Felix Salmon

FT editor Lionel Barber isn’t content with charging for his own content, he also reckons that every other news organisation is going to follow suit. Here are some quotes from a speech he gave last night:

I confidently predict that within the next 12 months, almost all news organisations will be charging for content…

We are seeing sustained and growing revenue as a result of our strategy of premium pricing for quality, niche global content – crucial at a time of weakening advertising. Many news organisations are following suit in charging, latterly the New York Times which had previously come down in favour of free access to its own content.

If Barber is confident that “almost all” news organisations will be charging for content within 12 months, and that the NYT is a gimme, then I’m happy to propose a wager with Mr Barber: that at no time within the next 12 months will the NYT charge for the content it’s currently giving away for free. What do you say, Lionel, a bottle of vintage champagne to the winner?

How far has Ben Stein sunk? Far enough that I feel compelled to resuscitate the Ben Stein Watch, just to share this unfunny and positively harmful TV ad which is now being aired:

“I went to freescore.com and found out my score for free”, says Ben, while an annoying squirrel holds up a sign with the word “FREE” in some horrible brush-script font.

A few points are worth noting here. First, the score itself is not very useful to consumers. What’s useful is the report — if there’s an error on the report, then the consumer can try to rectify it. Secondly, and much more importantly, if you want a free credit report, there’s only one place to go: annualcreditreport.com. That’s the place where the big three credit-rating agencies will give you a genuinely free copy of your credit report once a year, as required by federal law.

You won’t be surprised to hear that freescore.com is not free: in order to get any information out of them at all, you have to authorize them to charge you a $29.95 monthly fee. They even extract a dollar out of you up front, just to make sure that money is there.

Stein, here, has become a predatory bait-and-switch merchant, dangling a “free” credit report in front of people so that he can sock them with a massive monthly fee for, essentially, doing nothing at all. Naturally, the people who take him up on this offer will be those who can least afford it.

The level to which Stein has now sunk is more than enough reason — as if the case for the prosecution weren’t damning enough already — for the NYT to cancel Stein’s contract forthwith. It’s simply unconscionable for a newspaper of record to employ as its “Everybody’s Business” columnist someone who is surely making a vast amount of money by luring the unsuspecting into overpaying for a financial product they should under no circumstances buy.

It’ll also be interesting to see whether the new Consumer Financial Protection Agency will have the authority to regulate this kind of advertising. If it doesn’t, that’s a significant hole in its mandate.

Update: Ryan Chittum notes that the new credit card act requires advertisers to inform consumers that the only place for a free credit report is AnnualCreditReport.com; they will also be required to include a   statement that “This is not the free credit report provided for by Federal law.” When does this act come into force?

Update 2: It’s also worth quoting the NYT’s own ethics guidelines:

40. It is an inherent conflict for a journalist to perform public relations work, paid or unpaid.

44. Staff members may not engage in financial counseling (except through the articles they write). They may not manage money for others, offer investment advice, or help operate an investment company of any sort, with or without pay.

Stein isn’t a staff member. But the NYT generally holds its columnists to the same ethical standards.

Update 3: Here’s a good video, to go with Stein’s bad one.

Update 4: Freescore seems to be intimately connected with a very ugly company called Vertrue. Ugh.

Andrew Baston reports on China’s 7.9% GDP growth in the second quarter:

China’s government only reports year-on-year growth estimates. But when measured in the same terms as other major economies—an annualized quarter-on-quarter comparison—China’s growth in the second quarter could be on the order of 15%, some private economists estimate.

This is proof, I think, that stimulus programs can have spectacular effects, at least in the short term. Although once again Chinese assets are looking pretty bubblicious as a result. Beware the coming crash!

But who would win a fight between Giant Octopus and Vampire Squid?

Google calls bullshit on newspapers who say they don’t want to be indexed

Judge dismisses Donald Trump’s lawsuit against the NYT’s Tim O’Brien

“Once again, Ben Stein distinguishes himself by how many things he can get seriously wrong in a short column”

Kevin Drum rightly hates on the Time.com redesign, including its truncated RSS

“Our report stated women who drink alcohol are more likely to be raped. In fact, the research found the opposite.”

More cracked Kindles (see also)

Harold Meyerson says that Rubin is our McNamara

Two out of three major bond-rating firms now agree: California’s credit grade should begin with a B

Krugman: Government deficits, mainly automatic rather than discretionary, have saved us from a second Great Depression

Robert Reich is worried about Goldman Sachs

J, at This is the Green Room, is in the middle of a series entitled “Deconstructing the Gaussian copula”. Part 1 was here, Part 3 is on its way, and Part 2 features a really good explanation of CDOs and default correlation:

To understand why tranching compounds the correlation problem, think of the CDO as a rectangular bathtub interspaced with mines that represent each issuer’s default. The CDO investors are aboard a boat on one side of the bathtub, and need to cross to the other side. If the boat hits a mine, that issuer defaults, and the explosion of the mine will damage the boat. The equity tranche has an extremely thin hull and will sink quickly; the senior tranche has a thick hull and can withstand many blasts without taking damage. Finally, the boat moves across the bathtub via geometric brownian motion – which is to say, randomly.

