Felix Salmon

Schapiro wants to ban flash trading. We knew that already, but now it’s formal — NYT

Julia Ioffe gets Martin Wolf right, I think — TNR

Love this article on race relations between liberal urban 30-somethings. Hits close to home for me — GQ

I like the new Tube map sans Thames! Can someone get me one? I think it’s going to become a collector’s item — BBC

Money market funds lose $55 billion in 2 days as US insurance ends — Reuters

Interactive map of Manhattan lets you see how it looked before settlement vs how it looks now — NatGeo

You think US mutual fund fees are bad? Check out the UK ones! — Time

The Lafite bubble — Decanter

“The bear case is always more compelling and more articulate.” — Nusbaum

Who is getting blessed, and who is gonna bless it? America. And God! — Atlantic

The complete Taleb interview — Globe & Mail

Ben Stein’s paymasters Adaptive Marketing, the owners of freescore.com, aren’t just predatory bait-and-switch merchants. They’re also litigious bullies.

An anonymous blogger, going by the name “flâneur de fraude”, added a lot of corporate information to my Ben Stein post, mostly about Adaptive Marketing’s owner, Vertrue Inc. It was interesting stuff, and I linked to it, and that seemed to be the end of that. Certainly no one at Adaptive or Vertrue ever tried to get in touch with me or with Flâneur.

Then, out of the blue, Adaptive filed a lawsuit in Connecticut, of all places, saying that the allegation that they were running a predatory bait-and-switch campaign was actionable on the the grounds of “defamation, trade libel, and tortious interference with contractual relations and business expectancies”. I’ve uploaded a copy of the suit here. There’s lots of stuff around it, but the complaint itself is only three pages long, and doesn’t even allege that anything Flâneur wrote was false.

The really weird thing about the lawsuit, however, was the defendant: not Reuters, not Flâneur, but Yahoo. The suit wasn’t a libel suit at all, you see: it was just a way of trying to get Flâneur’s real name out of Yahoo. (She uses an email address at yahoo.com.)

When Yahoo didn’t turn up to the court hearing 2,576 miles away from its headquarters, the Connecticut Superior Court found in favor of Adaptive, and said that Yahoo would have to turn up in court on September 21, presumptively to reveal Flâneur’s identity.

At that point, Flâneur sprung into action, and got the Public Citizen Litigation Group involved. They have now filed a monster 43-page brief with the Connecticut court, and after reading it one has difficulty imagining that any judge will compel Yahoo to unmask Flâneur. Public Citizen’s press release is here, and the headline sums it up: the blogger who criticized freescore.com, it says, has the right to remain anonymous.

Adaptive has never complained to Flâneur, to me, or to anybody else, as far as I can tell, about any of our characterizations of their business. They never asked for any of our blog entries to be updated or edited, and they were conspicuous by their absence during the brouhaha over Ben Stein. If they had any problem with the blog entries, that was the time to say so — not now, when the whole episode is already half-forgotten.

Instead, knowing that Flâneur values her anonymity, they decided to try to unmask her in Connecticut court. I hope and trust that now, with the intervention of Public Citizen, they will fail miserably.

Scott Reyburn has a very misleading lede to his Hirst story:

Sept. 17 (Bloomberg) — A year after the record Damien Hirst sale, works by the artist are again being valued at levels seen at the peak of the art market boom.

His sole datapoint supporting this assertion? That a Hirst butterfly painting is coming up for auction with an estimate of £450,000 to £650,000. A substantially identical painting sold at the top of the market — the “Beautiful Inside My Head Forever” sale — for £1.6 million. Which means, I think, that Hirst values are actually down about 66% from the peak.

The ArtTactic Average Price Index for Hirst butterfly paintings (yes, there really is such a thing) is down a mere 41% since September 2008, which means that the estimate on the painting coming up for sale is if anything lower — not higher — than you might expect. So where on earth does Reyburn get his idea that Hirsts are back to their peak valuations? Just this: that the £1.6 million Hirst “had a low valuation of £500,000″ when it was auctioned.

