taxes (and I’d rather call them taxes than fees) to specialists and any other market maker. But when you see this tax ballooning at Internet speed–much the same way that finance has ballooned as a portion of GDP–you have to take a step back and ask, “what is the real, fundamental benefit that we’re all paying for here when we collectively direct money into this?”

John Malone is feeling bearish:

Mr Malone agreed with Mr Murdoch on the economy. “I think he is particularly bearish on the economy . . . I agree with him. I think this is going to be a long slog. There is just way too much debt in the west and we are starting to be borne down by that debt.”

I agree with both of them. But it’s worth noting that in the first quarter of 2009, Malone increased Liberty Media’s total consolidated debt to $14.09 billion from $12.23 billion at the end of 2008 — that’s an increase of more than 15% over the course of just three months. I guess Malone knows at first hand what he’s talking about.

The bond market is on fire right now: Treasury is selling $115 billion of notes this week, with the 10-year bond yielding a whopping 5.1 percentage points more than the inflation rate — the widest spread since 1994. Meanwhile, total corporate bond issuance in the first half of 2009 was an all-time high of $1.791 trillion — more than anything we saw during the boom. This is what it looks like when markets clear: bond investors are seeing attractive yields, bond issuers are seeing abundant liquidity, and there’s an enormous amount of pent-up demand for financing from the long wintry months when no deals could get done at all.

Meanwhile, the S&P 500 is closing in on the 1,000 mark, after having dropped below 700 in March. The primary market in stocks is already heating up again in places like China and Brazil, and assuming that stocks manage to stay at their current levels or higher will surely reopen in the US as well in 2010. Are we really back to normal already, as far as the markets are concerned?

I fear the answer might be yes. Or, rather, I fear that the relatively happy state of the stock and bond markets has removed a necessary degree of urgency from the regulatory-reform debate, which vastly increases the chances that changes will be small and ineffective. I also worry about all this new debt: the deleveraging trend seems to be unwinding itself, and the chances of moving to a more sensible and less leveraged world of more equity and less debt are diminishing by the day.

Pace Rahm Emanuel’s famous comment, we’ve wasted our crisis. Not that I want another one, of course — although I fear that given the amount of complacency in the markets right now, the chances of a second big shoe dropping continue to rise alarmingly. But asset markets have a way of setting the mood of policymakers, and right now that mood is that things ain’t broken any more. As a result, they are pretty unlikely to get fixed.

One of the things I like about the Case-Shiller indices is that they’re all based on a level of 100 at January 1, 2000, which by happy coincidence happens to have been a pretty “normal” time in the real-estate market, as such things go. A glance at any Case-Shiller release, then, gives you an immediate take on the cost of housing now compared to 2000. Rather than look at first derivatives or second derivatives, then, I thought I’d take a look at the absolute levels for a change.

At the height of the bubble, the levels got truly crazy, with Miami topping 280 at the end of 2006 and Los Angeles spending a full six months over 273. New York never got that bubblicious: its height was 215, in mid-2006. (An up-to-date Excel spreadsheet of all the datapoints is here.)

Today, New York is the most expensive (compared to its 2000 levels) of all the 20 cities in the Case-Shiller index: it stands at 170.5, down just 21% from the high-water mark. In comparison, Miami, at 144.6, is down 49% from its high, while Los Angeles is down 42%.

The cheapest city, by 2000 standards, is Detroit, the only city in double digits, which now stands at just 70. It’s down 45% from its end-2005 high of 127.

If housing kept track with CPI inflation, the Case-Shiller index would be at 125 now; in fact, it’s at 140. But of the 20 cities on the Case-Shiller list, just 9 have managed to outperform inflation: Boston, Los Angeles, Miami, New York, Portland, San Diego, Seattle, Tampa, and Washington. The big outperformers — New York and Washington — more than make up for the underperformers like Detroit, Cleveland, and Atlanta.

My gut feeling is that this means New York and Washington have significantly further to fall, in terms of housing prices; even Miami, at 144, is still looking pretty rich. San Francisco might look cheapish at 120, but it was artificially inflated, at the beginning of 2000, by the dot-com bubble: just a year earlier it was at 85.

