Felix Salmon

It’s not the regulators, it’s the politicians

Aditya Chakrabortty has a UK perspective on financial reform:

The first chapter of Alistair Darling’s July white paper on banking reform was devoted to explaining just how important the City is to the UK economy. The Treasury’s ledger of revenues from financial services did not include a debit column that listed the amount lost on institutional bailouts and tax avoidance – of course it didn’t. Put to one side, if you can, the watchdogs’ manifold failings in the run-up to the banking crisis. In the debate over reforming the City there has been none of the regulatory capture that economists usually fret about – where the regulators forget about the public interest, and rig the rules to suit the very sector they’re meant to be supervising. There is, however, plenty of evidence of political capture. This isn’t just a New Labour problem; it applies also to David Cameron and George Osborne, whose policies are nowhere near as tough as their rhetoric – and to Barack Obama’s administration, which, on everything from regulating bonuses to handing out taxpayer money, appears to have turned into an unglamorous subsidiary of Goldman Sachs. A cast like this means the prospects for real reform at next month’s G20 summit of major economies in Pittsburgh are depressingly slim.

When bankers turn honest

Peter Thal Larsen notes that the former CEO of JP Morgan Cazenove is now admitting that investment banks overcharge. This jibes with my experience in Switzerland: at one dinner I sat next to the former CEO of a large Swiss bank, who was very happy to admit that private banks gouge their clients by charging a low 1% management fee but then stuffing their clients’ accounts with own-brand structured products, all of which come with enormous fees and commissions attached. Could it be that one silver lining to the financial crisis is an outbreak of honesty among former bank executives?

Don’t worry about the FDIC

Rolfe Winkler has a good, detailed snapshot of what’s going on at the FDIC. But I’m not nearly as worried about the state of the US deposit-insurance fund as he is. As I’ve said before, the FDIC can’t run out of money. Conceptually, it has simply been faced with a choice up until now — do you raise money from banks, in deposit insurance premiums, before banks start going bust and need an FDIC bailout, or after? Congress made the decision that is should be the latter, when they barred the FDIC from charging such premiums between 1996 and 2006.

Good and bad financial innovation

Simon Johnson and James Kwak have an important article on financial innovation in the latest issue of Democracy. The broad thrust of the article I agree with — as you might expect, given that after listening to my last debate on the subject, James Kwak came to the conclusion that “obviously I agree most with Salmon”. (Thanks, James!)

The economics of private schools

Pockets has a spectacularly good comment on my blog entry about the charitable status of private schools which would more than deserve elevation as an entry of its own were it not for the fact that (s)he has gone into even more detail here and here. The main insight is that the “top” schools tend to advertise themselves and compete on the basis of how well their pupils do in exams, what universities they get into, that kind of thing. And that they can boost those numbers substantially by giving scholarships and bursaries to super-smart poorer kids:

40 pages of hedge-fund letters

Market Folly has the 24-page second-quarter letter from Elliott Associates, while the 16-page memo from Howard Marks of Oaktree is here. Both have moments of brilliance, and are better financial writing than anything you’ll read in a newspaper or magazine this month. Of course, they’re openly talking their book. But you guys are smart enough to discount for that, and come away with some pretty sharp insights.

Guaranteed bonus quote of the day

“I will only say one more thing here tonight, and it’s about the subject that’s close to most of us – and that is remuneration. We have to realize that remuneration has to be something that we earn. It can’t be guaranteed. I see so much so often in recent weeks of those dreaded two-year, three-year guarantees coming back into the market. And if there’s one thing I could ask all of us tonight, it’s to reflect before we sign the next guaranteed bonus for our colleagues across the industry. Because the reality is that we are destroying ourselves when we do it. We need to reward people with objectives that are clear, that are long-term, and that are given to people who are committed to our industry.”

Shrinking banks

I was high when I gave my presentation on risk to the Zermatt symposium this morning — 8,471 feet above sea level, to be precise, in an idyllic place called Riffelberg. Who needs wifi when you have views like that. In any event, it went quite well: after all the high empirical seriousness of the past couple of days, I think that the attendees enjoyed me blowing off steam by telling them that we had to do something which of course we won’t do at all: abolish the tax-deductibility of interest, move in general from a world of debt finance to a world of equity finance, and, insofar as there is credit in the world, encourage that credit to be in the form of loans rather than bonds.

The tyranny of the CPM

Why is online advertising so cheap compared to the cost of reaching 1,000 people in any other medium? Anybody whose answer involves oversupply or excess inventory should read Jim Spanfeller: