Opinion

Felix Salmon

Overdraft opt-in messages: Brace yourselves

Felix Salmon
Nov 19, 2009 18:30 UTC

It’s good that we’re moving to an opt-in system for debit-card overdrafts. But in order to get there from here I have a feeling that we’re going to have to dodge a lot of, um, personalized communications from our banks:

SoundBite’s Debit Card Overdraft Opt-In solution can proactively reach consumers through any combination of automated voice, text, and email messaging. Attempts to reach a consumer can escalate from one channel to another — such as from an email to a voice message to a text message — in order to increase reach-ability and response rates.

Maybe this is why the Fed’s model letter included a way for consumers to opt out, even though they’re opted out by default. If you formally communicate with your bank to opt out, will that stop them pestering you to opt in?

COMMENT

I just got a letter from my bank that let’s me know that if I don’t opt-out, they are going to share my information.

And if people don’t get the letter, and get their info shared, all the bank needs to do is point to an item in a database that says you were on their mailing list?

Criminals.

How to slow down foreclosures

Felix Salmon
Nov 19, 2009 17:41 UTC

Buried in Peter Goodman’s 2,300-word tale of Christopher Hall’s foreclosure woes is a gem of a program in Philadelphia:

Under the rules adopted by Philadelphia’s primary civil court, no owner-occupied house may be foreclosed on and sold by the sheriff’s office before a “conciliation conference,” a face-to-face meeting between the homeowner and the lender aimed at striking a workable compromise. Every homeowner facing a default filing is furnished with counseling, and sometimes legal representation…

Since the administration’s program was begun in March, it has been plagued by complaints of bureaucratic confusion and the indifference of mortgage companies. Many homeowners who have applied for loan modifications complain that their documents have been lost repeatedly or that they have been rejected without explanation.

The Philadelphia program forces an outcome by bringing together all the principals in one room. If the mortgage company proves intractable, the homeowner has the right to request mediation in front of a volunteer lawyer serving as a provisional judge, who relays recommendations to the program’s supervising judge. If the judge finds that the mortgage company is not acting in good faith, she can hold the house in limbo by denying permission for a sheriff’s sale.

This is a great idea: one of the biggest problems facing homeowners trying to come to some kind of a deal with their mortgage lender is that correspondence has a tendency to disappear into a black hole; that they find themselves dealing with an ever-rotating cast of customer service representatives who have a tendency to contradict each other and even themselves; and that constructive conversation, as opposed to a bureaucratic nightmare, is all but impossible.

The fact is that the banks simply don’t have enough trained and qualified personnel to be able to act in a sensible and intelligent manner with regard to each of the loan modification requests which are flooding in on a daily basis. But that’s the banks’ problem, and this Philadelphia scheme forces them to face up to it.

Daniel Indiviglio, I fear, doesn’t understand this at all, and seems to be living in an alternate universe where all bank decisions are entirely rational:

The bank is, ultimately, going to want to do whatever is in its best interest…

A face-to-face meeting won’t change that fact. And if foreclosure is a better alternative for the bank, then meeting in person won’t change that either. It’s a waste of time.

This might well be true: if foreclosure is in the bank’s best interest, then the in-person meeting won’t change that. But there is a very large number of foreclosures which aren’t in the bank’s best interest, and in-person meetings can change those outcomes for the better.

What’s more, even if any individual foreclosure might be in the bank’s best interest, it can also be in the bank’s best interest more generally to slow the whole process down:

In West Philadelphia, Councilman Curtis Jones Jr., one of the sponsors of the resolution, watched his childhood neighborhood consumed by foreclosure, as the homes of working families — their porches once lined with flower pots — were boarded up with plywood.

“It becomes a blight on your entire community,” Mr. Jones said. “It creates an environment that fosters everything bad, from prostitution to drug dealing to wildlife, like raccoons taking over whole houses. One house becomes 10, and 10 becomes the whole block.”

If banks face a situation where a wave of foreclosures can devastate property values, it’s in everybody’s interest to keep even defaulted homeowners in their homes for the time being, if only to preserve the value of the collateral. Schemes such as the one in Philadelphia can help break the vicious cycle of foreclosures leading to falling home prices leading to more foreclosures, and that’s good for all. I’d love to see the Philadelphia scheme rolled out in other cities struggling with this problem.

