Felix Salmon

Banks shouldn’t poach talent

Felix Salmon
Aug 18, 2009 18:25 UTC

Chris Swann today delivers a slightly more grown-up and footnoted version of my television rant from yesterday about how banks are paying their employees far too much money; I agree with almost all of his conclusion.

Excessive banking pay is a social ill. The sector has long sucked in far too much of society’s brightest graduates — putting them to tasks which often have little social value and at worst are parasitic. Politicians should not regulate bank pay directly. But lower compensation for bankers will be a sign that regulatory reform is working.

The bit I disagree with is about politicians regulating bank pay directly: I see nothing wrong with a Feinberg-style pay czar preventing banks with implicit or explicit government backstops from taking on too much risk.

The really ironic thing to all this is that paying star hires lots of money doesn’t work. Jeffrey Pfeffer puts it well:

When a company hires a star away from another firm, the star’s performance falls (46 percent of the research analysts did poorly in the year they switched jobs and their performance remained lower even after five years), there is a decline in the performance of the group the star joins, the market value of the company hiring the star falls, and the star doesn’t stay with the new employer for very long…

Chasing talent doesn’t work and just costs the companies doing the chasing a lot of wasted money… And there is another lesson in this sorry tale: the banks and securities firms who defend the practice of chasing stars as a justification for outrageous salaries are either being disingenuous or they really don’t fully understand what makes companies in their industry successful and the empirical data on the ineffectiveness of a “war for talent” strategy. Given their financial performance, the latter — pervasive ignorance of the determinants of success — is a real possibility.

Perhaps what we need isn’t a pay czar using draconian powers to cap executive compensation, but rather Pfeffer and his biz-school ilk (Boris Groysberg, Lucian Bebchuk) going out on tour to the boardrooms and C-suites of the major banks, explaining, with full empirical backup, that there really isn’t any point in entering into hiring wars. It’s not only harmful to taxpayers, it’s contraindicated from an internal profitability point of view as well.

As TED says, the only way to become Goldman Sachs is to grow that culture “organically, and slowly, over time”. CEOs in a hurry won’t like that conclusion. But it’s inescapable.


banks will do well to borrow a page from telecom play book. Banker/trader acquisition cost and retention cost if properly analysed and separately disclosed, could prove useful in the ongoing banker wage reform debate

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Art Capital’s Leibovitz loan: Numbers emerge

Felix Salmon
Aug 18, 2009 16:34 UTC

Bloomberg’s Katya Kazakina has a story on the relationship between Goldman Sachs and Annie Leibovitz today which adds very little to (and fails to credit the reporting of) the New York magazine story by Andrew Goldman. Given that Goldman got there first and got much more detail, it would have been nice to see Bloomberg give him some credit here.

Still, Bloomberg has succeeded where both Goldman and Gawker’s John Cook had failed, and got actual numbers out of Art Capital spokesman Montieth Illingworth as regards the commission Leibovitz has to pay them whenever any of her work is sold:

If Leibovitz doesn’t default, Art Capital would receive a 10 percent commission on copyright and real estate sales, Illingworth said. If she does, the commission would increase to 25 percent of the sale of the collateral (the higher rate includes 11 percent to 13 percent in legal, real estate and other fees, Illingworth said.)

“We have interest in the loan agreement and we have interest in the sales agreement,” Illingworth said, referring to the contracts related to the $24 million loan. “They would have to make an offer to buy out both.”

“They”, here, is Goldman Sachs, which has expressed an interest in buying the Leibovitz lien. And this story seems to confirm what I said yesterday, which is that Art Capital is valuing its loan at much more than $24 million: there’s the pure debt part of the deal, and then there’s the sales agreement on top, which is worth millions more to Art Capital. Art Capital values Leibovitz’s copyright at $50 million: even if they sold it for only $32 million after September 8, that would give them an extra $8 million in commission income, over and above everything which Leibovitz owes them on the loan. And the loan alone carries a 12% interest rate.

So my guess is that if Goldman wanted to buy Art Capital out of this deal, it would have to pay the best part of $30 million to do so. And then they would be owed $30 million by Annie Leibovitz, a woman whose decades-long history of repaying debts is uniformly atrocious. Somehow, with the best will in the world, I don’t see this deal happening. And the one thing you can be sure of, when it comes to Leibovitz and Art Capital, is that there’s no good will at all. Which means that Leibovitz is probably stuck with Art Capital for the foreseeable future, and Goldman Sachs is not going to be able to work out a white-knight deal.


I was recently telling someone that the real sign of India’s “arrival” would be that currency exchange kiosks abroad would start accepting rupees That day is still quite far, but a rupee-denominated loan is the kind of thing I would assume the first steps to be like.

Argentina’s pollsters

Felix Salmon
Aug 18, 2009 16:17 UTC

I just got a rather hilarious phone call from Brand Democracy (specialists in “psychographic segmentation studies”), a UK company interviewing “CEOs, businessmen, and key opinion formers” on the subject of their opinion of Argentina; their client is the Argentine secretariat of tourism. It’s a slow news day, so I played along; Unicef got a donation at the end. And what fascinated me most was that after a couple of pro-forma questions about visiting Argentina at the beginning, the bulk of the interview was all about my opinion of doing business in Argentina.

How easy, on a scale from one to 10, did I think it was to do business in Argentina? Would it change my mind if we told you that Amnesty International says that Argentina has a better human rights record than the US? Or if we told you that Buenos Aires has only one-tenth the homicide rate of Rio de Janeiro? How attractive do I think Argentina is now, as a place to do business? What if we told you that it’s the eighth-biggest land mass in the world, just after India, and its economy has been growing fast since it defaulted in 2001? Now how attractive do I think Argentina is as a place to do business?

I fear the Argentine secretariat of tourism won’t be too happy with my answers: the country bumped along at a 3/10 no matter how many times they asked the question, and when they asked for the single best reason to do business in Argentina, I couldn’t think of one. But I am fascinated that the tourism ministry, of all people, has given Brand Democracy the mandate (and the money) to do this survey.

Why should that be the case? The best reason that I can come up with is that Argentina thinks it needs some a serious boost to its touristic infrastructure, and is looking for external investment on that front. It is after all a gorgeous country with great wine country and a beautiful and sophisticated capital city; it’s also the main port of exit for anybody going to Antarctica. So it should by rights get more tourist traffic than it does. Maybe this is all part of an attempt to get the big international tourism-industry companies to start investing much more heavily in Argentina.

Of course, there are other reasons why the tourism minister might award a large contract to a foreign media company. But those aren’t the kind of reasons which make doing business in Argentina any more attractive.


I have recently moved to Argentina and believe there a huge amount of potential here. Due to the well educated population, low labor costs, similar time zones to the US, and the easily integrated western culture, companies are looking to Argentina as a destination to set up call centers and other outsourcing businesses. These companies provide employment to large numbers and in the long term invest capital into the country. I don’t know why anyone would say that there is not future here.

Debating financial innovation

Felix Salmon
Aug 18, 2009 15:07 UTC

I’m featured on yesterday’s Planet Money podcast, along with Mike Konczal and Tyler Cowen. I think they give me a fair amount of time to make my points, even though they cut the conversation down from well over an hour to just 25 minutes or so, including a lot of their own background and exegesis. In any case, if you prefer your Felix in audio format, here you are!


“… you have absolutely zero understanding of finance.”

That’s what gives his opinion value… He is as qualified as most of the Fed and Treasury Department.

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Just because you’re rich doesn’t mean you’re smart

Felix Salmon
Aug 18, 2009 14:18 UTC

A tweet from Joe Weisenthal yesterday, on the subject of Annie Leibovitz, is I think revealing of a particularly American mindset: call it the Wealth Corollary of the Efficient Market Hypothesis. In a nutshell, it says that if you’ve made lots of money, you must be pretty smart.

I think there’s a pretty good case to be made that the EMH(WC) is responsible for a lot of the rules surrounding the limitations on who is and who is not allowed to invest in hedge funds, and also for many of the obsequious interviews with rich individuals frequently featured in the financial media.

“If she’s rich, smart and has access to good advisers,” said Joe, “it’s on her to take such a huge decision [borrowing $24 million from Art Capital Group] seriously.”

That’s fair, as far as it goes, but the only evidence that Joe had of Leibovitz being a smart person with access to good advisers was that she had lots of money. The problem is that it’s far too easy for people to simply assume, on the grounds of wealth alone, that therefore there must also be some degree of financial sophistication.

The annals of finance are full of people taking advantage of the financially-illiterate, and while it’s certainly possible to take advantage of the financially-illiterate poor (lotteries, numbers games, payday lending, overdraft fees, etc) it’s equally lucrative to take advantage of the financially-illiterate rich, both through outright fraud and through hidden and/or excessive money-management fees. Or, in the case of Art Capital Group, getting Leibovitz to take out a loan with punitive default provisions, in the full and certain knowledge that she would be forced to default.

The fallacy embedded in the EMH(WC) can be hard for financial journalists to grok, because we have such a high financial-sophistication-to-wealth ratio. (More thanks to a low denominator than to a high numerator, it must be said.) If a financial journalist became wealthy, there’s a good chance they would be qualified to look after their money reasonably well. But that doesn’t mean for a minute that the same is true of photographers, say, or baseball stars like Lenny Dykstra, or pop stars like Michael Jackson, or any number of other people who have struck it rich in the sports/media/entertainment business. Annie Leibovitz was ill-advised for many years, and would have been much better off taking simple off-the-peg advice from her client American Express. But they were smart enough not to go down that road:

Because of her credit issues, Leibovitz was forced to deal almost exclusively in cash. In 1987, American Express offered her a plum ad campaign. Ironically, Leibovitz’s application for a card had been denied many times.

The American Dream is fundamentally meritocratic: if you’re smart and work hard, you can be massively successful. But the reality is different: some people are massively successful, and some non-negligible proportion of those people is not smart at all, especially not when it comes to finances. Having lots of money, sometimes, just makes it that much easier not to ever worry or think about matters financial. And that, in turn, makes it much more likely that you’ll end up being taken advantage of.


I believe this was best expressed in Fiddler on the Roof: “When you’re really rich they think you know.”

If I read this correctly, I would argue that there’s a bit of a logical fallacy with regard to how you’re defining the corollary to the EMH.

In the terms you’ve laid out here, the EMH effectively says “If the market is efficient, smart doesn’t equal rich.” Your description of the corollary is essentially, “Rich does equal smart, if market is efficient.”

But that’s actually the converse of the original EMH statement in these terms, which is not logically equivalent. The only statement that would be logically equivalent to the original EMH statement in this form is the contra-positive, which would be “If smart equals rich, then market is not efficient.”

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On Felix

Felix Salmon
Aug 18, 2009 13:44 UTC

As someone who knows a fair amount about Felix the Cat, I can concur with Skip Gates that he is not and was not a caricature of African-Americans. I can also concur with Paul Krugman and James Fallows that it is by no means necessary that Felix be African-American for Niall Ferguson’s FT lede (“President Barack Obama reminds me of Felix the Cat. One of the best-loved cartoon characters of the 1920s, Felix was not only black. He was also very, very lucky”) to be utterly inappropriate and offensive.

Which leaves only one question: What did Ferguson elide, with an ellipsis, in the email from Gates? I can’t imagine that Gates let Ferguson off quite as easily as Ferguson suggests.


the comparison is “about race” whether or not the historical Felix is African-American, because the color term “black” ONLY REFERS TO OBAMA WHEN THAT TERM IS BEING USED IN THE METAPHORICAL LANGUAGE OF RACE.

Casper the Friendly Ghost is literally “white”; Niall Ferguson is not.

Now, if I say that a couple of the earlier commenters remind me of Casper the Disingenuous Ghost…..

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Monday links are mostly revealing

Felix Salmon
Aug 17, 2009 22:17 UTC

I had fun on Canadian TV this afternoon hitting back at John Carney on bonuses

Gillian Tett on why bank ‘living wills’ aren’t going to happen

Entomophagy is the future!

Elizabeth Warren’s co-blogger Adam Levitin explains why the CFPA is necessary (PDF)

James Kwak (ex-McKinsey) on management consultants and photocopying client presentations

EC’s new short-selling proposal – it’s basically what the exchanges want

Anatomy of a newspaper correction

NYT’s Harris: “I have not yet chased down the reason why” the NYT doesn’t share its statistics with the public

Why we all need a nap around 4pm

The Daily Show discovers how to tranche the anal chastity default swap

Brad DeLong is much better at Felix Salmon blogging than Felix Salmon is

Pity the NYT didn’t push the FT on whether anybody’s actually paying $4,138 a year for its China newsletter

The Muppets take Paris

Felix Salmon
Aug 17, 2009 19:54 UTC

Earlier this month, 34 of Barack Obama’s first 60 ambassadorial appointments were political appointees rather than career diplomats — an astonishingly high percentage for a man who said when he took office that his “general inclination is to have civil service wherever possible serve in these posts”. Today, that ratio has gone up: it’s now 38 of the first 65, which means that four of the last five ambassadorial appointments have been political: plums given out to major fund-raisers.

The new ambassador to Paris is Charles Rivkin, whose history in the entertainment industry has him being forced to defend “the Dogg-frog flap” to the NYT:

“It’s a natural segue,” he said, referring not just to the Dogg-frog flap but to his broader background in children’s television. From the brilliant Mr. Henson, Mr. Rivkin said, he learned powerful lessons about communicating, and his background in children’s entertainment “prepared me well to engage Europe’s young generation of first-time voters”.

I’m sure the French are suitably impressed. Or not.

Matthew Yglesias attempts a partial defense of this practice, before giving up:

It’s simply in the nature of things that Spain’s ambassador in Washington will be a more senior figure in Spanish policy circles than America’s ambassador in Spain is in American policy circles. Which is to say that whether or not we appoint career professionals, government-to-government contacts that need to be run through an embassy will almost certainly be run through embassies located in Washington, where most countries are represented by very senior officials…

At the same time, for American foreign service officers heavy reliance on political appointees is extremely demoralizing.

