Felix Salmon

The doomed Grayson/Clay/Miller CFPA amendment

Felix Salmon
Oct 20, 2009 16:26 UTC

Mike Konczal has discovered an interesting amendment to the Consumer Financial Protection Agency bill, which would force the new agency to do an annual “financial autopsy” on a year’s worth of bankruptcies and foreclosures, to see whether any financial products turn out to have been particularly to blame. If there are, the CFPA would then be authorized to ban such products going forwards.

It’s a great idea, so long as the team of forensic accountants and financial experts is genuinely independent and is well schooled in the use and misuse of statistical data. But as Mike points out, the existence of such a team would make the relationship between the CFPA and financial institutions even more adversarial than it already looks set to be. And as TED points out, that’s both necessary and impossible.

The current administration’s plans for regulatory reform started out weak, in an attempt to make their passage politically palatable. Since then, they’ve only got weaker. Which means that the Grayson/Clay/Miller amendment simply ain’t gonna happen, essential as it might be to preclude evil and predatory new products from being introduced in a manner designed to circumvent the CFPA.


The CFPA would have authority to determine which products consumers can choose from. In short, the bill would create a regulatory overlay of the entire business community, extending far beyond traditional financial services. We need to take control of consumer choice. How does CFPA affect you? http://www.friendsoftheuschamber.com/iss ues/index.cfm?ID=469

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Personal jet usage datapoint of the day, Ken Lewis edition

Felix Salmon
Oct 20, 2009 14:50 UTC

2008 was not exactly a pleasant, relaxing year for Ken Lewis. You can see how he might have spent a large part of the year on the BofA corporate jet, but it’s hard to see how he would have had much time to do so for personal reasons.

Yet after spending $111,000 on personal use of corporate aircraft in 2006, and $128,000 in 2007, he managed to spend an impressive $220,000 in 2008. (See page 29 of this proxy statement.) It’s all part of a more general spike in personal corporate-jet use last year at companies which have received bailout funds. Here’s the chart:


I suppose that some of the increase might be explained by a rise in jet-fuel prices. But a rise of 123%? That seems a bit much. When did they find the time?


October 20th, 2009 7:57 pm GMT Ken: Thank you for the great observational comment!!!

http://blogs.reuters.com/felix-salmon/20 09/10/20/personal-jet-usage-datapoint-of -the-day-ken-lewis-edition/#comment-8101

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The secret Paulson-Goldman meeting

Felix Salmon
Oct 20, 2009 13:58 UTC

Andrew Ross Sorkin’s new book is out today, and breaks some pretty stunning news, dating from the end of June, 2008. At this point, we’re still months away from the now-famous but then-secret waiver, issued in mid-September, which allowed Hank Paulson to talk to Goldman Sachs; he’d promised not to do that when he moved from Goldman to Treasury.

But it turns out that Paulson just happened to be in Moscow at the same time that Goldman’s board of directors was having dinner there with Mikhail Gorbachev. (You know, as one does.) Take it away, Andrew:

When Paulson learned that Goldman’s board would be in Moscow at the same time as him, he had [Treasury chief of staff] Jim Wilkinson organize a meeting with them. Nothing formal, purely social — for old times’ sake.

For fuck’s sake! Wilkinson thought. He and Treasury had had enough trouble trying to fend off all the Goldman Sachs conspiracy theories constantly being bandied about in Washington and on Wall Street. A private meeting with its board? In Moscow?

For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink’s BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.

Anxious about the prospect of such a meeting, Wilkinson called to get approval from Treasury’s general counsel. Bob Hoyt, who wasn’t enamored of the “optics” of such a meeting, said that as long as it remained a “social event,” it wouldn’t run afoul of the ethics guidelines.

Still, Wilkinson had told [Goldman chief of staff John] Rogers, “Let’s keep this quiet,” as the two coordinated the details. They agreed that Goldman’s directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the “social event” on his official calendar…

“Come on in,” a buoyant Paulson said as he greeted everyone, shaking hands and giving bear hugs to some.

For the next hour, Paulson regaled his old friends with stories about his time in Treasury and his prognostications about the economy. They questioned him about the possibility of another bank blowing up, like Lehman, and he talked about the need for the government to have the power to wind down troubled firms, offering a preview of his upcoming speech.