In a low-correlation world, the mines are dispersed uniform randomly across the bathtub; hitting one mine does not imply or necessitate hitting any other. With high correlation, the mines cluster somewhere in the water; hitting one mine makes it relatively certain that another will be hit.

As a consequence, equity investors prefer high correlation. They are indifferent to hitting just a few mines or many, as they are wiped out in both situations. Therefore, they prefer the mines to be clustered, as this leaves more clear paths across the bathtub. In contrast, senior investors prefer low correlation – they can withstand glancing off a few mines, but hitting a cluster would wipe them out.

This helps explain why leveraged super-senior trades turned out to be so much more dangerous than simple equity tranches with a similar expected return. When an equity tranche sinks, you lose a small, light dinghy. When a senior tranche sinks, you lose an aircraft carrier.

(Thanks to Charles Davì for the pointer.)

When the WSJ editorial page proposes any kind of new tax, it’s worth paying attention to:

Another answer would be an FDIC-style bailout tax, perhaps tied to leverage ratios, for those in the too-big-to-fail camp.

Janet Tavakoli is on a similar page:

U.S. taxpayers should insist that a large part of Goldman’s revenues and profits belong to the American public.

A Goldman-specific tax might be fun to attempt, but there really is a public good to be served in taxing what you want less of — which is too-big-to-fail banks making outsize bets with other people’s money (backstopped by the taxpayer, of course) and then paying themselves billions of dollars in bonuses.

The WSJ’s bailout tax idea is a good one — especially if it rose in line with a financial institution’s balance sheet, and gave those institutions a serious incentive to shrink. If you can’t legislate a hard cap on assets, then you can at least provide some gentle encouragement to get smaller rather than bigger.

Overdraft fees and lottery tickets are both in their own way taxes on ignorance, or at least a lack of sophistication — which is one reason why both should be carefully regulated. Richard Sine, today, adds another item to the list: J-school tuition fees. He has a clear message for deans of journalism schools around the country:

Do not charge so much money to walk through the door that the program is open only to the rich, the idle, or the financially illiterate. That’s not a journalism school; that’s a gold-plated welfare program for your old newsroom buddies, built on the backs of starry-eyed naïfs.

I think it’s fair to say that going to journalism school increases your chances of getting a job in journalism. If J-school graduates are almost by definition financially naive — if they weren’t financially naive they’d never have spent so much money on J-school — then maybe J-school is only serving to increase the number of innumerates working in journalism. Which is a sobering thought.

Josh and Tyler have found a piece of ever-so-scientific research which calculates that the Shanghai stock market will crash somewhere between July 17 and July 27. Which is convenient for me, since I’ll be there personally from July 19 through 25; I should have a front-row seat!

If I had to pick a single day for the crash, of course, it would have to be July 22. When the predictions of a Log Periodic Power Law are ratified by a solar eclipse with the longest totality of the century, how could stocks possibly behave otherwise?

Update: Zubin has found a paper about the effect of eclipses on the stock market.

Remember September, when Goldman Sachs and Morgan Stanley became bank holding companies? The WSJ reported at the time that the banks were “taking steps to reduce their leverage”:

It had become increasingly clear to Fed officials in recent days that the investment-banking model couldn’t function in these markets…

Goldman — and to a lesser extent, Morgan Stanley — has maneuvered through the credit crisis better than other investment banks. But its business model, which relies on short-term funding, is under attack. Some stockholders worry that its strategy of making big investments with borrowed money will go wrong someday, which would make it more difficult for the firm to get favorable borrowing terms…

The most fundamental problem is how to generate profit growth in a world that no longer tolerates high leverage.

Now my colleague John Kemp has published a wonderful little chartbook of Goldman’s value-at-risk, which includes this. The annotation is mine:

I guess Goldman Sachs worked out how to generate profit growth in a world that no longer tolerates high leverage. It just increased the amount of capital it puts at risk every day.

John Carney thinks that the Baker-Samwick plan would create “havoc” in securitized mortgages, and points to Tom Lindmark:

I suspect that more than a few of the investors that own these mortgages might not be thrilled to see their contractual rights to foreclose on the property and dispose of it are going to be real happy to learn they’ve just been turned into long term investors in real property. They probably just want to get whatever is left over from a bad investment and lick their wounds for awhile. Instead, the government is going to make them stay in the game.