Overall, I think people looking for a bottom here are being premature. There’s still a huge overhang of unsold housing, and it’s still very hard to buy a house, if you don’t have a large down-payment — and given the US savings rate over the past few years, not so many people have that sort of money to hand. The precipitous part of the decline might well have come to an end: from here on in we might see a slow grind lower over many years. Only if you can live with that kind of long-term price decline should you be even thinking about buying a place right now.

Update: Jonathan Miller notes that the Case-Shiller index for New York excludes both co-ops and condos, and indeed covers less than a third of all sales in the city. So maybe it’s not particularly useful.

Update 2: Ryan, too, is unconvinced.

Breakingviews claims to reach “nearly 4.5m investors and opinion-formers”. But its website has only 60k uniques.

“Eat what the monkey eats, then eat the monkey.”

Who’s managing FINRA’s money? (They lost $624 million in 2008)

Adventures in niche hedge fund reportage, Uzbek real-estate edition

Gawker Media is the Goldman Sachs of the Internet

The public rates the Fed even lower than the IRS

Moe Tkacik lands at Business Insider

“Much modern art is criticised for superficiality, but you won’t hear anyone saying that about this. Boy, is it deep“

Stephanie Clifford should revisit this story, only this time start attacking Ben Stein

Brad DeLong’s dreams of reaching primary surplus – does anybody (including Brad) really believe it’ll happen?

The Antiguan receivers should be in charge of cleaning up the whole Stanford mess. The US guy is a disaster.

Any guesses how much Conde Nast pays in international data roaming charges for Steve Coll to sit in a traffic jam?

NY eating: “I was openly ashamed, secretly satisfied, and beyond that, vaguely guilty about being secretly satisfied”

NYT is now referring to “the Bank of America“. Has it been nationalized? No, it’s just the Vows page.

What a coincidence! That survey showing butchers are happier and have more sex? Was commissioned by Meat and Livestock Australia.

“Low end smartphones (Nokia’s supposed 2010 strategy) may be as attractive to discerning punters as discount sushi“

Tobin Harshaw with a great round-up of the high-frequency trading debate

“Ms Touby either has a car and a driver but not a whole new life, or a whole new life but no car and driver”

The new lendingtree: “a lifeless green block that sits on top of an extremely unwelcoming wordmark“

Wines and spirits have gone down in price over 100 years, except for Bordeaux, which has “gone loopy”

Just when you thought the art market might be getting a bit less obnoxious, what with the recession and all

According to his official bio, Jay Bryson, a Wachovia economist, is a much-quoted chap:

His comments on the economy regularly appear in The Wall Street Journal, the New York Times, and USA Today. He also makes frequent appearances on CNBC and Bloomberg TV.

Of course the downside of being quoted a lot is that sometimes you’re quoted saying something like this:

“Art is a very discretionary sort of object, and we are in the worst recession arguably in the postwar era,” said Jay Bryson, a global economist with Wells Fargo Securities in Charlotte, N.C. “Obviously somebody who has lost their job in a factory in Indiana probably is not buying art.”

I think probably somebody who still has their job in a factory in Indiana probably is not buying art. And never was. Especially not the kind of art sold at Bellwether, a well-regarded Chelsea gallery which sells art by artists you’ve probably never heard of. But which was still, until recently, pulling in a lot of money:

Becky Smith knows that all too well. She owned the Bellwether Gallery in Manhattan’s Chelsea neighborhood for a decade, but closed at the end of June after watching her revenue plummet to $80,000 gross in the first quarter of 2009. She had $40,000 net, and $10,000 of it went to rent each month.

The $80,000 figure was down from about $350,000 the same quarter in 2008 and about $600,000 during that period the year before.

In the first quarter of 2007, it seems, Bellwether was grossing $200,000 a month. Pay half that to the artists, and another $10,000 in rent, and you’re still making over a million dollars a year. And you’re not selling to factory workers in Indiana.