How on earth did Paulson think this was OK? Goldman Sachs was a hugely powerful for-profit investment bank, and there he is, giving private chapter and verse on his opinions about the US and global economy, talking about internal Treasury matters, and previewing an upcoming (and surely market-moving) speech. All in secret, at a “social event” which somehow got kept off his official calendar. Oh, yes, and one other thing — the whole shebang took place in the Moscow Marriott Grand Hotel, in the context of Goldman directors joking about how all the Moscow hotels were surely bugged.

This is sleazy in the extreme, and will only serve to heighten suspicions that Paulson’s Treasury was rigging the game in favor of Goldman all along. (It’s also a bit peculiar, to say the least, that the only two times Paulson met with private-sector boards he was out of the country, and arguably outside US jurisdiction.)

Paulson didn’t have this meeting out of fear or necessity: in fact, he told the directors that although there might be tough times ahead, “I think we may come out of this by year’s end.” (Blankfein was skeptical.) There was nothing in the way of extenuating circumstances which could possibly justify the secret rendezvous. This is definitely a situation where Wilkinson should have pushed back and said no way — but it’s hard to say no to Hank Paulson. Whose reputation has now taken yet another serious lurch downwards.


Toutes les marque Tee Shirt Armanisont originales et directement de l usine. Toutes les Pas cher tee shirts sont 30-70% de remise et livraison gratuite. vous souhaite une bonne journée:)

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Felix Salmon
Oct 20, 2009 02:31 UTC

Hank Paulson’s call logs. This is the kind of insanity that results when you refuse to use email. — Sorkin

Market Indicators I’d Like to Fluctuate — Colbert

Gasparino’s new book quotes Cayne as saying he gets the best pot in NYC — Dealbreaker

I don’t agree with judging the severity of news errors by whether they “could have moved financial markets” — WRG

Harvard paid $500 million to exit backfired swaps, plus another $425 million over 30-40 years. All Larry’s fault. — Bloomberg

The New York Times Says It Will Cut 100 Newsroom Jobs — NYT

Donald Judd, or Cheap Furniture? — Reverent

Bercovici: Marcus Brauchli “should resign.” — Daily Finance, TNR

Conde Nast would never tell Ruth Reichl Gourmet’s renewal rate?! Wtf? — NYT

“Bikes are the American Indians to the car’s Christopher Columbus” — Slate

David Cay Johnston wonks out on reinventing the estate tax — Tax Analysts

More confusion from Parker on ’05 Bordeaux — Dr Vino

Holt on Nossiter on wine. Makes me want to buy the book! — NYT

Even more things Levitt & Dubner are wrong about — Real Climate

Charles Kenny: “Television, it turns out, is the kudzu of consumer durables.” — FP

YouTube comment or e.e. cummings? — McSweeney’s

Kudos to The Atlantic’s James Bennet, A-List Editor of the Year — AdAge

Wise Quiggin! How Superfreakeconomics killed contrarianism — CT

The story of the 20 year old with the $183,000 FHA Loan. Just 3.5% down and immediately underwater — TBI

Ezra Klein calls Superfreakonomics a “shoddy statistical work that could literally kill somebody” — WaPo

When the dictionary is wrong, and Bill Walsh is right — The Slot

Eye-opening article about the puzzle of lower healthcare costs in Hawaii — NYT

Scott Raab’s article on John Demjanjuk’s Kafka nightmare — Esquire

The NYT’s caption on a photo of Nova Scotia mentions “lusty pirates.” — NYT

Matt Goldstein writes about Galleon’s edge and touches on the outright shameful Moody’s leak — Reuters

More complications to the “fair use” case over the Obama “HOPE” poster. Not smart, Shepard. — NYT

Nomura’s dress code bans “gay colour nail polish,” “suits of lustrous material.” — Times

The Perfect Brief – Mick Jagger’s 1969 letter to Andy Warhol, assigning the cover design of a hits album — Swiss Miss

Sneaky Microsoft plug-in puts Firefox users at risk — Computerworld


Why don’t you post a link to Levitt’s and Dubner’s responses to their critics? You’ve posted links to 3 different critiques and reposted your own lengthy criticism of their previous book but can’t bother to post their rebuttals, which include a fairly damning email thread from the guy at Climate Progress.

And I’ll just say that it’s amusing to me that it took some PC heresy to get leftists like Klein to notice that, Hey!, this popular science book isn’t real rigorous!

