Felix Salmon

Why I think Reuters won’t buy Breakingviews

Felix Salmon
Jul 14, 2009 21:27 UTC

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.


“…the consumer is now part of the communication, and that social media could be used to develop metrics based on information and opinions that people volunteer…“When social media works is when a brand can join a conversation and add something to it, and provide utility to the user base.”… “The savvy marketer … can maintain their customer loyalty through a conversation… They want value from understanding more, they want to understand the brand, they want to communicate more.” He cautioned, however, that once a brand begins this kind of conversation, it has to be prepared to stay the course and continue it…” http://www.thearf.org/assets/am-09-inma- report

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Is Baker-Samwick finally getting traction?

Felix Salmon
Jul 14, 2009 20:37 UTC

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!


That’s perfect! The government will own our houses, build our cars, and (soon) employ us all. Utopia is just around the corner.

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When TALF displaces TARP

Felix Salmon
Jul 14, 2009 19:47 UTC

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?


Chrysler Financial paid back its TARP loan that placed earning restrictions on top executives with another government-based loan (TALF); it’s corporate welfare no matter how anyone looks at it. What the government should do is audit Chrysler Financial to determine whether the $1.5 billion TARP dollars were actually used for the intended purpose– to fund 85,000 consumer loans for the purchase of Chrysler vehicles. Who purchased 85,000 Chrysler vehicles from January through April of 2009? Chrysler Financial should be forced to name these consumers. Finally, if 85,000 consumers purchsed Chrysler vehicles, why did the company declare bankruptcy?

Cerberus and the government should allow our capitalist system to work and permit Chrysler Financial to go belly-up!!!!!

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Can we hope to abolish debt-related tax incentives?

Felix Salmon
Jul 14, 2009 18:38 UTC

Kevin Drum says that although we should get rid of debt’s tax advantages, we won’t:

We should get rid of it.

(We won’t, of course, any more than we’ll get rid of agricultural payments or road-building subsidies. If you scratch most free market capitalists you’ll find a socialist just below the surface. But we can still dream.)

The weird thing is that this really is within the realm of the possible — the UK, for instance, abolished mortgage-interest tax relief in 2000, a move which had no visible effect whatsoever on either house prices or homeownership, but which did wonders for the exchequer.

As for the business interest tax deduction, why not go the whole hog and replace the corporate income tax with a corporate interest tax? If you structured it to be revenue-neutral, and you phased it in over the course of say five years, then you’d have a huge number of companies trying desperately to pay down their debt and increase their equity — which is exactly what we want. As an added advantage, everybody could stop complaining about the dual taxation of corporate dividends. It might even have bipartisan support!


The problem with such tax changes is they only encourage new tax games and in the end what difference does it really make? If you want to raise taxes, there are simpler and more direct means.

The unsustainability of debt-for-equity conversion

Felix Salmon
Jul 14, 2009 15:55 UTC

According to its earnings release today, Goldman Sachs posted a loss of $500 million on its “real estate principal investments”. On the conference call, CFO David Viniar said that was based on a loan book of about $6.4 billion, which is now being marked “in the low 50s”.

Needless to say, a diversified loan book should never be marked in the low 50s — that’s equity-like returns, and in exactly the wrong direction. But more to the point, it’s hard to imagine that the value of commercial real estate itself (as opposed to real-estate loans) has fallen by much more than 50%, on average, from the last time it was mortgaged. What I take from this mark, then, is that Goldman is basically marking its loans to the value of the underlying real estate; it’s assuming that all of them will default, and is counting only on recovery value rather than mortgage payments.

The upside of this is that what we’re seeing is exactly the kind of debt-to-equity converstion that Nassim Taleb was pushing in his FT column today. Goldman used to own lots of commercial real-estate debt; now, to all intents and purposes, all that debt has been converted to equity. The problem of course is that Goldman doesn’t particularly want to own lots of commercial real-estate. It’s going to end up selling those assets, and when it does, the buyers will have financing — debt will come back. Indeed, there’s a good chance that Goldman itself will finance the sales. That’s the problem with debt-to-equity conversions: they tend to be temporary things, and get followed in due course by the raising of new debt to replace the old.


Goldman Sachs will be eternally grateful to Obama for staying out of its way. Goldman has an uncommon grasp of the joystick.

This could be its letter of appreciation, —-

http://pacificgatepost.blogspot.com/2009  /07/goldman-sachs-thank-you-mr-presiden t.html

Liveblogging the Goldman earnings call

Felix Salmon
Jul 14, 2009 14:50 UTC

Over at the commentaries blog.


FYI: RS finally (yesterday)published the Taibbi article online.

http://www.rollingstone.com/politics/sto ry/29127316/the_great_american_bubble_ma chine/print

Fun Fact: The story link is the top Google search result for the phrase “great vampire squid”.