COMMENT

Very interesting topic. Many people needs assistance to stop foreclosures

Posted by paulstv | Report as abusive

Navigating the news

Felix Salmon
Nov 19, 2009 15:56 UTC

The indispensable Abnormal Returns has a smart post up on aggregation:

Aggregators, investment or otherwise, are not the cause of the downfall of traditional news gatherers like newspapers. They are simply a sign that people are hungry for information and analysis presented in an efficient manner. For better or worse, that instinct to seek out order in an increasingly complex world is here to stay.

Of course, the news media has been trying to present information and analysis in an efficient manner for centuries: there’s nothing new there. The difference today is that the internet has brought thousands of different news sources just one click away, and so there’s demand for a new layer of editing. Newspapers have always needed editing to put the focus on the most important news, but different readers want different kinds of news and no one editor can be all things to all people.

On the internet there are thousands of people sifting news through their own particular filters, and some of them, like Abnormal Returns, prove to be extremely popular. That’s partly because they’re simply very good editors, and partly because they’re not artificially constrained in the way that newspaper editors are: they can link to anything they like, not just the product of one news shop; and they can ignore important-but-boring stories in favor of the ones that people actually want to read.

It’s almost impossible for newspaper editors and publishers to compete with that — which is exactly the reason why they should instead be embracing it. Either you can encourage people to read your news, or you can discourage them. Everybody needs some degree of help navigating the vast ocean of news and commentary which is produced every day, and no sensible publisher will come to the conclusion that cracking down on invaluable navigators is a good idea. Instead, they should be encouraging them as much as possible. As the late Sy Syms might have said, an educated news consumer is any publisher’s best customer.

COMMENT

Aggregation? That makes a nice brand name for a locally focused service. “Where do you get your news?” “I go to the Philly Aggregation.”

Posted by bdbd | Report as abusive

Fire the lot of ‘em!

Felix Salmon
Nov 19, 2009 14:12 UTC

John Hudson has an interesting round-up of responses to the signs of humanity from Goldman Sachs on Tuesday: I’m definitely the outlier in a sea of commentators saying that they’re tiny, meaningless, and an attempt to deflect attention from the bigger issues surrounding the bank.

Leave it to Charlie Gasparino, then, to veer wildly in the opposite direction:

Goldman is putting aside a whopping $500 million — the largest such donation in company history — to help small businesses.

I wondered if it ever dawned on Blankfein or his partner in this charity binge Warren Buffett — also a Goldman shareholder — that this money may be theirs to do as they please. Such a major donation like this one, I am told by one prominent Wall Street CEO, should have been approved by all shareholders…

The last thing shareholders need is such overt do-gooderism… what say did the rank and file shareholder have in such a major cash layout? None, which should spark plenty of debate among shareholder rights advocates…

I think it’s about time for Lloyd Blankfein to step down and resign as CEO of Goldman, and really start doing God’s work by sparing the rest of us the stupidity of listening to his excuses.

Let’s put this in perspective, here. $500 million is less than a buck a share; Goldman, which is trading at $177, moves more than that on an average day just thanks to market noise. And a large part of the $500 million is coming from the Goldman Sachs Foundation, which already has the money: it isn’t fresh shareholder funds. Blankfein runs a bank making $3 billion a quarter, and Gasparino thinks he should resign over a commitment to spend $500 billion over five years? Very odd.

But clearly calls for resignation are in the air these days, what with Rep. Peter DeFazio calling for both Larry Summers and Tim Geithner to be fired. Maybe it’s the Palin book which is sending everybody scurrying to these corner positions. Whatever it is, it isn’t helpful.

COMMENT

Many, though not all, Americans are 100% pure imbeciles! It goes without saying that this situation is a problem when we know that “every vote counts”… Viva le Francia!