Funny how that never came up when they were asserting that abortion cut crime…better late than never, I suppose.

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Those rising falling interchange fees

Felix Salmon
Oct 19, 2009 19:38 UTC

Something smells very fishy to me about this chart in today’s WSJ:


How can fees be going down as a percentage of transactions if they’ve been rising sharply in nominal terms? The total amount of goods bought on plastic isn’t rising that fast. The WSJ doesn’t help answer the question, preferring instead a simple he-said she-said:

Debit cards carry lower interchange fees than credit cards, but fees on those cards are rising as debit cards become more popular.

Merchants in the U.S. paid an average interchange rate of 1.82% per transaction last year, down from 1.93% in 2005, according to the Nilson Report, bolstering the industry’s argument that fees are falling.

Huh? In once sentence we’re told that fees are rising, while in the next we’re told that fees are falling. Not helpful, WSJ.

The answer, I think, is that the second chart is rather misleading. Consider a world where:

  • Credit-card fees are higher than debit-card fees, and are rising.
  • Debit card fees are also rising.
  • Debit card usage is rising, while some things which used to be bought on credit cards are now bought on debit cards.

I suspect this is exactly what we’re seeing in the chart above. The “falling fees” chart is really just a chart showing that people are moving from credit cards to debit cards. (And remember that debit cards don’t come with cash-back rebates, or loyalty miles, or anything like the amount of purchaser protection that credit cards offer, all of which things are paid for by interchange fees.) Fees are rising across the board, but the secular move into the world of debit cards, which were all but nonexistent a few years ago, allows the industry to claim that fees overall are falling.

I’m waiting to hear from David Robertson of Nilson Report, and I hope he’ll be able to give me some more figures on all this. But my gut feeling is that the second of the WSJ’s charts obscures much more than it reveals.



Nice catch on this. I believe the anomaly has to do with the data source, the Nilson Report, began combining Visa’s PIN-debit interlink network figures in the “average rate” chart in the 2006 figures. Interlink PIN debit interchange rates average in the 1.00 – 1.10%% range, signature debit 1.40-1.50%, credit 2.00 – 2.10%. Visa’s Interlink is the largest PIN network with about 40% transaction share.

MasterCard has an online PIN network as well, Maestro, though its U.S. volumes are negligible as it functions as a back-up network to regional PIN networks in the U.S.

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Spinning off Banamex

Felix Salmon
Oct 19, 2009 18:43 UTC

Well done to the FT’s Adam Thomson for getting the word “candescent” onto the front page of today’s FT — it’s not a word we see nearly often enough. He uses the word in the context of the debate over Banamex, which, if various lawsuits go against Citigroup, could force the US bank to divest itself of its highly-profitable Mexican subsidiary.

Thomson rightly calls Banamex “highly prized” — and it’s very much considered core to Citi’s operations, as opposed to a non-core holding which might get sold off. But in principle there’s no reason why Citi shouldn’t sell Banamex.

For one thing, Banamex is run as an almost completely independent operation from the rest of Citigroup: it’s the only part of the Citi empire to operate under a non-Citi name, and its managers have successfully resisted any attempts at integration ever since it was bought for $12.5 billion in 2001.

And for another thing, Banamex is one of only two non-US countries where Citi has a substantial retail presence. (The other is Poland, where Citi bought Handlowy in 2000.) Elsewhere, Citi has been happy to sell off its retail banks: it sold its German operations, for instance, to Credit Mutuel last year for $7.7 billion.

Selling off Banamex would help Citi concentrate on its core competency when it comes to retail banking, which is the high-end Citigold product. Yes, Banamex has lots of strengths elsewhere in the retail world, but that doesn’t scale globally, and if Citi were simply to spin off Banamex, making it a genuine Mexican company again, that would both raise much-needed cash and bring the bank’s Mexican operations in line with its operations elsewhere.

Owning Banamex made a certain amount of sense when Citi was in world-domination mode, but the opportunity cost of holding onto it is now enormous, given the $20 billion or so it would fetch in an IPO. It might be time for Citi to just let it go, even if the Mexican courts don’t force it to do so.


our anti-drug laws are responsible for 13,000 dead mexicans in 3 years, and for corruption and violence that are now world-wide. the ‘cure’ has been far worse than the ‘disease’.