DC taxation datapoint of the day

Felix Salmon
Jul 14, 2009 14:42 UTC

Ryan Avent quotes Alice Rivlin:

The CFO’s office estimates that if DC were able to tax non-resident income at its current tax rates it could raise more than $2 billion additional revenue, more than doubling the current yield of the District’s individual income tax of about $1.3 billion.

If the District of Columbia were to become a state, it could and almost certainly would start taxing people who work in DC but live elsewhere. Which is a huge proportion of DC’s professional classes. Needless to say, this is a Very Good Idea. Not that it’ll ever happen.


The underlying problem is that DC is a city without the same-state suburban hinterland that normally surrounds American cities. Its tax rates are high because it cannot capture the tax revenues of a significant portion of the employees that work in the city because they effectively live in a different state. The tax rates in any central city would be significantly higher if there were not intra-state transfers and shared funding of large institutions such as universities and prisons.

The best answer to this problem is retrocession. The second-best is the commuter tax. Neither are doable at this point.

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How to reduce the mountain of debt

Felix Salmon
Jul 14, 2009 13:59 UTC

Nassim Taleb is right that there’s too much debt in the world, and he’s also right that debt=denial:

Debt has a nasty property: it is highly treacherous. A loan hides volatility as it does not vary outside of default, while an equity investment has volatility but its risks are visible. Yet both have similar risks. Thus debt is the province of both the overconfident borrower who underestimates large deviations, and of the investor who wants to be deluded by hiding risks.

Taleb has been saying for a while that the world “must” move to a state of less leverage; sometimes, putting on his prophet hat and coming across a bit like Karl Marx, he calls it a historical inevitability. But the thing about historical inevitabilities is that you don’t need to legislate them:

Government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity. There is no other option.

Well, there clearly is another option, and it’s equally clearly the option which is going to be taken — an attempt to recapture as much of the status quo ante as possible, with a bit more regulation this time around. The upside of this approach is that it’s not “forcible” — attempts to do anything by force generally end badly.

My feeling is that the best option is a middle way: don’t try to force debt-for-equity swaps, since the unintended consequences could be extremely horrible. But do get rid of all the tax benefits that debt has over equity. At the moment, companies pay tax not on earnings before interest but earnings after interest — that gives them an incentive to lever up as much as possible. Last year, Steve Waldman had a great post entitled “Eliminate the business interest tax deduction“; it’s well worth (re)reading in light of what has happened since.

In general the multi-trillion-dollar edifice of debt financing is predicated on all manner of artificial tax advantages which are given both to borrowers and to fixed-income investors; tax-free municipal bonds and mortgage-interest tax relief are just two of the most egregious examples here.

Forcibly converting mortgages into some kind of shared-equity arrangement where banks get direct exposure to the house price is fraught with difficulty; abolishing mortgage-interest tax relief, however, is easy. And it raises much-needed money for the government as well.


The reason that we have tax incentives and govt guaranteed lending is because, in the US, we have an aversion to giving people money. With a tax credit, you can tell that they paid taxes, and aren’t freeloaders. With subsidized debt, you can hope to get paid back,and, possibly even make money.

The reason that we have incentives for home ownership is that we want more people to own homes, as opposed to renting. Presumably, we’re trying to spread the wealth, instead of focusing more wealth in the hands of landlords. The same is true of tax credits and loans for college. We don’t want to limit education simply to those that can afford it.

You could cut all these subsidies, and just accept the negative social consequences, assuming that there would be some in your view. On the other hand, you could institute simple transfers of money, like a Guaranteed Income, or giving the less well off the money for a down payment of 20% say. Of course, this would mean that you’re just giving people money.

My solution is just that: give people money. The current system of competing incentives and disincentives is inefficient and, because it’s so complicated, impossible to figure out what is effecting what. We should aim for simplicity and ease of supervision. We should simply transfer money to people through a Guaranteed Income, Down Payment Subsidy, etc. However, the goals of these programs make sense to me, and we shouldn’t forgo aiding the people addressed by these programs.

Monday links get lost

Felix Salmon
Jul 14, 2009 03:00 UTC

In a survey of 12,500 people in 13 countries, almost half of respondents admitted to giving wrong directions on purpose

Ezra Klein says that “of course” the Cheesecake Factory is delicious — but does that go for, say, Applebee’s, too? And isn’t the food at all these places generally too sweet?

“In a 2004 interview—well before the launch of Portfolio–Conde Nast CEO Charles O. “Chuck” Townsend said that the one magazine he’d like his company to own would be BusinessWeek. (Scroll way down here.) But, given the company’s experience with Portfolio, it’s not clear if that sentiment persists.”

I hate the CIA World Factbook redesign

Share music via Bluetooth? In reading that, I immediately felt old. Not only have I never done this myself, I didn’t even know people did this. Were you aware?”


Why in the world, websites (or folks behind them) decide to use gray letters instead of black letters on a white background, in the name of brand identity? It strains the eye and makes reading those web pages a tedious chore. I am referring to the CIA World Factbook and many others like that. This trend is not old, but a recent (as in the last 3-4 years) phenomemon.