Posted by jean john jane | Report as abusive

Counterparties

Felix Salmon
Nov 19, 2009 05:19 UTC

Everything you ever wanted to know about delta-hedging and options vs cash equities strategies — TITGR

Thomas Kinkade Cannibalized — 2CoP, Flickr

New York Times is ditching Times Extra — PC, FS

The Kanjorski amendment: Sanati has a Q&A with the man himself — NYT

Microcredit might not raise incomes, but it’s still a good idea — CGAP

Can I now outsource to Alphaville the job of calling the PE firms for comment? — FT

“I attend Sotheby’s tastings to remind myself that there is no shortage of multi-hundred-dollar wines I don’t like” — Atlantic

Bankruptcy nerdcore — Credit Slips

Best New NY Buildings of the Decade — Curbed

Peak rock music! — Ritholtz

Whisky company drills in Antarctica for Shakleton’s Scotch — HuffPo

Congratulations to Adam Pasick, who’s moving to DC to work for the Atlantic. Sadly that means he’s leaving Reuters.com — MB

How to monetize the prestige of the NYT: Turn it into a million-dollar book deal! NYT itself, of course, gets $0 — NYO

Joe Biden Needs a Bicycle — Cityfile

BusinessWeek Under Bloomberg: About 100 Staff To Be Laid Off — PC

Democratizing art

Felix Salmon
Nov 18, 2009 23:29 UTC

I had a very interesting lunch with Jen Bekman of 20×200 last week — a woman who has just raised $825,000 in venture funding to help expand her project of bringing art to everybody. “I want anyone who’s educated and even remotely affluent to feel self-conscious if they don’t have an art collection that they can talk about,” she says, and to that end she’s selling limited-edition art starting at just $20 for an 8″x10″ C-print in an edition of 200. (Hence the name.)

The editions are limited not because that makes them more likely to rise in value, necessarily, but rather because it helps to infect her buyers with the collector bug: they are incentivized to buy now, before an edition sells out; they get an experience which only a small number of other people will share; and they feel as though they’re part of a select group of people who are supporting a particular artist. (The artists get 50% of all 20×200′s revenues, and retain copyright in their work.) What’s more, a lot of young artists today come to prominence with one high-profile image; limiting the editions that flow from that image helps to push artists to create more new work.

More generally, limiting editions helps to brand them as being non-generic: artisanal, rather than mass, culture. While 20×200 is certainly curated by Bekman, it also has a broad enough range of art that it allows her buyers to exercise their individualism and feel that they’re buying something uniquely suited to themselves and few others.

And yes, there is a chance of price appreciation too. 20×200 features a lot of artists, and it’s statistically probable that eventually one or two of them will become art-world stars; at that point, their early work will be worth much more than $20 or $50 or $200. And the biggest pieces — Bekman sells 30″x40″ prints for $2,000 and occasionally goes even bigger than that — could conceivably become seriously collectable.

But like any good gallery, 20×200 is all about getting enjoyment out of what you’re buying, rather than speculating on future price appreciation. Most art doesn’t go up in price, and certainly not small works on paper which, due to the limitations of digital printing, are unlikely to last out the century. The thing I really like about 20×200 is that it’s both elite and accessible: it’s not a free-for-all like art.com, without a curatorial sensibility, but at the same time it’s not a forbidding white cube either.

Jen has a real retail sensibility: she’s got big plans for the post-Thanksgiving rush, and she’s more than happy to recommend prints which go with the sofa. Most art is decorative; there’s no shame in that. She’s not even particularly high-end, as retail goes. She’s just trying to persuade the woman with the $2,000 handbag that $500 is not an excessive amount of money to pay for a print. It’s a struggle, sometimes, but she’s going about it in a great, accessible manner. I wish her — and her investors — all the best.

COMMENT

There is something seriously creepy about the quote in the first paragraph. If she makes her living by getting people to feel stupid for missing out on what all the cool kids are doing, she needs to go find an honest line of work.

Posted by anonymous | Report as abusive

Kicked out of finance, and into journalism

Felix Salmon
Nov 18, 2009 20:13 UTC

whitney.jpg

Up until yesterday, Michael Whitney was a presenter on Bloomberg TV; he would occasionally get his byline on Bloomberg News stories. Whitney was fined $55,000 last year by the CFTC and is subject to a permanent injunction, after being charged with false reporting and attempting to manipulate natural gas prices.

Is it OK for a financial services professional who has run into major trouble with the law to simply move over to journalism and cover the same asset class there? Henry Blodget certainly thinks so: the former technology analyst is now publishing earnings estimates on his website despite being barred from ever doing exactly that for the securities industry.