Honest bank of the day: Banco Popular

Felix Salmon
Oct 19, 2009 15:29 UTC

Banco Popular’s earnings this morning were pretty bad, and its press release reflects that. The headline is simply “Popular, Inc. Reports Financial Results for the Quarter and Nine Months Ended September 30, 2009″ — no crowing there. And the opening paragraph is sober indeed:

San Juan, Puerto Rico, Monday, October 19, 2009 – Popular, Inc. (“the Corporation”) (NASDAQ: BPOP) reported a net loss of $125.0 million for the quarter ended September 30, 2009, compared with a net loss of $183.2 million for the quarter ended June 30, 2009, and a net loss of $668.5 million for the quarter ended September 30, 2008. For the nine months ended September 30, 2009, the Corporation’s net loss totaled $360.7 million, compared to a net loss of $541.0 million for the same period in 2008.

This kind of straight-up honesty stands in stark contrast to, say, Citigroup, which desperately tries to spin a profit out of its loss-making quarter. Popular could have done the same thing: thanks to a series of preffered-share exchanges, it managed to rack up a hefty $596 million in net income applicable to common stock. As a result, this loss-making quarter for Banco Popular actually ended up with positive earnings per share of $1.40.

But Popular doesn’t dwell on that figure at all: its earnings report is straight-up and just-the-facts. Good for them; it would be great if bigger banks started following suit.

(HT: Zach Carter)


Compare Nokia’s Q3 release. 10 pages of crufty pro forma bollocks and happy talk, with the IFRS numbers (aka “the truth”) buried on page 15.

Crowdsource the CFPA!

Felix Salmon
Oct 19, 2009 14:13 UTC

The credit unions and the banks have won: thanks to something known as the Miller-Moore amendment, the Consumer Financial Protection Agency will now be barred from overseeing all but a handful of credit unions and any bank with less than $10 billion in assets. That’s 98% of all the banks in the country. Even so, however, it’s not exactly suprising to see the headline in The Hill this morning: “Tweaks to consumer agency fail to calm banks, credit unions”. Those lobbyists, they’re never satisfied. (If they were, they’d be out of a job.)

I’m actually a little unclear on what the Miller-Moore amendment does. Here’s how the NYT explains it:

Under the Miller-Moore amendment, the new agency would have the authority to write rules for all banks and other lenders, including lenders that have never faced significant regulation. But the banks with assets of less than $10 billion and credit unions smaller than $1.5 billion would not face regular exams by the agency.

Instead, the consumer regulations would continue to be enforced in most cases by the agencies that monitor the financial condition of the banks. Mr. Frank said that under the amendment, the new agency would still have the authority to investigate complaints raised at any bank.

So the CFPA can write rules for small banks, and can investigate complaints at small banks, but can’t examine small banks, or enforce its own regulations at small banks? It all seems like a horrible mess to me.

One thing is clear, though: in the wake of the amendment being accepted, consumer finance is crying out for some kind of centralized, crowdsourced database of bank fees and practices. If the CFPA is barred from examining banks itself, then we should just get the banks’ customers to do its job for it. Then violations of CFPA rules could be automatically flagged and forwarded on to the agency as soon as they arise, even without formal examinations.


The CFPA would have authority to determine which products consumers can choose from. In short, the bill would create a regulatory overlay of the entire business community, extending far beyond traditional financial services. We need to take control of consumer choice. How does CFPA affect you? http://www.friendsoftheuschamber.com/iss ues/index.cfm?ID=469

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Levitt and Dubner on the northern spotted owl

Felix Salmon
Oct 18, 2009 02:54 UTC

In light of all the controversy over the war against environmental science being waged by Superfreakonomics, I’ll add only that this comes as no surprise to me, since something similar (albeit on a much smaller scale) can be found in the first book. I actually did some reporting on this when Freakonomics first came out, but since it was buried in a 4,400-word review on a little-read personal website, it’s hardly surprising that nobody saw it. So I’ll resuscitate it here. The upshot is that the Freakonomists have a history of misrepresenting environmental science:

Levitt and Dubner like to get holier-than-thou when others make mistakes. At one point, they eviscerate a homeless advocate named Mitch Snyder, for saying that there were 3 million homeless Americans:

When Snyder was pressed on his figure of 3 million homeless, he admitted that it was a fabrication… It may be sad but not surprising to learn that experts like Snyder can be self-interested to the point of deceit. But they cannot deceive on their own. Journalists need experts as much badly as experts need journalists… Working together, journalists and experts are the architects of much conventional wisdom.

So what happens when Dubner and Levitt – a classic pairing of a journalist and an expert – get together? It may be sad but not surprising to learn that even they can come up with decidedly dodgy numbers. Here’s one:

Economists have a curious habit of affixing numbers to complicated transactions. Consider the effort to save the northern spotted owl from extinction. One economic study found that in order to protect roughly five thousand owls, the opportunity costs – that is, the income surrendered by the logging industry and others – would be $46 billion, or just over $9 million per owl.

When alarmist figures in the billions start getting quoted, I immediately start getting suspicious. So I went to the footnotes, which cited a paper by Jason Shogren from which, I believe, this is extracted. Here’s what Shogren actually writes:

Opportunity costs have been estimated for a few high-profile, regional ESA conflicts such as the northern spotted owl. One study estimated that an owl recovery plan that increased the survival odds to 91 percent for a population of about 1,600 to 2,400 owl pairs would decrease economic welfare by $33 billion (1990 dollars), with a disproportionate share of the losses borne by the regional producers of intermediate wood products, a relatively small segment of the population (Montgomery et al. 1994). If the recovery plan tried to push a goal of 95 percent survival odds, costs increased to $46 billion. Another study estimated the short-run and long-run opportunity costs to Washington and Oregon of owl protection at $1.2 billion and $450 million (Rubin et al. 1991).

In other words, Levitt and Dubner have taken the very highest estimate from Shogren’s paper, one which Shogren didn’t even come up with himself, and used it uncritically. They could have used the $1.2 billion and $450 million estimates instead, of course, but chose not to for reasons we can only guess at.

I also sent Shogren an email, asking him what he thought of this use of his number. He said that the $46 billion was “an outside estimate,” and added:

We used the number to illustrate what little we do know about costs of the Endangered Species Act. Other numbers we cite in the paper say that the ESA is more about transfers of wealth (from agricultural to recreation) than about the loss of wealth.

The really weird thing is that the factoid aboout the spotted owl seems to have been dropped into the book utterly randomly: it’s there only to illustrate the broader point that economists try to measure all manner of different things. But why would Levitt and Dubner concentrate only on the costs of saving the spotted owl, while ignoring the benefits? And why would they pick a number which seems designed to shock, rather than a much more reliable number which is less shocking, like the cost per life saved of installing various safety features on roads or subways? The broader context, after all, is that of abortion, and whether it’s possible to quantify the costs and benefits of abortion, after taking into account its role in lowering the crime rate. Saved lives, in this context, seem far more germane than saved owls.

Update: John Berry writes in with more:

Back in the ’90s I spent a week reporting on the economics of the spotted owl court injunction that had halted timber sales in the northwest. My best source was a guy named Stub Stewart, who had just retired as CEO of a privately owned lumber company based in Eugene, Ore. He introduced me to a former plywood mill manager who had become a consultant after his plant shut down. The consultant had a data base that covered the whole forest products industry in the region. Their joint conclusion was that the owl hadn’t cost a single job.

The key was that the industry had pretty well exhausted its resource base. First, the privately owned timber was cut and as that source of stumpage dwindled, the Forest Service and the BLM gradually increased the allowable cut on public lands. But that too was finite and timber sales began to fall. Meanwhile, productivity grew rapidly in the industry. Stewart flew us in his helicopter out to a sale site in the Oregon Cascades his company was cutting. The entire operation was being performed by a contractor with a crew of only three using about $1.5 million worth of equipment, including a small crane. Productivity was also going up in newer plywood mills. All of the job loss up to that point which was being blamed on the owl was due to the diminished resource base and the productivity gains. I haven’t revisited the issue since I wrote the story for the Washington Post. But that $46 billion figure has got to be far, far too high. I led my story with the fact that the Georgia Pacific Company, among the largest forest products companies, had just moved its corporate headquarters from Portland to Atlanta because that’s where the new softwood resource base was located–on privately owned land in the Southeast.


In fact, the spotted owl controversy probably created net new jobs for large numbers of lawyers, which are the kind of high paying, knowledge-oriented jobs we want to create in our modern economy (sarcasm intended – a pox on all the parties).

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