Interestingly, even at the height of the boom, that $100,000 a month going to Bellwether’s artists still works out at only about $5,000 a month per gallery artist — and you can be sure that a couple of the top names got the lion’s share. So while the gallerist was making a million dollars a year, a lot of her artists were probably making just a couple of thousand dollars a month.

So what now? Smith will continue to deal privately, but that means mostly secondary-market works, and little if any new money for artists. They’re the ones who are really going to start hurting.

How low can Ben Stein get? Well, we know he’ll sell himself to sleazy rip-off merchants if the price is right. But now he’s penned an anti-Obama column for The American Spectator which is so despicable that it fairly takes one’s breath away.

Stein calls Obama an “anti-white” “ultra-leftist”; he says that the magna cum laude editor of the Harvard Law Review and University of Chicago professor has “total zero of an academic record” and a “complete lack of scholarship”; he claims Obama “has given Iran the go-ahead to have nuclear weapons” and wants “active destruction of our interests and our allies and our future”. Oh, and Obama “urgently” wants to “take away our freedoms”, because he “knows Americans are getting wise and will stop him if he delays at all”.

This is the kind of stuff which, if it was written by a left-wing commentator about a Republican president, would have Stein screaming about “treason”. It’s also the kind of thing which should automatically disqualify Stein from writing for the New York Times — as if his creationist propaganda and insane conspiracy-mongering weren’t reason enough. But I’ve given up hope at this point. I don’t know what Stein did to make himself untouchable at the NYT, but it was surely extremely effective. What’s sure is that the Sulzbergers and all other NYT stakeholders should be desperately ashamed at this point that they have anything to do with the man.

(HT: Gross)

Nick Denton says that Gawker Media’s revenues were 45% higher in the first two quarters of 2009 than they were in the same period last year; he also tells me that pageviews are up 40% June-on-June. Judging by his chart, profits (revenues less expenses) hit an all-time high this quarter, which explains why he’s started hiring again. (He passed, however, on hiring Bonnie Fuller.)

The cuts at the end of last year — you can see them in the declining expenses — not only made the remaining Gawker employees more productive, but also took out of the network the blogs which were the most difficult to sell to advertisers: Consumerist, Wonkette, and Valleywag. The only hard-to-sell site now is Fleshbot, which accounts for less than 7% of Gawker Media’s pageviews. (Gizmodo, the easiest sell, is also the most popular site, with about a quarter of Denton’s pageviews.)

Gawker’s now a lean money-making machine, which is well positioned to survive any further plunges in the online advertising market. The “I’m not in this to get rich” Denton of 2003 is a fully-fledged mogul now. And now he’s beginning to show impressive earnings growth, can the sale of a significant stake be far away? Or even the first blog IPO?

Joe Hagan has a big story on Goldman Sachs in this week’s New York, and Moe Tkacik and Matt Taibbi both pick up on the way that Hagan deals with Goldman’s share of the AIG bailout funds. It’s worth quoting at some length:

Goldman Sachs was AIG’s biggest banking client, having bought $20 billion in credit-default swaps from the insurer back in 2005…

By that weekend in September, Goldman Sachs had collected $7.5 billion from its AIG credit-default swaps but had an additional $13 billion at risk—money AIG could no longer pay. In an age in which we’ve become numb to such astronomical figures, it’s easy to forget that $13 billion was a loss that could have destroyed Goldman at that moment.

Hank Paulson and then–New York Fed chief Tim Geithner called an emergency meeting for the following Monday morning…

At the meeting, it was hard to discern where concerns over AIG’s collapse ended and concern for Goldman Sachs began: Among the 40 or so people in attendance, Goldman Sachs was on every side of the large conference table, with “triple” the number of representatives as other banks, says another person who was there. The entourage was led by the bank’s top brass: CEO Blankfein, co-chief operating officer Jon Winkelried, investment-banking head David Solomon, and its top merchant-banking executive Richard Friedman—all of whom had worked closely with Hank Paulson two years prior…

On the government side, Goldman was also well represented: Geithner himself had never worked for Goldman, but he was an acolyte of former Goldman co-chairman and Clinton Treasury secretary Robert Rubin. Former Goldman vice-president Dan Jester served as Paulson’s representative from the Treasury. And though Paulson himself wasn’t present, he didn’t need to be: He was intimately aware of Goldman’s historical relationship with AIG, since the original AIG swaps were acquired on his watch at Goldman.

