Felix Salmon

Blake Hounshell asks (of me specifically, no less) why “other banks didn’t follow Goldman’s lead when in December 2006 the firm turned bearish on the mortgage sector”.

The answer is that Goldman never had much in the way of net mortgage exposure to begin with, and could therefore turn bearish quite easily. Banks which had tens of billions of dollars of illiquid mortgage bonds on their balance sheets, by contrast, had no real way to put on a bearish bet.

More generally, pure investment banks, like Goldman, always claim to be in the moving business as opposed to the storage business. Today’s NYT story shows that there are limits to how true that is — Goldman had significant long-term mortgage exposure which it hedged by building up a short position in synthetic CDOs. But at least its net position stayed very small.

Competitors like Merrill Lynch, by contrast, found themselves taking enormous amounts of mortgage-bond exposure onto their own balance sheets just because no one else was willing to buy the lowest-yielding tranches of their mortgage bonds. It was that exposure which ultimately doomed the bank. Merrill might have been talking the moving-not-storage talk, but in practice it was acting as a waste dump for all manner of risky paper that the bond desks couldn’t move.

And big commercial banks with investment-banking arms, like Citigroup and UBS, never even claimed to be movers rather than storers: they actively sought out high-yielding triple-A paper as part of their business model. So long as the yields were higher than their own internal cost of funds, they considered such a position to be inherently profitable — and the bigger the position, the more profitable it would be.

There was also a difference in the type of mortgage paper which each bank had in its long portfolio. While Merrill, Citi, et al were stocking up on the lowest-yielding debt, Goldman I suspect had mainly the equity tranches of the bonds it underwrote: the highest-yielding, riskiest paper. Because the equity tranche is inherently extremely risky, even in good times, it’s only natural for any bank owning such paper to want to hedge that exposure.

And this is where I think that Goldman might have gotten a little lucky. Because equity tranches can all go to zero very quickly, you need a fair amount of CDS insurance to hedge that exposure. But once you’ve bought that CDS insurance, it will continue to rise in value as the housing market implodes, long after your original equity tranche has been wiped out.

Let’s say the housing market is at 100, and you have $3 million of bonds which will get wiped out if the market drops to 97. So you hedge that exposure by buying credit default swaps which pay out $1 million for each point that the housing market drops. (This is massively oversimplifying, but work with me here.) If the market falls to 97, then you lose $3 million on your bonds, while making $3 million on your CDS — you’re even. But if the market falls even further, to 70, then you still lose only $3 million on your bonds, while making $30 million on your CDS — gravy! You don’t even need to buy any more insurance to make that extra money, you just need to keep holding the insurance you already own.

On the other hand, let’s say the housing market is at 100 and you have $50 million of bonds which will get wiped out if the market drops past 75. At that point, the temptation is to do nothing at all, since hedging costs money and your models tell you that the market will never fall that far. And by the time that the market starts falling, insurance is so expensive that you can’t afford it any longer.

More generally, if you’re starting from a market-neutral position, it’s easy to go short. But if you’re starting from a large net long position, it’s much, much harder to do that. Almost impossible, really, especially when the market seizes up and there’s no liquidity any more.

And while I’m on the subject, there’s one thing worth adding: that none of this would have happened if Goldman hadn’t been so mind-bogglingly enormous. Goldman could hold on to the short side of all the synthetic CDOs it was underwriting precisely because in some distant other arm of the Goldman empire, a mortgage desk had managed to make money by introducing lots of mortgage-backed bonds onto the bank’s balance sheet. So the logical thing to do was to create a new desk which could make money by introducing lots of mortgage CDS onto the balance sheet. That way Goldman made money on both trades, while its balance sheet was hedged and canceled itself out.

If however there was a cap on bank size, or punitive capital requirements on balance sheets above $100 billion, then those kind of shenanigans would be much harder to pull off. Goldman would then do neither the original mortgage deals nor the subsequent synthetic CDOs, and the world would be a better place.

The big story on this slow news day is the NYT’s 3000-word story on Goldman and synthetic CDOs, which now has a formal response from Goldman itself.