Let’s nip this one in the bud: there is nothing in this proposal which says that the owner of the property can’t sell it. Indeed, quite the opposite: Baker and Samwick write that “the mortgage holder is free to hold or sell the property as they choose”. Which in turn means there will be no havoc wreaked in securitized mortgages.

Banks, once they’ve foreclosed on a property, are still free to sell it, if they so desire, to the highest bidder. But the buyer of the house will have to continue renting it, at market rates, to its current inhabitants, until they either fall behind on their rent or move out. Which is no great hardship — that’s what landlords do.

This year’s class size at Harvard Business School — 942 students — is a new record, up from 900 last year. Most of HBS’s costs are fixed, of course, so a marginal increase in enrollment is likely to drop straight to the bottom line — something Harvard’s in desperate need of these days.

The value of the Harvard brand doesn’t seem to have diminished — I doubt it had too much difficulty scaring up those 942 students — and similarly I doubt that a 5% increase in class size will have any effect on the market value of a Harvard MBA. But there’s no doubt that value has gone down substantially over the past year or two, especially given that Harvard’s MBA is one of the more finance-heavy courses out there.

The pendulum’s swinging back: senior managers will need to manage more, while doing much less in the way of financial engineering. I wonder whether and how that fact is going to be reflected in the Harvard curriculum

Someone is hiring writers and paying $10 for 600 words

Eliot Spitzer on Matt Taibbi’s Goldman Sachs piece: “good journalism, and good reading”

“Asset allocation will work most of the time in the future but not always” — that’s just saying it’s certain to fail.

This can only be good

Nice gapminderish source for OECD macroeconomic data

I’ve made the Power Grid! But they massively undercount the number of unique visitors that Reuters gets.

Cyrus Sanati confirms that my very own employer “is in preliminary discussions” about buying Breakingviews. Needless to say, I have no first-hand, or even second-hand, knowledge of such matters — nobody tells me anything, and nor should they. But I can say that this smells of desperation on the part of Breaking Views, and I will also confidently predict that the deal is not going to happen.

If I had to guess, I’d say that (a) Breakingviews has had talks with Thomson Reuters in the past, before we set up our own commentary service; that (b) faced with mounting losses Breakingviews called another meeting; and that (c) it then promptly leaked that meeting to the Times, characterizing it as “preliminary talks”, in an attempt to scare up some other buyer.

When I joined Reuters’s commentary group, it was clear to me that we were a Breakingviews killer: we were going to provide better commentary than they do, at the unbeatable price of $0.00. Reuters can afford to do that because journalism is always a loss center here: the profits come from terminal sales, and introducing a commentary service adds value to the terminals and makes them easier to sell. It doesn’t need to be priced separately.

What’s more, Breakingviews never really came to terms with the inherent tension in any subscription-based commentary service: analysis and commentary tends to be valuable and important insofar as it’s influential, and you only get influence when you have a large number of readers. The FT’s Lex column, whose alumni are now running not only Breakingviews but also the WSJ’s Heard on the Street column and the Reuters commentary group, became influential for one main reason: it was read by substantially everybody in the City of London, normally during their commute into work. Similarly, it’s hard to imagine Thomas Friedman having a fraction of his current influence if he didn’t work for the NYT.

After you have a wide readership, it then becomes possible to have some market-moving effect, at least in the short term — which is how the WSJ’s Foster Winans ended up being jailed for insider dealing after leaking the contents of his column to his stockbroker. But that was in the early 1980s, and it’s far from clear that the value of tomorrow’s Heard on the Street column has held up since then.

I fear that the Winans case had much more far-reaching effects than anybody suspected at the time: people started to believe that there was immediate cash value to analytical financial journalism, and such journalism started concentrating increasingly on “actionable” content: advice that Company A is overpaying for Company B, for instance, and that therefore its shares might fall, or that if you look at Company C based on this ratio or that sum-of-the-parts analysis, it turns out to be worth much more than the share price is indicating.

The problem is that this kind of valuation analysis is just a tiny and not particularly interesting subset of what a good commentary service can and should do. If your column is very widely read and therefore influential, then occasionally such a column might move markets — a bunch of smaller investors are liable to read it, find it compelling, and start buying or selling the stocks in question. Similarly stocks move when they’re plugged by Jim Cramer or other guests on CNBC; sometimes they even move when they’re not so plugged. So in today’s media-saturated world, amid the noise of Yahoo forums and CNBC talking heads, it behooves more highbrow media outlets to concentrate on more substantive subjects, especially when we’re in the middle of a crisis and there’s important reporting to be done about massive issues like regulation, economic policy, and the solvency or otherwise of systemically-important financial institutions.

