Felix Salmon

The upside of outrage

Felix Salmon
Nov 24, 2009 14:25 UTC

Noam Scheiber has the fascinating behind-the-scenes story of how the derivatives-regulation sausage is being made — and how Wall Street, amazingly, seems to be losing the lobbying war, at least for the time being. In a nutshell, the banks sought to get around proposed new derivatives regulations by creating an “end-user exemption” loophole which they could then drive their trucks full o’money straight through. But the CFTC’s Gary Gensler saw through the ruse and persuaded Barney Frank to tighten up the language and minimize the size of the loophole. And since the banking lobby was pretending to care only about its end-user clients, it had few if any grounds on which to object to the new bill.

Writes Scheiber:

Gensler’s own role can’t be overstated. A former Goldman Sachs partner who served as Treasury under secretary in the late 1990s, Gensler’s nomination to the CFTC aroused suspicion among congressional liberals when the Obama transition team announced it last December. But Gensler spent several months persuading regulatory hawks that he was one of them, and his actions as chairman underscore it. “The reason I think the left and these consumer groups are in good position is that they have Gensler at the CFTC,” says the bank lobbyist. “He’s turned a rinky dink commission into the most powerful agency in the federal government when it comes to derivatives.”

This is not the first time that the head of the CFTC has tried to rein in the power of the banks. But it is the first time that Congress has listened — and that’s worrying the likes of Andrew Ross Sorkin, whose column today is headlined “Beware the Result of Outrage”.

I’ll have more to say on Sorkin’s column in general, and the Miller-Moore amendment in particular, later today. But suffice to say that Scheiber I think shows quite compellingly that there’s significant upside to outrage too.


I also found Mr. Sorkin’s perils of outrage lacking. I’m not informed enough to know if the risks he describes are real, but I’m not sure he is either.

I’m left with the impression that we must let the financial system run wild lest something be more expensive or we have less credit. OK – so what?

Sorkin writes: “Up to now, they’ve been kept whole, even as others have been asked to share the pain. Otherwise, some feared, creditors might get spooked, and lending might seize up.”

That’s silly. Won’t they just hedge their exposure with credit default swaps from the next AIG and backed by taxpayers anyway?

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Felix Salmon
Nov 24, 2009 04:14 UTC

Remembering collateral costs in synthetic ETFs — Index Universe

Daily Intel commenter says the only cure for Goldman’s PR troubles is PUPPIES FOR EVERYONE — NYM

Man puts $25k downpayment on a “Warhol” dated 1996 (he died in 1987) featuring “Matthew Baldwin” (who doesn’t exist) — SLT

Guy invites 700 FB “friends” to meet up; 60 RSVPs as “maybes” & 15 “attending.” One actually showed up — NYT

Newtongate: the final nail in the coffin of Renaissance and Enlightenment ‘thinking’ — Carbon Fixated

Sinoscience chartporn — Kedrosky

AOL’s New Image: Animated Edition — Paid Content

Just another day in the sleaze of the art world — AFC

Dick Fuld made $541 million in cash from bonuses and stock sales, never mind the stock he owned at the end — NYT

Flags by color proportion — Shahee Ilyas

Where can you find a coveted bottle of 1997 Champagne Salon? In first class on Japan Air Lines — USAT

Empty LA


A 1997 Salon? Did they would not have been my pullquote. Yes, Salon is always expensive and always good, but next to the 1995 and 1996, the 1997 is small beer at best.

Now if JAL were serving a bottomless 1996 Krug, I’d book that flight to Tokyo right now..

Chicago’s good parking deal

Felix Salmon
Nov 23, 2009 21:00 UTC

File under “events which don’t happen every day”: Gawker describing a newspaper article as being “real journalism” (their emphasis) and “what news alarmists say will be missing if and when we lose newspapers”.

But the fact is that the article in question, an investigation into Chicago parking-meter revenues by Dan Mihalopoulos, is contentious, one-sided, and flawed.

