Felix Salmon

In September, Tyler Cowen picked Berlin as his “preferred exile”:

There would be plenty of art and music, lots of smart people to talk to, access to other good locales, and the near-certainty of public order, yet with bearable winters and good health care.

Today, on the 20th anniversary of the fall of the Berlin Wall, he’s not so enthusiastic:

I like spending time in Berlin. But I am never sure I like Berlin itself, West or East. Berlin is Germany being imperial. Berlin is Germany looking toward the east. Today Berlin is Germany pretending it is normal, while not yet having a new identity.

Maybe the change in tone is a function of all the news coverage about Berlin right now, all of it concentrating on the city’s historical importance. But the fact is that for all Berlin is now the capital of the most important country in Europe, it’s still, as its unofficial slogan puts it, arm, aber sexy. (Poor, but sexy.)

I spent four months in Berlin in 2008, and never once did I think of it as “being imperial”. Being grungy is more like it. The most imperial thing in Berlin is the Reichstag, which, after it was wrapped by Christo, was topped by Norman Foster with a transparent dome and opened to the public in as non-threatening and enjoyable a manner as he possibly could. Can Berliners be rude? Yes. But not in an imperial way, more in a sullen way.

Berlin has celebrated mainly itself since the wall went up, and even more so since the wall came down. It was always exceptional in many ways, being divided into quarters given to each of the Allied powers, and being a domicile of choice for young West Germans looking to avoid military service. With the exception of a flurry of construction activity in the early 90s, money has never had much interest in Berlin: it’s much more famous for the Love Parade.

Neither Berliners nor the rest of Germany consider the capital to be particularly German. Instead, it’s a historical anomaly, most of which was literally walled off from the rest of the world for 30 years, and all of which remains a very long way from any other major city. When you’re in Berlin, with its dearth of high-speed rail lines, you don’t feel particularly connected to the rest of Europe: instead, you feel the freedom associated with being distant from the concerns of others. I love the city, and I send it all my love on this special day. Long may it retain its singular character.

Gabriel Sherman has a long profile of Andrew Ross Sorkin, which spends a lot of time talking about Sorkin’s problematic status within the NYT in general and the Sunday Business section in particular. But all big companies have internal politics. What’s interesting is what the story says about the NYT’s devotion, or otherwise, to serving its readers by giving them the information they want.

For instance, here’s Sorkin launching DealBook:

It was a radical idea for the Times. The paper had never aggregated outside news under its flag before, and Sorkin had to convince his skeptical bosses that the paper could point its readers to competitors.

And here’s Sorkin asking a NYT colleague, Tim O’Brien, for information a pair of fellow reporters had FOIA’ed:

“I also told him that my reporters on the piece, Don and Gretchen, would probably be uncomfortable simply handing over documents to him that they had spent a lot of time and energy to find, analyze, and report on,” O’Brien told me by e-mail.

As John Cook notes, this is silly at best:

The grand irony of this flap is that much of it would have been rendered moot had the Times simply done what Sorkin did so effortlessly: Put the documents at issue online… That’s another Timesworld disconnect between the youthful web-focused culture and the old-school diggers—after Van Natta and Morgenson spent months working to get access to the documents, they apparently didn’t think to push their editors to share the originals with their readers.

I’m constantly amazed at the number of stories in the NYT which are based on primary sources the paper refuses to put online. In a tiny handful of cases, revealing the document might endanger a source or otherwise be inadvisable. But there’s no good reason not to publish documents received as the result of an FOIA request.

The NYT tends not to publish documents it uncovers as part of its investigations; one NYT reporter told me once that editors, when asked about the policy, mumbled something about copyright. It’s an untenably old-school approach, and serves mainly to promote turf wars and jealousies. The NYT has the best newspaper website in the world; its reporters should be encouraged to make full use of it.

The WSJ has an interesting Ken Lewis profile today:

If there was a bank executive who seemed to have the mettle to withstand today’s regulatory and market pressures, it was Ken Lewis. The Mississippi native clawed to the top of Bank of America. After succeeding his mentor, Hugh McColl Jr., as chairman and CEO in 2001, Mr. Lewis kept up a blistering pace of acquisitions and tight control of operations at the bank, which expanded to $2.3 trillion in assets from some $620 billion.