The Goldman domination of the meetings might not have raised eyebrows if a private solution had been forthcoming. But on Tuesday, Paulson reversed course and announced that the government would step in and save AIG, spending $85 billion in government money to buy a majority stake…

Of the $52 billion paid to AIG’s counterparties, Goldman Sachs was the biggest recipient: $13 billion, the entire balance of its claim. The amount was surprising: Banks like Merrill Lynch that had bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar in deals moderated by New York’s insurance regulator. Eric Dinallo, the former New York State insurance commissioner, who was at the AIG meetings, characterizes the decision this way: AIG’s counterparties, Goldman being the most prominent, “got to collect on an insurance policy without having the loss.”

Over time, it would appear to many that Goldman Sachs had received a backdoor bailout from a Treasury Department run by the firm’s former CEO. Why did Paulson bail out the banks that did business with AIG, critics have demanded ever since, and not Lehman Brothers? Certainly executives at Lehman want to know. (As one former Lehman managing director there puts it, “The consensus is that we were deliberately fucked.”)

The first thing worth noting here, beyond Hagan’s clearly prosecutorial stance, is that he’s got Eric Dinallo on the record criticizing the AIG bailout on the grounds that it was a backdoor Goldman Sachs bailout. That’s an important development, I think. Dinallo knows what he’s talking about, and he’s clearly not scared of annoying Goldman.

As Hagan notes, Dinallo was the person who orchestrated the unwind of smaller monolines’ positions; I believe that the 13-cents-on-the-dollar deal with Merrill Lynch was over CDS sold by ACA. I believe that ACA was rare in that it never had a triple-A rating to start with; Merrill was buying insurance from a single-A-rated insurer, which means that it had every reason to assiduously hedge its counterparty risk there.

I don’t think, in all fairness, that ACA ever provided all that much of a precedent for AIG. ACA was small enough that it could fail without much in the way of systemic consequences; it also had no consumer-facing obligations which it might default on. Even Taibbi seems to concede that if AIG had been allowed to fail, the entire financial system would have come down with it:

I was on a radio show a few weeks back with a hedge-fund manager, a Goldman apologist, who insisted on the air that Goldman would actually have made more money if AIG hadn’t been rescued, because the bank was properly hedged against AIG’s collapse… it wasn’t until the show was over that I realized the proper response to that argument was just, “Bullshit!” Goldman has been making that argument ever since the AIG bailout, but it has never come out and identified that magical counterparty or counterparties who’d have been able to come up with $20 billion after a system-wide financial collapse.

I think this is true. Yes, Goldman had as much counterparty hedging as it could, with respect to AIG, but counterparty hedging, like all hedging, is imperfect. For a detailed explanation of how Goldman hedged its counterparty risk, go here. But here’s the conclusion:

Ultimately, you try to hedge what you can hedge; what you can’t hedge, you try to quantify; what you can’t quantify, you try to understand; and what you can’t understand, you keep small enough not to sink the firm.

According to Hagan, Goldman failed on the last front: a loss of $13 billion on its AIG exposures would, he says, have sunk the firm. But then again, a loss of $13 billion on its AIG exposures would only have happened in the context of what Hagan calls “an overall collapse of the financial system” — and no investment bank is set up to survive that.

So yes, the AIG bailout was, to some degree, a Goldman bailout. But really the AIG bailout was a bailout of the entire financial system. Goldman was a beneficiary of that, to be sure, but so was every other financial company in existence.

Jason Zweig has some eye-popping results from Elroy Dimson:

Based on decades of data from 53 countries, Prof. Dimson has found that the economies with the highest growth produce the lowest stock returns — by an immense margin. Stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually.

Is this a published result? Can anybody point me to the paper where Dimon finds this?