A bit of background: in February, a company named Chicago Parking Meters LLC paid the city $1.15 billion for the right to parking fee revenues for the next 75 years. And now? Well, the headline seems unambiguous: “Company Piles Up Profits From City’s Parking Meter Deal”. But in fact the article only gives numbers for revenues and operating profits. There’s no indication of Chicago Parking Meters’s cost of funds, or whether, after paying the interest on its debt, it’s managing to make any profit at all.

The theme of the article is that selling the rights to parking fee revenues was a mistake:

“Had we done this ourselves, it could have made a lot more money,” said Alderman Scott Waguespack…

The economist Roger Skurski calculated the current value of the deal. Mr. Skurski said his conservative estimate was that “the city could have earned about $670 million more by keeping the asset.”

But this ignores the whole point of doing the deal in the first place: that the city was politically incapable of raising the parking-meter rate itself. This was clear as far back as December, when I wrote that “this parking-meter initiative is the municipal equivalent of a CEO hiring McKinsey to come in and recommend job cuts: it’s a way of doing what needs to be done while somehow managing to blame someone else”. When the deal went through, Chicago parking meters were charging just 25 cents per hour: all the proof you’d ever need that the city, on its own, was incapable of charging a market-clearing price for on-street parking.

Mihalopoulos also ignores the question of whether higher parking-meter rates might benefit the city of Chicago in other ways, by reducing the congestion from cars circling downtown streets at a crawl, desperately seeking a Spot.

And he also buries the news that in fact Chicago Parking Meters is making less money than it had expected:

According to the meter deal’s income statement for May 2009, revenues for the month were about 20 percent below projections. At the same time, expenses were far over budget, mostly for “supplemental staffing.”…

Because the company is not writing tickets, it seems many Chicagoans are getting away with parking for free. A company audit of a section of the North Side found 41 percent of occupied spaces filled by motorists who were not paying, according to the company records.

What’s more, at the end of the story we find this:

Before entering into the parking meter deal, the city hired a consultant whose confidential report suggested the lease could generate $650 million to $1.2 billion for the city.

The report was not disclosed to the public until after the check from the winning parking meter bidder cleared. Officials say revealing a consultant’s valuation analysis before a deal closes would hurt the city’s chances of getting the best possible deal.

This datapoint comes well over 1,000 words after Mihalopoulos tells us about the $1.15 billion deal value. If you don’t remember that number from the beginning of the article, the tone of the writing makes it seem as though the city was somehow hiding a report which showed it got a bad price. Instead, the report reveals that the city got a price at the very top of the expected range.

So far, Chicago Parking Meters has made rather less money than it had hoped out of this deal. Maybe its revenues will recover, as Mihalopoulos seems to think they will; on the other hand, maybe they won’t. The risk all belongs to the company, rather than the city. The city just gets to spend a whopping great big check, and also bring the price of on-street parking up to where it should have been for years. A good deal, not a bad one.


So many non-Chicagoans providing context-free analysis.

Unfortunately, Felix, you have based your current post on you last post, which was based on Barbara Kiviat’s spectacularly false blog post. She has absolutely no idea what she’s talking about. Parking meter rates in Chicago have been increased repeatedly over the last decade. In 2002, meters in the Loop, River North and Streeterville were raised to $3 from $1 (in some areas, $0.25). And there were zero political repercussions.

In fact, if you look at Mayoral and Aldermanic elections for the last, oh, 100 years, you’ll find that it’s nearly impossible to lose re-election in Chicago, no matter how spectacularly corrupt and mismanaged the government in which you serve.

This lease was yet another terrible idea in a long line of terrible ideas (leasing the Skyway, leasing the city-owned parking garages) which only serves to reinforce the shocking level of fiscal irresponsibility in Chicago government. Running through the list of leaseable municipal properties, after Midway and O’Hare, there’s not much left. With what do we pay our bills then?

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I’m getting emotional

Felix Salmon
Nov 23, 2009 20:04 UTC

The Fund seeks to provide qualified investors with an opportunity to achieve long-term capital appreciation through investment in Emotional Assets. Its objective is to deliver a stable target growth rate of 15% per annum, with predictable volatility – at the same time preserving capital.