But I think this misses a crucial point. Ken Lewis was always a momentum play, as most acquisitive CEOs are. So long as things are going well, they’re going great. But the minute their stock starts dropping and they lose that sense of inevitable global domination, things can fall apart very quickly indeed.

This is partly a function of scales dropping from the board’s eyes, as Carrick Mollenkamp and Dan Fitzpatrick explain. But it’s also a question of character: some CEOs are emboldened when their companies go through a rocky patch, while others are weakened — and Lewis is clearly one of the latter. (John Mack, who famously told Tim Geithner to “get fucked” at the height of the crisis, would be one of the former.)

In other words, Lewis never had the mettle to withstand regulatory pressure, should it ever arise. Other acquisitive CEOs like Sandy Weill are the same way. They’re like central banks intervening in currency markets: they can push regulators to move further in the direction they’re already moving, but they can’t push back once regulators become aggressive. That’s why Weill stepped down, and that’s why Lewis stepped down too.

At least between, say, $3 and $6 per bottle:

Supplying wine to sell at $5, $4, $3 or even two bucks per bottle is not that difficult once you set out to do it. Cheap surplus grapes, cheap surplus wines, low-cost winemaking processes and economies of scale all contribute to extreme value supply. Nope, supply is easy. The challenge, until recently at least, has been selling the stuff.

Studies have repeatedly shown that wine drinkers are influenced by price – but not in the way you learned in Econ 101. A lower price does not always produce more sales because insecure buyers infer quality from price. They assume that higher price means better wine.

I’d like to see some empirical data here, but intuitively it’s at least possible that raising a wine from $3 to $6 per bottle might increase rather than decrease sales. That seems to be changing, as Mike Veseth explains in the rest of the article. But let’s say it holds true here, or once did. This isn’t a case of Veblen goods: drinking a $6 bottle of wine hardly counts as conspicuous consumption. Is there a name for this phenomenon? And is it found elsewhere?

Update: “Fred Engels“, in the comments, makes the excellent point that there’s another place this phenomenon is often found: the stock market, where demand often rises as the price of a stock goes up.

The GAO reports on the TSA. File under “why doesn’t this surprise me”:

TSA lacks assurance that its investments in screening technologies address the highest priority security needs at airport passenger checkpoints. Since TSA’s creation, 10 passenger screening technologies have been in various phases of research, development, test and evaluation, procurement, and deployment, but TSA has not deployed any of these technologies to airports nationwide… Deployment has been initiated for four technologies–the ETP in January 2006, and the advanced technology systems, a cast and prosthesis scanner, and a bottled liquids scanner in 2008… in the case of the ETP, although TSA tested earlier models, the models ultimately chosen were not operationally tested before they were deployed to ensure they demonstrated effective performance in an operational environment. Without operationally testing technologies prior to deployment, TSA does not have reasonable assurance that technologies will perform as intended.

(Via Fallows)

I’m late to Sam Jones’s article about investors who did due diligence on Galleon and decided to stay away, but I think it raises a number of silly ideas which ought to be put to rest.

First, it’s worth noting that, ex post, this kind of exercise can be done on any hedge fund. The vast majority of hedge-fund investors, and all big ones, do some kind of due diligence before investing in a fund. There’s no such thing as a fund which receives investments from everybody who does due diligence on it. Therefore, for any fund which fails, there is going to be a certain number of investors who did due diligence on it and who didn’t invest. The same is equally true, of course, for any fund which succeeds.

What’s more, the reasons given for not investing in Galleon are so weak and vague as to be all but substance-free:

“Crudely, there are three ways to make money as a hedge fund manager,” said one large multi-billion dollar asset manager.

“You can take advantage of trading technology, but few do. You can be more intelligent than others, but few are.

“Or you can have some specialised source of sustainable information. Unless that information is from fundamental analysis – and in Galleon’s case it did not all seem to be – then that’s a red flag for us.” …

“People mistake wealth for intelligence,” according to one investor.

“No one pretended Raj [Rajaratnam] was a brilliant stock analyst – he was just extremely well connected.

“And he always made that known.”

Both investors accept unquestioningly that there’s some kind of a correlation between intelligence and alpha — despite a long history of extremely smart guys blowing up, and despite the fact that no one has come close to empirically demonstrating any such correlation. On top of this dubious correlation, they then layer the assertion that Raj Rajaratnam wasn’t actually all that smart. How would they know?

What’s more, if being extremely well connected is grounds for suspicion when choosing money managers, that would probably disqualify pretty much every single Silicon Valley venture capitalist.

It’s not even clear that investors who steered clear of Galleon were smart in hindsight, for all this self-congratulatory slapping of their own backs:

Investors that did put their money in Galleon, however, can take comfort from the fact that, by and large, the companies funds’ are highly liquid and are unlikely to suffer losses as a result of unwinds.

The good thing about investing in a fund which makes large short-term bets on individual stocks is that such bets are unlikely to be crowded trades which suffer enormous losses when everybody tries to exit at once. Anybody who invested in Galleon received healthy returns over the length of their investment, and got out unbloodied at the end. The principals won’t be as lucky, of course, but the investors have nothing to regret.

(HT: Manham)

“The Volkswagen Beetle did far more damage to the environment than the Hummer ever did, or will” — TBM

Wherein Brad DeLong changes his mind on the intelligence and ability of Alan Greenspan — BDL

Wherein Brad DeLong changes his mind on what happens to productivity in recessions — BDL

Awkward Metaphor of the Day goes to Jim Cramer “Bears Run Out of Ammo” — TSC

The unemployed face the same odds of getting a job as an applicant faces getting into Harvard — CNN

How not to deliver bad news to Wall Street — Matthews

“The Galleon gang is doing little justice to the term ‘white collar’ crime. Specifically, the collar part.” — NYM

Sorry, Kyle, you were second choice: Kushner wanted Sorkin for Observer job — NYM

Life among the business journalism watchdogs: Dean Starkman, CJR, thinks CAGW’s “obscure” — Stoll

7-11′s own-brand Yosemite Road wine is $3.99/bottle — Dallas Observer

Do you believe in IMF forecasts? If so, you’re a turkey! — Taleb/Huffpo

Mega-hedgie Julian Robertson has never checked his voicemail, ever — NYM

Banksy fever reaches Kurdistan — Meyer

What happened to mutual-fund fees and expenses in the wake of the financial crisis? Lipper has crunched the numbers, and it seems that the tumble in the stock market didn’t have much effect on expenses:

Surprisingly, the median management expense for most asset classes was largely unchanged from 2008 levels; most exhibited changes of +/- a few tenths of a basis point.

Fees, on the other hand, are a different kettle of fish entirely:

70% of equity funds realized increases in total expense ratios from their most-recent annual report to their most recent semiannual report. Of those funds with increases, the average increase was +8.2 bps, while for the funds with expense decreases the average decrease was only -2.4 bps.

There’s even a helpful chart:

The reason for the fee hike becomes clear at the end: it’s being implemented in a desperate attempt to keep income from plunging along with the stock market.

Despite the increase in management fee ratios for many asset classes, the revenue derived from those fees has plummeted. We estimate that total revenue over the period examined by this report is down more than 40%…

The total dollar amount of fees collected by open-end funds appears to have declined by approximately 31% over the period examined by this report. This value is in spite of increases in realized expense ratios for many funds.

The lesson here is simple: Stop trying to beat the market, and move to index funds or ETFs instead. (Index funds weren’t included in the Lipper survey.) Mutual funds are moving away from being a mass-market product, and becoming more of a niche product aimed at elderly investors who don’t know any better and who don’t worry much about total expense ratios. The smart money’s moving out of mutual funds, to the extent that it was ever invested in those funds in the first place, and the dumb money that’s left over is largely price-insensitive. Expect these fees to continue to rise for years to come.

John Reed wasn’t even on the list of people who I thought should apologize for their role in creating the bubble which led to the financial crisis. But good for him for doing so:

John S. Reed, who helped engineer the merger that created Citigroup Inc., apologized for his role in building a company that has taken $45 billion in direct U.S. aid and said banks that big should be divided into separate parts.

“I’m sorry,” Reed, 70, said in an interview yesterday. “These are people I love and care about. You could imagine emotionally it’s not easy to see what’s happened.”

Reed is a bit like Gerry Levin, looking back on a merger gone horribly wrong; it’s understandable that he has many regrets and might be more prone to apology. But still, it’s a start. Sandy? You’re up next!