To their credit, Reuters and Heard on the Street and Lex have all been moving in that direction: when the whole world is falling apart, it’s silly to care overmuch about this or that stock going up or down a buck or two. Even Breakingviews has been doing the same thing. But you can’t put a dollar value on big-picture analysis in the same way that you can try to put a dollar value on “actionable intelligence”. And so, especially in a world of unprecedented banking-sector consolidation, it becomes increasingly difficult for Breakingviews to charge premium rates for its content. After all, these questions are being debated on blogs and on op-ed pages and in conferences and at lunches across the world — and that puts Breakingviews in an invidious position. It can’t fully engage with the debate, because it has hidden itself behind a subscription firewall (and has a serious allergy to ever linking to anything). And essentially no one is going to engage with Breakingviews, for much the same reason. The site therefore becomes hermetic, and easy to ignore.

Breakingviews has attempted to address this problem, by syndicating content to major newspapers around the world (the NYT, the Telegraph, Le Monde, El Pais, Handelsblatt). It doesn’t make real money from those syndication agreements — indeed, Rupert Murdoch is now one of Breakingviews’s largest shareholders, because Breakingviews gave Dow Jones an equity stake when the WSJ started running Breakingviews columns. (That practice stopped abruptly when Murdoch took over.) Breakingviews hopes that its newspaper columns give it enough readership that it becomes influential — and that somehow any value it gets from such influence will spill over into the non-syndicated, subscriber-only content which accounts for substantially all of its revenues.

In reality, however, Breakingviews columns only have influence insofar as they’re publicly available — either syndicated in a major newspaper, or else made freely available on the Breakingviews website. And since the company’s subscribers won’t pay good cash for content they can read for free, Breakingviews is in a serious bind. Today is not 1983, when the importance of Foster Winans was related to the fact that he could move stocks the morning that his column came out. Instead, the importance of any columnist (or blogger) is much more directly related to that individual’s influence in and around policy-making circles. You can’t be influential behind a massive subscription firewall; in the age of the hyperlink you can only be influential if you’re available for free. (Every so often there’s an exception to this rule, like Matt Taibbi’s Goldman Sachs article, but look more closely and you’ll discover that the article is influential only insofar as it was circulated for free, in samizdat format.)

The genius of Reuters setting up a commentary team is that we can offer our content at a marginal cost of zero. Once the commentary is available on the wire, for the benefit of subscribers to the terminals, those subscribers want it made available as widely as possible for free — because that way it becomes maximally influential. (That’s my argument, anyway, we’ll see how much traction it gets.) In that sense, commentary is the opposite of news.

Terminal subscribers love it when they have privileged access to a news feed, because it means that they know something which their competitors don’t. That’s the paradigm which built the old “actionable intelligence” business model behind Breakingviews. The new world, by contrast, is built around linking and influence: it’s a world of network effects and positive-sum games, rather than a world of jealously guarding information and trying to prevent other people from accessing it. In that world, the content on a Reuters terminal has value not because it is unavailable elsewhere, but rather because it’s very easily accessible on that terminal, alongside all the other information you might ever want. (It’s worth noting that Bloomberg puts all of its columns online for free, and Bloomberg is no great friend of the web — but it knows that a columnist who isn’t online is a columnist nobody wants to read.)

To Reuters, then, the value of Breakingviews can be broken down into three parts. There’s the value of its contracts; the value of its brand; and the value of its journalists. The contracts are clearly a wasting asset; the brand is associated with an outdated and  increasingly quaint business model; and the journalists, insofar as we want them, can be much more easily hired individually and incorporated into the existing commentary group, rather than trying to engineer an awkward merger between two very different teams.

Before the Reuters commentary team was built, there was a case to be made that Reuters should buy Breakingviews and get a fully-formed commentary team with a certain amount of reputation which it could then repurpose to its own ends. The company didn’t go down that route, and — wonderfully — decided to build its own commentary team instead. At that point, any hope within the group of Breakingviews shareholders that it could exit via selling out to Reuters must have died. And I trust that’s what Reuters told Breakingviews at that “preliminary discussion”. If Breakingviews is looking to sell out, they should hope to find a different buyer.

Remember the Baker-Samwick proposal which I resuscitated in the Atlantic this month? Well, it seems to have got some traction:

U.S. government officials are weighing a plan that would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes instead, sources familiar with the administration’s thinking said on Tuesday.

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

I’m hopeful. Better late than never!

Dealbook is making a big deal out of the fact that Chrysler Financial has repaid its TARP loan. But read down to the bottom of the press release, and you find this:

Funds used to make the repayment of TARP were obtained through the completion of a AAA-rated automotive asset-backed securitization (ABS) through the Term Asset-Backed Securities Loan Facility (TALF).

So, yay, the government got its TARP money back. Because some other arm of the government (the Fed) was willing to lend the same amount of money even cheaper, through TALF. This is an improvement how?