No. Auction estimates aren’t valuations, they’re just tools the auction house uses to try to maximize its revenues. The valuations are whatever the paintings sell for. And it’s pretty obvious that this year’s butterfly is going to sell for substantially less than £1.6 million. Which is the only comparison that matters.

Many thanks to Andrew Leonard and Alok Jha, who have discovered the Philips Econic. Here’s the relevant bit of their flyer (warning: 9.9MB PDF):

Yes, that really does say “dimmable”. And Jha says that this is the “new bulb that will hopefully make the doubters shut up”.

When I moved into my new apartment in 2005, we ended up needing a huge number of 40W reflectors, all on dimmers, which between them consume an insane amount of electricity. What’s more, they need very frequent replacing, which is non-trivial. If I can just replace them with dimmable LEDs which last for 25 years, I will be a very happy person indeed.

Teri Buhl found this chart at WLMlab.com. It shows the percentage of Wells Fargo’s $38 billion in construction and development loans which are in default, compared to nationwide figures:

“Alarming, Alarming, Alarming” is right — especially the last line, which shows that the loans more than three months in arrears are running at more than nine times the national rate. And that’s before the spike in delinquencies which seems certain to hit:

The bank specialized in underwriting short-term loans up to five years during the credit boom of 2005-2007. The standard terms for such loans included interest-only payments on a floating rate with a huge balloon payment in the final year of the loan. If these loans cannot be refinanced, more waves of defaults are inevitable.

“The bank”, here, is Wachovia, not Wells, but it’s all Wells Fargo’s problem now, along with untold billions in contingent CDS liabilities which no one seems to be able to estimate.

I fear that Wells Fargo is representative of the banking system as a whole: since MLEC and TARP and PPIP all failed in their original intent of ridding the system of its toxic loans, those loans remain stinking up balance sheets across the nation. Wells is bad — but then again, so might everybody else be, too.

Nils Pratley and Neil Unmack both have good columns on the latest bit of regulatory arbitrage by Barclays. Essentially, the UK bank is taking $12.3 billion of toxic assets and replacing them with a $12.6 billion loan to some kind of special-purpose entity which exists to own those assets. By doing so, Barclays gives all the upside on that toxic debt to the new vehicle, called Protium; in return, it gets lower balance-sheet volatility, since the loan to Protium doesn’t need to be marked to market every day. The total amount of capital that Barclays has at risk will go up; meanwhile, the degree to which Barclays’ shareholders will have any degree of transparency will go sharply down.

The fact that the UK regulators are letting Barclays get away with this is very depressing — and yet another sign that in the world of high finance, we’ve learned nothing, and nothing has changed. For all the grand rhetoric which will be ladled on in Pittsburgh this weekend, the base-case scenario now is that nothing substantive is going to happen at all when it comes to regulatory reform.

The existence of arbitrage, and arbitrageurs, is a necessary precondition for having a reasonably efficient market. Arbitrage allows the law of one price to become roughly true, and in turn belief in the law of one price is the central faith of any arbitrageur, who will pick up on price discrepancies safe in the knowledge that sooner rather than later the law will turn those trades into profits.

The problem is that the law of one price is not some kind of physical law with replicable effects, and sometimes it disappears entirely. So this kind of thing is actually true of all arbitrage:

DLC arbitrage is characterized by substantial idiosyncratic return volatility and a high incidence of large negative returns.

DLC (dual-listed company) arbitrage — where you look at the share price of the same company in different countries, and bet that they’ll converge — is one of the purest forms of arbitrage there is. But it’s not surprise to learn that it comes with “a high incidence of large negative returns”: any arbitrage strategy is ultimately a game of picking up nickels in front of a steamroller. Unless you have unlimited liquidity and never need to worry about margin calls, the market is likely to move against you just until you give up, at which time it will snap back to where you would have made a huge profit. Just ask the guys at LTCM, or the stat-arb hedgies who blew up in 2007.

This is why only the biggest and most liquid companies tend to try their hands at arbitrage: it’s very much a don’t-try-this-at-home strategy. Even if you’re convinced that the trade is risk-free, it really isn’t.