Zweig’s first explanation for the phenomenon makes no sense:

When you buy into emerging markets, you get better economic growth — but, at least for now, you don’t get in at a better price…

In other words, economic growth is high, but stock valuations are even higher… At year end, emerging-markets stocks traded at a 38% discount to U.S. shares, as measured by the ratio of price to earnings. Now that both markets have bounced back, emerging markets are at only a 21% discount. And make no mistake: They should be much cheaper than U.S. stocks, because they are far riskier.

It seems to me that if you get higher growth at a 21% discount, that clearly counts as “a better price”. Yes, emerging-market stocks are more volatile. But the impact of volatility on a market’s (or even an individual stock’s) p/e ratio is far from obvious.

Zweig does then come up with a better reason why high-growth economies might have lower returns: essentially, the future growth is coming from companies which either don’t yet exist or haven’t yet listed. But before I start trying to work out what’s really going on here, I would very much like to take a closer look at Dimson’s results. Because they seem improbable to me: which slow-growing countries can boast a long-run 12% annual return on stocks?

Roger Ehrenberg has a much-linked-to piece about how Wall Street banks might revamp the way they pay their traders: basically, he says, turn them into fund managers, with a large ownership stake in their virtual funds.

The main problem with this, that I see, is that a Wall Street investment bank has lots of very good traders, and they never all have big bets on at the same time. When one desk wants to put on a big trade, it generally needs to make a case for putting at risk a large amount of the bank’s capital. But the capital doesn’t then belong to that desk in perpetuity: it lasts only as long as the trade does. So capital is always flowing to where it can best be put to use. That’s how a bank’s prop traders, as a group, can often make much more money than any given trader or desk could on their own.

Under Ehrenberg’s scheme, I think, that flow of capital from desk to desk would be seriously diminished, since the whole point of his plan is that traders get to compound their profits after they’ve made them.

I’m also not a great fan of Ehrenberg’s “sanctity of contracts” argument in favor of Citigroup paying Andrew Hall $100 million this year. (For the reasons why it shouldn’t, see Yves Smith.) Hall’s contract would be worth bupkis if Citi had gone bankrupt; the only reason it didn’t was that the US government bailed it out. So if the US government wants to call some shots here, it can. Sure, Hall can sue if he wants, and he might even win. But depending on how the negotiations go between Hall and Citi, it’s probable that he won’t.

In the February 2008 edition of Robert Parker’s hugely influential Wine Advocate newsletter, critic Jay Miller gave a highly-coveted 96-point rating to a formerly pretty-much unknown Spanish red called Sierra Carche, a Monastrell-based wine from Jumilla. Given that most Americans — indeed, most wine drinkers — have never heard of either Monastrell or Jumilla, the rating was a huge boon for the wine, and directly resulted in at least one consumer, Robert Kenney, ordering several cases without having ever tasted the wine at first hand.

Dr Vino picks up the rest of the story at some length, but suffice to say that Kenney was disappointed in the wine he bought, Miller agreed with Kenney’s opinion, and the importer ended up emailing this note to Miller:

“We have had similar problems with this wine and had a meeting in March with the winery to find out what the problem is. There was clearly some substandard product shipped by the winery and we have had to take back a large chunk of this wine from the market because it was rejected by the trade. I apologize on behalf of the winery for this apparent bait and switch. Going forward we are searching for a different winery for this brand (owned by our UK partner Guy Anderson wines).”

Yep: “we are searching for a different winery for this brand”.

Conceptually, most of us are dimly aware that if we buy a big, mass-produced wine like Yellowtail or Jacob’s Creek, we’re not going to always get juice from the exact same vineyard. But Sierra Carche was different: the labels were individually numbered out of 16,000 bottles, it was getting rave reviews in Wine Advocate, and it was made from a mix of obscure grapes grown in an equally-obscure region of Spain. On its face, this was the antithesis of the kind of homogenization and globalization excoriated in Jonathan Nossiter’s documentary Mondovino.

It turns out, however, that the opposite is the case.