This is not satire. It’s real, and the fund manager is even giving quotes to the FT:

“Most fund managers over-promise and under-deliver. With emotional assets, there are no synthetic assets or fancy structures.”

Somehow the irony of a fund manager denigrating over-promising while still pledging to deliver stable 15% returns is never remarked upon.

In any event, I have it on good authority that next up will be the Emotional Liabilities Fund. Go ahead and monetize those neuroses!


Is it based in Palm Beach? Sounds like Madoff II.

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The fiscal-prudence debate

Felix Salmon
Nov 23, 2009 19:34 UTC

Edmund Andrews has a long front-page story today on what he calls “the United States’ long-term budget crisis” — and has occasioned a strangulated “Urg” out of Paul Krugman in doing so. Krugman wrote a very smart blog entry on Friday (Tyler Cowen called it one of the best recent economics posts in some time) which talks about exactly the issue that Andrews is addressing — the question of whether and how the interest rates that the US pays on its borrowings might rise in future. But none of that nuance made it onto the NYT’s front page. Instead, we get this:

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

Economic forecasting is hard enough a few months out; trying to guess what a certain number is going to be in a decade’s time is a fool’s errand, and it’s sad that Andrews didn’t give the other side of the story. What’s more, this scary chart doesn’t seem quite as scary when you look at the y-axis:


Most developed countries can cope quite happily with net interest payments around 3% of GDP. According to the OECD, Belgium is already at 3.8%, and Italy’s at 5.2%; the average for the euro area is 2.7%. So while there might be a big rise in this metric, it would be a big rise from a low level and to a number very much within the bounds of precedent.

None of which is to say that Andrews doesn’t raise an important question. But fiscal prudence is the kind of thing which get rich financiers like Pete Peterson and Bill Gross very excited; it doesn’t have nearly as much effect on the populace as a whole. Just ask the Japanese: if they’re having problems right now, it’s not because of their massive government debt. So it would have been nice to see a slightly less one-sided article.


To help Howard’s understanding. I am not repeating anyone’s piffle but Paul Krugman’s own. Perhaps you did not notice the date on Paul’s article but it is from March of 2003. At that time your vaunted GDP growth had been less than 2% for the previous year and had averaged less than 1.5% for the last two years. Unemployment had increased over the previous year (and would continue higher for another few months). In the second to last paragraph, Paul describes the economy as sputtering. Perhaps you were the only person regaling that period as a time of GDP growth but I am afraid I missed it at the time. At the time, Paul worried that when the economy did recover(which he was not predicting anytime soon), the fiscal deficits would lead to higher interest rates. I think it is a fair question to ask. Now as well as then.

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Ackman’s auction-rate apartment

Felix Salmon
Nov 23, 2009 19:05 UTC

Bill Ackman has sold his huge apartment at the Majestic, which means he also needs to sell the baby 1BR one floor down that he bought in 2007 for $450,000. (How baby? It’s 322 square feet; that’s smaller than the 406-square-foot living room in the apartment he just sold.)

Given the degree to which real estate values have plunged in the past two years, you might be surprised to learn that Ackman is asking $950,000 for the apartment — $2,950 per square foot, and well over double what he paid for the place. And the apartment faces west: it doesn’t even have a view of the park! (Ackman does claim to have spent more than $250,000 on renovations, but even accounting for that, he’s still set to make a substantial profit if he gets anything like the asking price.)

If, as seems likely, no one offers $950,000 before December 8, the apartment will be auctioned off by Ackman himself, who promises to “provide some excellent wines for participants”. Residents of the building should probably turn up for the win alone — and for the spectator sport of watching the bidding, of course. No word on whether Ackman’s setting a reserve, but I’m sure he’s familiar enough with the story of auction-rate securities to have a Plan C in hand if there aren’t any bids at all.


I’m impressed that he spent over $750 per sq. ft. just on renovations!