To be fair to Mr Rivkin, Paris is something of a special case, although I’m not entirely sure why. When Obama said that “it would be disingenuous for me to suggest that there are not going to be some excellent public servants but who haven’t come through the ranks of the civil service,” I, for one, thought to myself “OK, he’s going to do Paris and maybe a couple of others”. But thirty-eight of these appointments is far too many.

Besides, I’m not at all sure that Yglesias is right that when a foreign government wants to go through an embassy it will go through its own embassy in Washington rather than through the US embassy in its own country. That might be true some of the time, for some governments. But it’s not a reliable general rule which the State Department can count on. America’s ambassadors are important — and when they’re famous mostly for their connection with the Muppets, that devalues the seriousness with which the US views the rest of the world.


While there are some rather comical appointments, diplomacy just isn’t as big a deal as it used to be. Foreign ministers can call up (or fly to) Foggy Bottom/White House when they need to, instead of calling the ambassador.

Ambassadors liaise with the establishment of the country – something that a very rich political appointee can do much easier than an ill paid career FSO. Thomas Schieffer was ambassador to Australia and then Japan and won raves for his handling of both postings. He’s running in the Dem primary for Governor of Texas, was part of W’s Rangers investor group (and President of the Rangers), and ran a number of firms after a decent legal career. An Ambassador of that level can entertain, open doors, and make connections far better than an FSO.

FSOs are generally alienated from America and especially its politics (not as badly as their children, but substantially). It’s just the nature of the work – living abroad for years makes it far harder to keep up with how American life is lived and the key politics. They are thus not the right people to be the most senior representatives – they will struggle to understand and convey the needs and desires of the American people and of the President. They’re also of questionable loyalty, as their ultimate prosperity relies so heavily on the contacts that they have made in their years abroad. US ambassadors to Saudi Arabia are the most notorious for post career rewards, but it applies broadly to all career FSOs. Again its the nature of their careers rather than a personal aspersion and is something that simply needs to be managed – FSO’s interests simply are not aligned with the job of Ambassador to many countries.

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Where the NYT beats the WSJ

Felix Salmon
Aug 17, 2009 19:08 UTC

Around the beginning of 2009, the two daily newspapers I subscribe to (the NYT and the WSJ) started being left on the sidewalk outside my building, rather than delivered indoors. This annoyed me, since anybody could (and frequently did) simply walk away with the paper I’d paid for. After altogether far too much work on my part, I eventually determined that the papers had switched newspaper delivery companies, I provided them with keys to the building, and the problem was more or less solved — until a month or two ago, when I noticed that although the NYT was still being delivered indoors, the WSJ was back to its old location on the sidewalk.

This time, I didn’t care. I desultorily tried to report the problem on the services.wsj.com website, but got an error message saying that for continuing difficulties of longer than a few days I needed to phone an 800 number during certain office hours. And that was as far as I got: I never picked up the phone, and the WSJ is still being delivered to the sidewalk every day. And I’ve noticed two interesting things. The first is that when I pad out in my blogger pyjamas to pick up my morning paper, I don’t particularly care if the WSJ is there or not. And the second is that the WSJ is always there.

I’m not paying much money for my WSJ subscription: my last payment, of $149, was in April 2008, and the next payment isn’t due until March 2010. Maybe that’s why I don’t value it very much. But then again, no one else seems to value it much either, seeing as how (in contrast to the NYT) it’s never stolen from outside my front door.

All of which is to say that insofar as there’s a big (if quiet) national war being fought between the NYT and the WSJ, I fully expect the NYT to win it. It’s better designed, easier to comprehend, broader in scope, and in general much more of a pleasure to read than the WSJ.

I think the WSJ is competing against former self: it’s trying to become better than it was, or at least a little bit more accessible to a non-managerial audience. The jury’s still out on whether or not it’s succeeding on that front. But it’s nowhere near becoming genuine competition for the NYT.


“After reading how the WSJ changed its newsroom culture from prizing lengthy PAGE ONE investigative reporting in favor of breaking news,”

This is the nub of it. The WSJ used to be worth reading. Now it isn’t. Its remaining readership are a combo of leftovers who haven’t noticed the decline in journalistic standards, and right wing nuts who want their viewpoint confirmed. The businessmen and financiers who formerly considered the WSJ essential are switching to the Financial Times, or the Economist, or Bloomberg, or some combination of them.

The WSJ is now retaining subscriptions by slashing prices — step one in losing all paid readership. It’s dead and it’s going to die a lot faster than Murdoch thinks.

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