This was the first vintage of Sierra Carche, which is owned by Guy Anderson in the United Kingdom. Guy Anderson Wines describes its business: “As one of the UK’s leading brand creators, …. [w]e are constantly researching and learning what people look for when choosing a wine…. We have a strong track record of producing innovative new wine brands…. [B]rands created by Guy Anderson Wines such as Fat Bastard, Mad Dogs & Englishmen and Gran Familia have found success in markets around the world.”

Sierra Carche, in other words, is a brand dreamed up by a UK wine-branding agency. And when there were problems with the first vintage of the brand, they just decided to go to some other winery to make the second vintage of the same brand. Indeed, it’s still incredibly unclear where, exactly, the first vintage came from, or who the winemaker was, or even whether there was any particular winery at all involved in the production of this brand. More likely the brand was created in conjunction with the commercial arm of a group of wineries in southeastern Spain, who were looking for a way to move their juice.

Now I have no problem with foreign winemakers doing interesting things with grapes sourced cheaply from unfashionable regions. Indeed, one such wine won a Pinot contest I held at my house in 2007. But it did so honestly. Sierra Carche, by contrast, looked for all the world like a high-end wine lovingly crafted from local terroir by a dedicated Spanish winemaker, rather than a mixture of juices driven by second-guessing “what people look for when choosing a wine” and designed to be one of “a raft of wines available at your local store”.

Once you know that, the Wine Advocate’s 96-point rating becomes easier to understand: this wine was designed to get high ratings, because high ratings are the best possible driver of international sales. It had been, to use the wine-world term, “Parkerized”. And the importer will of course have done everything in his power to ensure that Parker’s critic drank the very best possible expression of the wine.

Parker has thousands of loyal followers, and if they want to go out and buy Parkerized wines, that’s entirely up to them. If the wines then turn out to be very different from what the critic tasted, that’s a genuine scandal. Guy Anderson Wines will go off and find “a different winery” for Sierra Carche, but will keep the brand, because that 96-point rating, even if it’s for an earlier vintage, is still a great way of making sales on later vintages. Consumers will assume there’s some kind of continuity there.

But many of them will also assume that Miller somehow stumbled across this gem from Spain, rather than thinking that they’re drinking an English brand, made from Spanish grapes, specifically designed to appeal to Miller’s palate. But that’s what a lot of winemaking is, these days. And it’s increasingly difficult to tell the difference between honest local wines, on the one hand, and Parkerized global brands, on the other.

Greg Mankiw adds some insider detail to the story of Larry Summers’s ill-fated interest-rate swap, in the form of an email from “someone knowldgeable about the financial situation at Harvard”.

The email is clearly meant to exonerate Summers, at least a little, but I’m unconvinced. Taking the three points in sequence:

1) The instrument in question was highly liquid and could be sold fully within a few days; essentially all money was lost in 2008 two years after Larry Summers left.

This is true, but misleading. When people speculate in the markets, it’s the act of putting on the position which is the point at which the gamble is made. After that point, you make money if the position rises in value, and lose money if it plunges. Interest rates could have fallen at any time after the bet was made, and Harvard would have lost the same $1 billion.

The argument about liquidity only serves to underline how speculative this bet really was. If it was a genuine long-term hedge of certain future borrowing needs, Harvard would not have needed the liquidity since the position would have been designed to sit on the university’s books for decades. On the other hand, if Harvard was intending to trade in and out of this position, then the liquidity helps, but the swap can no longer be considered a hedge at all.

Was Harvard maybe intending to keep the swaps on its books in the event that interest rates rose, while selling them if rates fell? That seems to be the implication here: that if Summers had still been around, he would have liquidated the swaps when rates fell, and thereby avoided massive losses.

Again, however, this argument doesn’t hold up to scrutiny. If Summers had wanted to buy a swap with limited downside, one which automatically unwound if rates fell to a certain level, he could easily have done so. But that’s not the instrument he bought. Instead, he bought a sophisticated financial product which left Harvard potentially on the hook for $1 billion or more — and then did nothing to address that tail risk.

2) Harvard has a system where the treasurer makes these decisions with approval of the corporation and involvement of a debt management committee on which president does not serve.