At the very least, one would hope that any such journalism would come with extensive disclosures and disclaimers. Blodget was happy to do that when he was writing for Slate, but there’s nothing that detailed at the Business Insider. Instead, his bio there goes into no real detail at all about his fines and banishments:

From 1994-2001, Henry worked on Wall Street at Prudential Securities, Oppenheimer & Co., and Merrill Lynch. He ran Merrill’s global Internet research practice and was ranked the No. 1 Internet and eCommerce analyst on Wall Street by Institutional Investor and Greenwich Associates. He was later keelhauled by then-Attorney General Eliot Spitzer over conflicts of interest between research and banking.

At Bloomberg, there was no disclosure at all of Whitney’s past. Whitney, a freelancer, was fired by Bloomberg yesterday, along with other freelancers on the TV side. Bloomberg’s spokeswoman, Judith Czelusniak, refused to answer questions about whether Bloomberg freelancers are held to the same standards as full-time employees, whether it is acceptable for journalists to have run into this kind of trouble with regulators, and whether or not the discovery of Whitney’s past was the reason for his dismissal.

My feeling is that there are enough highly-qualified journalists looking for work out there that it’s not necessary to bring into the journalism industry people who have been dishonorably kicked out of the securities industry. But if you are going to do that, at least be open about it.

Update: Of course none of this is as bad as Thom Calandra’s bio where he’s plugging his latest investment newsletter:

Thom co-founded and was the editorial spirit of CBS MarketWatch, MarketWatch.com and FT MarketWatch in Europe.

As the voice of Thom Calandra’s StockWatch and The Calandra Report, Thom fancied $300-ounce gold before that metal became an investment rage.

Not mentioned at all is the fact that he was fined $540,000 by the SEC for pumping-and-dumping illiquid stocks while atThe Calandra Report. But I don’t really consider investment newsletters to be journalism in the first place.

(Thanks Otto)

Update 2: Henry replies, and I reply back.

COMMENT

Canadian blogger located somewhere in South America, is perhaps the most apt comment on the utter lack of ethical standards in our elites since Jack Grubman’s kid got into the 92d Street Y on the back of a doctored analyst report.
cheap jerseys http://www.usajersey.org

Posted by jacobneo | Report as abusive

How US investors can play the carry trade

Felix Salmon
Nov 18, 2009 18:40 UTC

When I wrote my blog entry on currency ETCs yesterday, I wasn’t aware of the various carry-trade products available on US exchanges. But after a very informative conversation with Morningstar’s Bradley Kay this morning, I’m now much more up to speed. And while there’s nothing in the US quite like the UK products, there are still a fair few carry-trade vehicles to choose from.

First though it’s worth looking at some well-established ETFs which are very bad ways to play the carry trade: the Currency Shares suite of ETFs which aim to mirror the performance of nine different currencies. Of those nine, six pay essentially no interest at all, and the amount of interest they pay is basically at the discretion of Currency Shares. “They should be paying interest,” says Kay, “it’s only when I run the graph and I look at them that I say wow, over periods when there should be positive carry, there’s really nothing there.”

The Currency Shares ETFs, then, are a good way to make a short-term bet on currency movements. But they’re not a good way to play the carry trade in particular, which involves taking advantage of the higher interest rates available in foreign currencies.

Then there are a couple of funds which are simply plays on the direction of the dollar. The PowerShares dollar index funds (UUP is bullish, UDN is bearish) are based on futures, and therefore do accrue local-currency interest in much the same way that the ETCs do. But they’re fundamentally trading vehicles designed to make bets on the direction of the dollar, not to use low dollar interest rates to fund investments in foreign currencies.

Finally there’s a pair of funds which specifically seek to replicate the carry trade — the PowerShares G10 Currency Harvest fund (DBV), and the iPath Optimized Currency Carry fund (ICI). Both of them use futures to capture the full local-currency returns: they’re true carry-trade plays.

There are differences between the two, most notably that DBV is a true ETF, where shareholders own shares in a trust. ICI, by contrast, is an ETN, which means that shareholders are essentially just unsecured creditors of Barclays, who don’t get paid for taking on the Barclays credit risk.