Twitter seems to have quadrupled in value over the course of just a few months: after raising $35 million at a $250 million valuation earlier this year, it’s now raising another $50 million at a — wait for it — $1 billion valuation. At these kind of levels, one assumes, there must be some idea of how to make money in the future. I also hope the founders are beginning to cash out at this point: or does Twitter really have a burn rate which would make Michael Wolff proud?

For those of you who prefer your overdraft journalism in video form, here’s a short documentary by Karney Hatch about overdraft fees. It’s very good, partly because it actually tells you what to do if you’ve been dinged by these things and the bank won’t refund your money. Small-claims court is your friend! And works!

Update: This is just the trailer, it turns out.  The short version ran on Current TV; the long version is available on Amazon.

The Income Map — Creative Class

I missed this story from last month about the secondary market in delinquent tax bills. Sobering and a bit scary — NYT

Jon Weil nails it on the SEC — Bloomberg

I’m most flattered that The Big Money considered me interesting enough to warrant a 1,800-word profile by Marion Maneker. There’s a few bits of it which are interesting even to me:

Even with his Stein trophy, there’s good reason to take Salmon at his word and assume he has little clout. He doesn’t have the massive traffic of the biggest business bloggers. He estimates he gets a few hundred thousand page views a month, hardly what the big dogs in the space like zerohedge or Barry Ritholtz are pulling. What Salmon does seem to have is a knack for getting attention.

There’s an implicit distinction here between clout, traffic, and attention, although Maneker doesn’t really explore it. I think that clout, or influence, is vaguely related to traffic but not in very strong way: if the NYT didn’t listen to me on the subject of Ben Stein, it certainly wouldn’t listen to zerohedge. On the other hand, someone like Brad Setser, when he had a blog, was much more influential than his traffic figures might suggest. It’s not how many people that are reading you which matters in terms of influence — it’s who is reading you.

Maneker’s not clear on exactly whose attention I have the knack of getting; I’m not entirely clear on that myself. But I think I’m relatively weak on appealing to individual investors — I almost never blog investment ideas, and when I do, you’d generally be much better off doing the exact opposite. Saying things like “buying an Apple computer is a much better investment than buying Apple stock” is not the kind of thing which tends to endear me to CNBC-watchers.

Bloggers, on the other hand, seem to read me quite a lot: thanks to their linkjuice, I’m #2 in the Mediate rankings, compared to just #18 in the Seeking Alpha rankings. Neither means anything on its own, but the comparison is interesting. What bloggers and editors want is not usually what investors are looking for.

The most interesting part of the article for me is that Maneker seems to harbor a weird prejudice against blogs, despite being a first-rate blogger himself. He says that “no one” would cite Nouriel Roubini’s blog “as the source of his fame or influence”, which is simply false: many people, myself included, would do just that. As soon as he quotes me saying that the blogosphere is “the best graduate seminar ever invented”, Maneker pooh-poohs the notion. And then there’s this:

If you ask Felix, it’s not just coverage that blogs provide. Ironically, they give you depth.

Ironically? What’s ironic about getting depth from a medium which Maneker himself considers “wonkish journalism”? The irony here is surely that Maneker, a blogger who knows his way around the internet, would write an article which seems to work from the unexamined assumption that blogs are superficial, silly things. (And would also write an article which quotes me extensively but links to me only sparingly.) I’m a blogger who can happily write long and super-wonky blog entries on vulture funds or synthetic CDOs, and according to Marion, I’m “the blogosphere’s signal personality”. So there’s clearly nothing ironic about getting deep, wonky information from a blog.

That said, however, the profile is more than fair — it’s downright fulsome. And when no less an authority than Jack Shafer says it’s terrific, I can’t help but be very happy indeed with the way it turned out.

Eliot Spitzer is surely right about this:

Our market has been–and will continue to be–undermined by regulators who are intellectually or ideologically unwilling to confront powerful market players.

I can’t agree with him, however, about his proposed solution to the problem:

Instead of adding bureaucracy, we should be using the government to help invigorate shareholders to police companies. They should be empowered to control executive compensation, eliminating all the conflicts that now encumber those decisions.