Mark DeCambre is right: it seems that BofA is going to remain headless at least until Thanksgiving. No outsider seems to want the job — the list of people who have turned it down seems to include everybody who works or has ever worked at JP Morgan, plus former BofA executive Michael O’Neill, who went on to head up both Barclays and Bank of Hawaii. Meanwhile, the leading insider, Brian Moynihan, can’t conceivably be tapped until after his Congressional testimony on November 17.

It’s not as if Ken Lewis’s reputation needed to take another hit, but here it is anyway: he’s created a monster with no succession plan and no ability to hire a CEO. At least when Hugh McColl was building the monster it was always clear that Lewis would be there if he ever fell under a bus. Lewis, by contrast, made sure to throw any potential rivals out of their top-floor windows on a regular basis. And now the BofA board is struggling with the consequences of those decisions.

Mohamed El-Erian, the CEO of Pimco, sent me a note this morning which sums up the dire straits of the economy, as revealed in today’s employment report, in one sentence:

The problem is that very few people in DC are thinking of this as a structural challenge. Until they do, there is little basis for the sketch of a potential solution.

Here’s the issue: unemployment is at 10.2%, and broader underemployment is at 17.5%. For the foreseeable future, both of them are going to be extremely high — it doesn’t really make much difference, at the margin, whether they’re going up or down. Financial markets are used to looking at first derivatives, but in this case it’s the absolute level which is important.

When you’re unemployed, you don’t spend. So long as unemployment remains high consumer demand will be depressed. That’s going to be true even if the savings rate starts dropping, thanks largely to the enormous debt burden that US consumers have already placed upon themselves. That’s important for the US economy, and it’s also a major sea-change for the global economy. As El-Erian says in today’s FT:

There is one public good that needs to be replaced: the key role that the US has played as the engine of global growth. This role is now constrained by the debt of US households.

The implications of this are huge. If the US no longer drives the global economy, then the rest of the world will be much less inclined to fund its twin deficits to the tune of trillions of dollars per year. Meanwhile, the high unemployment rate means that the Fed is going to keep the Fed funds rate at or near zero, which bodes ill for the dollar. These are huge forces, acting in an extremely complex global financial system, and you don’t need to be Nassim Taleb to know that the end result of such a state of affairs is likely to be large, unpredictable, and potentially catastrophic.

Which brings me back to Washington. Here’s El-Erian again:

The best defence against these outcomes is early recognition and coordinated action. Key economic powers must shape their expectations and policy strategies to the changed contours of the global economy. They must also actively manage policy changes at the national and multilateral level in a way that broadens the provision of global public goods.

They must, yes. But will they? I fear — and clearly Mohamed fears too — that the answer is no. So far I’ve heard nothing out of Washington which says to me that the White House has a plan for addressing long-term structural problems in terms of unemployment, capital flows, and interest rates. A lot of these problems have been around for many years, and most of them have been diagnosed sharply at one point or another by Larry Summers. So it’s not like Washington is oblivious to what’s going on. But we’re at the limits of what monetary policy is able to achieve, and the nation cannot afford to repeat the monster hit to the US fisc which we’ve seen over the past couple of years.

Maybe, then, there simply isn’t a solution: the problem is just too big, too complex, and too intractable. It’s a depressing conclusion, but also a pretty compelling one.

Wow:

In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points.

Well, at least give the BLS credit for not trying to sugar-coat the data. This is truly awful, and makes it obvious why the Fed will keep rates at or near zero for the foreseeable future. You just can’t raise rates when unemployment is in double digits.

Artful in the extreme: Dave Eggers publishing house does a newspaper — McSweeney’s

Cracking down on would-be pretzel monopolists — WSJ

The right way to eat sushi. Don’t dip it rice-side-down into the soy sauce! — Snippets

Tkacik on Gladwell. Warning: 7,719 words! — The Nation

Want to kill bankers? There’s an app for that — American Banker

The curveball illusion — Illusion Contest

Japanese bike-parking technology — Guardian

Pandit didn’t work at Citi. Thain didn’t work at Merrill. Corzine wouldn’t work at BofA — The Deal

Jon Chait fact-checks error-riddled WSJ op-ed piece. Don’t hold your breath waiting for correction — TNR