The role of the database in the financial crisis

Felix Salmon
Nov 23, 2009 15:38 UTC

It’s over a year old now, but this paper, by Norm Cimon, is still very interesting for where it places the blame for a large part of the financial meltdown: the rise of computing power generally, and the relational database in particular.

All securitizations, after all, are based on computer analysis of a database of underlying assets. And Cimon explains:

The development of a good relational database design relies on the sort of cooperative effort that only exists in a handful of companies. That’s because extracting all the information from the involved parties is a daunting task. The rule of thumb is that it can represent upwards of 85% of the effort involved in re-engineering a corporation’s data assets, while the actual code to accomplish the job accounts for less than one-fifth of the work…

Now imagine coordinating the collection of such information across something as vast as the global mortgage-backed security industry which developed over the last 5-10 years. It never happened.

The investment banks and ratings agencies who were putting this stuff together simply never stopped to dot their i’s and cross their t’s — they were originating bonds at such a torrid pace that they didn’t have the time to make sure that reality was well represented in the way their models were constructed. Anybody who tried to create the kind of well-formed database that Ted Codd would be proud of would fall far behind the pack, and never sell anything.

Cimon concludes:

Weizenbaum’s book contains a very powerful argument for exerting human control over important business processes. He understood intuitively what we would end up doing to our accounting practices, our banking concerns, our investment houses, and all the other institutions when easily automated tasks could thoughtlessly be driven by limitless computing power. With networked computers now cast by all organizations, including the financial sector, into the role of wizard-behind-the-curtain, we all live in Oz. It’s long past time we pull back the veil and call a halt to the mindless application of this supreme and supremely dangerous creation before the damage gets any greater.

In the age of zero-price computing power, it’s far too easy to cut corners and trust in black boxes. What’s more, it’s incredibly difficult for any regulator to audit such things: I don’t think the Fed or the SEC has a department of relational-database integrity. Maybe they should think about starting one up.


First, I want to thank Felix for asking if he could post this after I sent it off to him. I’d come across the Wired article he’d written a few years back (http://www.wired.com/techbiz/it/magazin e/17-03/wp_quant?currentPage=all) about the equation used to measure risk. The same issue had a companion piece about a coding system for tracking investments. It was obvious that both dovetailed with what I’d put together so I forwarded him a copy.I wrote it to make a point that still escapes many analysts: the way to make sense of mortgage-backed securities and other such instruments is not through the use of ever more sophisticated equations for risk but simply by tracking what’s in them. We’ve known how to do that for a long time. That we chose not to says some very disturbing things about the knowledge and/or honesty of the people who steered us into this train wreck.As for knowledge, books such as The Black Swan only hint at the reality of the world we’ve created. Statistical theory and it’s attempt to model the after-the-fact distribution of market investments is useful but only to a point. The likelihood is that the trading systems we’ve created are non-linear. If so, it’s entirely possible that feedback can force them onto trajectories that don’t look remotely like the ones typically modeled using statistics.It’s easy to get fooled. Such systems can look stochastic even when all the variables are strictly determined. So this is not about rational versus irrational actors (see Justin Fox’s Myth of the Rational Market for example: http://www.nytimes.com/2009/08/09/books/ review/Krugman-t.html). This can happen even as everyone acts quite rationally. It’s a property of the system itself. That may be what’s been built and what we’re watching operate.What’s deeply disturbing is that the quants seem to have no understanding of these systems, even though the major developments in the field have all come within the last 50 years. This isn’t about equations for risk, it’s about the possibility of slipping into a different set of trajectories or “orbits”, a different portion of the attractor for the system.Or do they know and not care? If so it’s dishonest. The money that’s been made in commissions and bonuses is almost beyond comprehension. A tacit admission that the system is prone to this sort of jolt may not be one they are willing to accept, or they can accept it to make public.Again, we can solve this by tracking what’s in those investment vehicles. That we can’t or won’t do it means one of two things. The financial institutions participating in these markets may be unable to organize itself well enough to do it. That’s a market failure. On the other hand they may be unwilling to do this because of the money that would be lost. Near-instantaneous feedback about the performance of the components would remove the latency in the current system. That would flatten those fees real quickly. That’s a moral failure and it means the system should be taken apart.