Does anybody believe that this hare-brained scheme was the idea of Harvard’s treasurer? Come on. Harvard had $1.6 billion in floating-rate debt, and it’s conceivable that the treasurer might want to swap that debt into a low fixed rate. It’s not conceivable that the treasurer would be interested in swapping nonexistent future floating-rate debt into today’s fixed rates — especially not when the hypothetical future borrowing wouldn’t even take place for as long as 20 years. This deal has Summers’s fingerprints all over it, and would never have been done had he not been president of the university.

3) Given the plan to borrow large amounts of debt in the future, doing something to lock in low rates made sense. Iif Harvard was borrowing big, there would be offsetting saving now. The big error was the failure to adjust hedge when Allston was scaled back and to take account of the risks associated with the change in the university’s credit rating.

I honestly don’t know what Mankiw’s anonymous source could be talking about when he or she refers to “offsetting saving”. Was it an egregious dereliction of fiduciary responsibility to keep the swaps on Harvard’s books even after the excuse for putting them on — the multi-billion-dollar plan to expand the university into Allston — was put on hold? Yes, of course. And you can’t blame Summers for that, since he had left Harvard by then. On the other hand, there was always a risk that Allston would be scaled back, and indeed one of the most likely reasons for scaling back Allston was that there might be a national economic crisis — exactly the sort of thing which is normally accompanied by a reduction in interest rates.

Summers was well aware of the risk of an economic crisis. Indeed, in 2004, at about the time that the swaps were put on, he gave a major address at the IMF/World Bank annual meetings about the systemic risks posed by the US current-account deficit, and warning of “a slowdown in growth that would be unacceptable in the United States and would have very severe consequences for growth globally”. But maybe because he had gone through so many other current-account crises abroad during his tenure at Treasury, he was pretty clear that he thought the big risk was that interest rates would go up, rather than go down. In response to one question from a central banker, he said:

I certainly would not want to suggest how you or any other central banker should manage your reserves, but I would point out that when you buy U.S. treasury bills, what you get is 1.75 percent, and it doesn’t really matter whether the U.S. economy grows rapidly or grows slowly. And that is, as I said, a negative interest rate in real dollar terms, and I think that’s the number that one should focus on.

Summers couldn’t have been much clearer that he was pretty convinced that interest rates in the US were going to have to rise: it seems quaint now, but back then 1.75% really did seem like an incredibly low interest rate on T-bills.

Given his analysis, and his ego, it’s pretty obvious how Summers decided to use the future Allston expansion as an excuse to engage in a massive interest-rate gamble outside the purview of the Harvard Management Company, which is the arm of Harvard with a real mandate to play the financial markets. The real reasons for the rate swaps can be found in that 2004 lecture, not in vague ideas that Harvard was sure to issue floating-rate debt at some point in the 2020s. And given those real reasons, it’s easy to see why there was no clear mandate to unwind the swaps when Allston was scaled back.

Basically, Summers took a massive gamble with Harvard’s money, and lost — big. The buck stops with him, and I look forward to Summers admitting as much sooner rather than later.

Last year, I put together an interactive feature for Portfolio.com entitled “Watch Out Below”; it listed nine vulnerable “tall poppies” who were liable to be cut down to size over the coming year. There were three CEOs on the list: Shelly Adelson, Ken Lewis, and Wendelin Wiedeking. Maybe it’s to his credit that Wiedeking managed to hang on longer than the other two. But now he’s been fired, while the other two still have their jobs, even if their reputations are in tatters.

The weird thing is that although Wiedeking’s now gone, the jury’s still out on what he achieved. After all, the tiny sports-car company he transformed over the past 16 years is now being bought for €8 billion on sales of about €6 billion a year. As a hedge-fund manager — which is what he most resembled of late — Wiedeking came spectacularly unstuck, thanks to a liquidity crunch he couldn’t get out of. But the brand he leaves behind him is a strong one, and even with €10 billion in debt it still has significant equity value.

Wiedeking was a classic product of the boom years, and the saga of VW and Porsche will make for many gripping books. There’s no doubt that today’s a low day for him. But I suspect that history will be much less harsh on Wiedeking than it will be on, say, Lewis.

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