They invest in slightly different things, too: DBV takes the G10 currencies and goes long the three highest-yielding currencies while going short the three lowest-yielding currencies. As a result, it’s either 2x leveraged (if the dollar is not one of those six currencies) or 1.66x leveraged if the dollar is part of the mix. The results can be highly volatile: in the second half of 2008, the fund fell over 30% as the yen (one of the shorts) rose and the Aussie and NZ dollars (the longs) fell.

DBV then is very much a trading vehicle, rather than an investment vehicle. Over the long term it does tend to generate positive returns, and those returns tend to have a nice low correlation with most other asset classes. The problem is that when you really need diversification — when people are panicking and stocks are plunging — is likely to be exactly the same time that this strategy blows up as well, as investors flee risky smaller currencies for the safety of the low-yielding dollar.

ICI is much more conservative, carefully selecting G10 currencies to invest in so as to maximize carry while minimizing volatility. It’s also cheaper than DBV, charging 65bp rather than 75bp per year. But it’s tiny, with a market capitalization of less than $30 million, so I’d stay away for the time being.

And there’s one more fund worth mentioning: the WisdomTree Dreyfus Emerging Currency fund (CEW). It too is quite small, but it invests in all manner of exotic high-yielding currencies, and it’s performed quite well: Kay gives it credit for avoiding the zloty crash. If you really want to play the carry trade, this might be worth a look.

COMMENT

Anyone?

Does anyone know the truth behind Berkshire Hathaway Inc looking into further carpet manufacturing companies, after their success with Shaw Industries? My source claims BRK are looking into a specific company Oriental Weavers (ORWE.EY – ORWE.CA)

Please advise if you have further updates on the topic.

Posted by NewYorkInvestor | Report as abusive

Providing credit to the poor

Felix Salmon
Nov 18, 2009 17:17 UTC

Megan McArdle is cutting up her credit cards, but she doesn’t want to force anybody else to do the same thing. She responds to my sentiment that credit should come from loans, not cards, thusly:

I don’t think personal loans are a very good substitute for the kinds of emergencies that frequently beset the people who this would most effect–if your car breaks down and you can’t get to work, you don’t really want to wait until the bank approves your personal loan to get the car fixed. But there are a lot of people who think we could make the poor better off by essentially denying them access to credit, because credit extended to the poor carries high interest rates to cover the default risk, and many people get themselves into big trouble with it.

The problem is, there are two sets of outcomes. There are people who are made better off by payday loans or credit cards, because they get the car fixed and don’t lose their job. Then there’s a group, which seems to be smaller but significant, who end up much worse off.

McArdle is far too generous to the lenders here. For one thing, I made it clear in my post that credit cards are very good for transactional credit: if you need to pay the car-repair shop today, using a credit card is a great way of doing so. But you should also have a good enough relationship with your bank that by the time the credit-card bill comes due, you can pay it with the proceeds from a personal loan or line of credit.

Secondly, I don’t think for a minute that we should deny the poor credit; in fact I’m on the board of a non-profit institution which exists to provide credit to the poor, and I’m all in favor of that. It’s credit cards I don’t like, with their high fees and interest rates (and there are even exceptions to that rule, such as the ones provided by many credit unions). And I really dislike payday loans, which are pretty much universally predatory, especially when compared to similar products from community development credit unions.

Megan’s conceptual mistake here is clear when she says that “credit extended to the poor carries high interest rates to cover the default risk”. But in fact the interest rates on credit cards are really not a function of default risk at all. Mike Konczal had a great post on this back in May, where he showed pretty conclusively that credit-card interest rates were all about maximizing profit for the issuer, rather than compensating for default rates. And payday loans are even worse.

What earthly grounds does Megan have for saying that the number of people made worse off by payday loans is smaller than the number of people made better off by them? I suspect she considers the alternative to be no-credit-at-all-nohow-noway. But that’s not what anybody is proposing. I, for one, think that credit should be available to the poor, very much so. But not in the quantities and at the rates that it’s been available until now. There is such a thing as too much credit, and we crossed that line long, long ago.

Update: Megan responds. At length.

COMMENT

well. personal loan is very gud for poor and needy people.

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