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Why BusinessWeek shouldn’t ape Time.com

Felix Salmon
Nov 23, 2009 14:05 UTC

Why was Josh Tyrangiel hired to be the new editor of BusinessWeek? One reason, the pundits agree, is that he successfully dragged Time — another weekly — onto the web. Ryan Chittum writes about “his eye-popping numbers at Time.com”, with pageviews rising from 400 million in 2006 to an estimated 1.8 billion this year, while Marion Maneker says that “he had tremendous success in building Time.com’s Web traffic over a few years”.

I’m an admirer of Tyrangiel too. But it would be depressing if Bloomberg’s brass hired him on the basis of his pageviews, because Time.com is an object lesson in how not to boost traffic. Reading Time.com is an exercise in frustration: the stories there are hugely painful to read. Barely-relevant links to other stories interrupt the flow on a regular basis; slideshows are everywhere; and in general it’s almost impossible to get through a whole story without being forced to visit multiple pages in doing so. Revealingly, no one’s talked much about Time.com’s uniques over the past few years, just its pageviews.

The last thing that Bloomberg should ever want to do with BusinessWeek.com is use such tactics. It might make sense for Time.com to operate in the CPM-driven junk-mail paradigm, where revenues rise with pageviews and therefore you maximize the latter to maximize the former. But BusinessWeek’s high-end readers won’t and shouldn’t put up with such shenanigans.

Tyrangiel’s job at BusinessWeek.com will be to build strong bonds with the readership — to make them loyal readers and to constantly exceed their expectations of what a website can deliver. That will help give Bloomberg the prestige and glory it wants from its consumer-media operations, and will also allow Bloomberg’s business-side staffers to position themselves happily at the high end of the market, selling relationships with readers rather than simply eyeballs-by-the-million. If BusinessWeek.com becomes half as annoying to read as Time.com is today, it will have failed, and Bloomberg is going to have to be careful to make sure that Tyrangiel undrinks the pageview Kool-Aid he quaffed so gluttonously at Time.


I read 21 national business news homepages for my blog about business journalism every weekday, the big nationals, ones you would expect. The one I have the most trouble deciphering is Reuters’.

Time lays out all of its business stories in one place where it is easy to find them and tell which ones are new. Reuters makes this a mess. Finding Matt Goldstein can take multiple clicks (although you are usually buttoned on top). There are days I only look at the top story because it’s the only one I can tell is new.

My cross-eyed list of most helpful homepages is:

1) The New York Times Business Section
2) The Wall Street Journal “In Today’s Paper”
3) Bloomberg News “Exclusives” section
4) Fortune.com homepage
5) Portfolio.com homepage (the one thing they did right)
6) NPR Marketplace homepage
7) Time.com business/tech homepage
8) Newsweek.com business/tech homepage

The ones that annoy me because it’s hard to figure out what’s new and featured…

1) Forbes.com (do any actual journalists contribute?)
2) Reuters.com (so much content, so hard to find)
3) BusinessWeek.com (so much content, so hard to find)
4) CNBC (a little busy and the highlighted stories are mostly not highlights)
5) CNN/Money for making it so hard to find Paul LaMonica.

Annals of news-burying, Overstock edition

Felix Salmon
Nov 22, 2009 08:08 UTC

Friday was the Financial Follies — which means that most of New York’s financial journalists descended on the Marriott Marquis for the evening. The joke going around was that Friday afternoon would be a great day to bury bad news, a la Jo Moore, on the grounds that even fewer people would be around to cover it than would normally be working on a Friday after the markets close.

But Overstock, it seems, took the joke literally, waiting until 4:02pm on Friday to announce that it had received a delisting notice from the Nasdaq. (And the wait was a long one: they received the letter the previous day.) Naturally, the headline of the release (“Overstock.com Announces Receipt of NASDAQ Notification Letter”) gives no hint as to the importance of the contents.

Gary Weiss, of course, noticed; I suppose we’ll have to wait until Monday to see whether the news has any effect on the stock.