“Mono-urbanity is so 20th century.” — Hyperallergic

Is BlackBerry the new AOL? If it can’t beef up its web browser sharpish, then yes — WSJ

Even if you’re paying the WSJ $600 a year, you still can’t get stories more than 2 years old. Yikes. — Newsbreaks

Block-by-block election results in NYC — NYT

Performance reviews actually damage the receiver’s performance, by underlining the alpha status of the giver — Reuters

Fortune to cut 30% of its editorial staff. And, one hopes, Ben Stein — NYP

Might BofA move its HQ to NYC? Makes sense to me, it has the city’s second-tallest building — Crain’s

John Quelch reports:

Legal immigrants to the US who are resident for five years (or three years for those who marry a US citizen) can apply for US citizenship. Currently, citizenship application and processing fees in the US are $675 per person, up from $60 two decades ago. These fees, which exclude the costs of individual legal assistance or private citizenship classes, were increased by 69% in July 2007…

The number of US citizenship applications from legal residents dropped by 50 percent in the two years after the price increase. As a result, the Federal agency handling citizenship applications still runs a budget deficit, suggesting to some bureaucrats that the price needs to be raised again!

Quelch then disappears into some weird fantasty world where citizenship costs $30,000, minus “an income tax deduction of value-based citizenship fees over five years,” whatever that’s supposed to be. But the fact is that we’re talking about the marginal value of citizenship over permanent residence here, and that marginal value is very low indeed.

Quelch has the upside right, and it’s limited:

New citizens get to vote, apply for federal jobs, and bring their families to the US.

For some people, the last of these is very valuable indeed. For most people, none of them is worth much at all. For one of my relations, there were tax reasons for becoming a US citizen, which I never really understood. For me, the biggest upside to becoming a US citizen would simply be the reduction in airport risk. Dahlia Lithwick explains:

I am in this country on a green card. You should also know that over my almost 20-year residence in this country, I have been told by more than one INS official that I have absolutely no rights here and that, visa or no visa, my residence here can be terminated at their discretion.

On the other hand, Quelch doesn’t mention the downsides of citizenship at all. The most obvious is jury service: if you’re not a citizen, you get an automatic get-out-of-jury-service-free card, and it’s valid for life. Nice. And then there’s taxes. If a permanent resident leaves the country and stops being a US resident for tax purposes, she doesn’t need to pay any US taxes at all. A US citizen, by contrast, needs to pay US taxes on her global income for her entire life, no matter where she lives. On top of that, many countries require that if you become a US citizen, you need to give up your initial citizenship. Which is a major decision indeed. Finally, there’s the fact that if you travel on your US passport, you run a slightly greater chance of being hated on by the people in whose lands you’re travelling.

So it comes as little surprise that as the price of citizenship increases, the demand for it falls, to the point at which the overwhelming majority of citizenship-eligible permanent residents already decline to apply for it.

The thing which confuses me is why the US would encourage a system which creates a weird not-quite-citizen class of permanent residents who don’t get to vote but who otherwise walk and quack like any other first-generation American. If my American wife wanted to live and work in the UK, we’d simply apply for her to get a UK passport. Why doesn’t the US system work the same way?

I don’t understand much of the mathematics in Nassim Taleb’s new paper, co-written with Charles Tapiero. But still I fear that the paper’s main point is hidden in a blizzard of equations:

…

The point here is that the risk to the taxpayer associated with any given bank grows exponentially with that bank’s size. Ceteris paribus, a bank with $500 billion in assets is a lot riskier than a bank with $400 billion in assets, not only 25% riskier.

Treasury seems to consider too-big-to-fail to be a binary thing: either you are, or you’re not, and if you are, then you’ll have to get by with higher capital requirements. But if that kind of a scheme is implemented, then it automatically creates a strong incentive for any too-big-to-fail bank to grow, and grow fast. The bigger that a TBTF bank gets, the more moral hazard can be palmed off onto the taxpayer, while the bank’s own capital ratios don’t have to rise at all.

Treasury I think should consider a scheme where capital ratios rise steadily with the size, risk, and interconnectedness of financial institutions, rather than simply falling into one of two buckets. And there should be no cap on how high those capital ratios can get. If such a cap is put in place, then every big bank will simply be given an incentive to blow straight past it.