Shareholders, like all stakeholders, will make a better determination about the use of their capital than bureaucrats who don’t ever suffer the downside of a bad investment. We need to facilitate opportunities for shareholders to actually participate in key decisions, and to deny those whose interests are not aligned from hijacking them. Strangely, we’ve heard a lot about executives and bureaucrats in this moment of reform. But shareholders, a force integral to the integrity and vitality of markets, have largely been left out of the discussion. We need them now more than ever.

Shareholders simply don’t have the time, information, or ability to do this: they’re owners, not managers. And they certainly have no way to address systemic, as opposed to company-specific, risks. Federal and indeed international regulations and regulators are absolutely necessary; the only question is whether they will be sufficient.

On Friday, I posted a chart which I thought showed donations to Harvard University rising substantially over the past couple of years, to over $1.6 billion a year. Boy was I wrong. As the Crimson reports, Harvard received $602 million in gifts this past fiscal year—an 8 percent year-on-year decline.

My commenters picked up on the mistake very quickly, but unfortunately I missed those comments: I rushed to meet Bob Millman for wine that afternoon, and then disappeared off to a wedding for most of the weekend, and by the time I got back the comments on the Harvard post were quite far down the list. Which is no excuse: I really should have been on top of this.

So many apologies for not updating the post in a timely manner, and for not paying enough attention to my astute and perspicacious commenters. You guys are the best, and I definitely screwed this one up.

The LBO of Hilton hotels made no sense even at the time: I described it as crazy, adding that the lenders (including Bear Stearns, bless ‘em) were “taking equity-like risk” for pretty modest returns. So it comes as no surprise to learn that Blackstone, the buyer, has not only written down its investment by half, but is also looking to restructure Hilton’s debt.

The interesting thing here is the way that Blackstone is planning to do this: it essentially wants to convert Hilton’s outstanding loans into bonds. Which might come as some relief to the US taxpayer: we own a whopping $4 billion of Hilton debt inherited as part of the Bear Stearns bailout. If the bond markets are frothy enough to show appetite for Hilton debt right now, I’d happily sell it to them.

Update: See also the way that Warner Music Group turned $1.1 billion of loans into bonds. Although, as Vipal Monga notes, a lot of the time “refinancing loans doesn’t eliminate the debt, it just replaces lower-priced loans with more expensive bonds, increasing the interest burden on the companies”.

Many thanks to David Leonhardt for the shout-out in his column today. Referencing an old blog entry of mine, he returns to the question of sticky wages and concludes that, contra the likes of Chris Swann, there really is something to it: “the sticky-wage theory,” he says, “seems to have survived the Great Recession”, with average weekly pay rising from $612 to $618 in nominal terms over the past few months, and even more in real terms.

I’d caution, however, that it’s a bit too early to be quite as constructive as Leonhardt is when it comes to wages. No one ever said that the stickiness in wages had disappeared overnight: these things happen slowly. Here’s Swann in June:

With so many workers waiting in the wings, wages nationwide may start to fall over the next couple of years.

The United States would be following the path of Japan in the 1990s — the most recent example of absolute pay cuts in a modern economy.

And here he is following up last month:

With the U.S. economy clawing its way out of recession, surely the danger has passed? Not quite. Prices are the ultimate economic straggler.

In Japan, for example, the country only started to experience falling prices roughly three years after the start of the recession in 1991. Wages didn’t start to fall until 1997. The United States could still follow Japan’s lead.

When one looks at the large number of companies which have implemented pay cuts, it’s too much of a stretch to extrapolate that to immediate nationwide pay declines. Instead, it’s more that a taboo is being broken. What’s more, there’s a continuing and significant risk of medium-term deflation, certainly so long as unemployment remains at its current elevated level.

Here’s Leonhardt:

“There’s been a huge shift in power in recent years from labor to capital,” as the astute financial blogger Felix Salmon has written. Labor unions have shrunk, and companies can move operations to lower-wage countries. “Now that workers have lost their negotiating leverage,” Mr. Salmon wrote after FedEx made its announcement, “we might start seeing more across-the-board pay cuts.” If the economy were to weaken again, we still might.

But I don’t think that the only way we get there from here is via a double-dip recession. Any jobless recovery runs the risk of painful deflation. So unless and until the unemployment rate stops going up and starts coming down, the threat to wages remains.

Update: Leonhardt responds.