Here’s what I think is the most interesting new information in the story:

Beginning in 2004, with housing prices soaring and the mortgage mania in full swing, Mr. Egol began creating the deals known as Abacus. From 2004 to 2008, Goldman issued 25 Abacus deals, according to Bloomberg, with a total value of $10.9 billion…

Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of these wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity. On occasion, he allowed some hedge funds to take some of the short trades…

Goldman’s bets against the performances of the Abacus C.D.O.’s were not worth much in 2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market collapsed. The trades gave Mr. Egol a higher profile at the bank, and he was among a group promoted to managing director on Oct. 24, 2007.

There are a couple of things which jump out, here: firstly that Goldman was structuring synthetic mortgage-backed CDOs as early as 2004, and secondly that it held on to the short side of those deals for years.

Remember that by their nature, synthetic CDOs have equal-and-opposite long sides and short sides. Anybody buying these things from Goldman knew that someone else was betting the opposite way. And they knew that someone was Goldman, at least in the first instance.

Over 2004, 2005, and 2006, and even into the first half of 2007, demand for mortgage-backed credit assets was insatiable. That’s why so many originators started churning out low-quality paper, and that’s why Goldman got into the origination business too, both on the real-money side (although it was never a huge player there) and on the synthetic side.

Goldman’s synthetic CDOs involved it paying millions of dollars in insurance premiums every year to the investors who bought them. Because of the balance of power between buyers and sellers of credit during the boom, the people buying bonds had very little bargaining power, and the people issuing debt had a lot. As a result, private-equity shops were able to issue billions of dollars in cov-lite loans, and the likes of Goldman Sachs were able to put all manner of triggers into their CDOs — things like ratings downgrades — which would stop the money flowing from Goldman to the buyers, and start sending money flowing back in the opposite direction.

Goldman was certainly in a good position here. It had a substantial portfolio of mortgage-backed securities — so substantial, in fact, that it wrote down $1.7 billion on its residential-mortgage exposure in 2008. As a result, it had a lot of appetite for hedges against those securities, and happily held on to those hedges in 2004-7 when they were losing, rather than making, money. It liked holding the position because it had structured the hedges itself, and knew exactly how profitable they might be if and when the housing market turned.

But does that mean, as the NYT article says, that Goldman’s decision to take the short side of the CDOs “put the firms at odds with their own clients’ interests”? No, it doesn’t. In fact, I’m a bit depressed that we’re still having this argument, a full two years after everybody derided Ben Stein for saying the same thing. I may as well simply disinter what I wrote back then:

If I sell you something – whether it’s a car or a house or a stock or a ham sandwich – I have no fiduciary responsibility to you. Caveat emptor, and all that. If I am investing your money on your behalf, then I have a fiduciary duty. But if you’re looking for fiduciaries, you’re not going to find them on the sell side, only on the buy side.

When Stein accuses Wall Street banks of “betraying their clients’ trust,” he’s simply confused about who the clients are, in these transactions. If I’m an investor and I buy a stock from a broker, then I’m buying it because I think the total amount of money I’m paying is a fair amount for that security. I’m completely agnostic about whom, exactly, I’m buying the stock from: if a different broker has the same security for a lower price, I’ll go there instead. And I’m certainly not trusting the broker to assure me that my security will go up rather than down in value. In fact, at the margin I actually like it if my broker is shorting that stock and thinks it will go down in value – because that just means that I get to buy it at a slightly cheaper level.

It’s just ridiculous to think that “basic fairness” means that Goldman should be exposed to exactly the same risks as anybody who it sells securities to. Goldman Sachs isn’t Berkshire Hathaway, investing money on behalf of shareholders. It’s an investment bank: an intermediary between issuers and investors. If an investor buys any kind of financial security, he’s deliberately buying a risk product. He gets all the upside if that security rises in value. But he also gets all the downside if that security falls in value. It’s not the job of any securities firm to bail him out.

The 30,000-foot view of what happened here is that there was an enormous amount of mortgage paper flooding the market over the course of the 2000s. Goldman Sachs, as a sell-side institution which manages its risk book on a daily basis and doesn’t want to take long-term directional bets, hedged its mortgage exposure with short positions it created by structuring synthetic CDOs. The buy-side, by contrast, had an enormous amount of appetite for long positions in mortgages, and it was the job of banks like Goldman to feed that appetite: again by structuring synthetic CDOs. Goldman was killing two birds with one stone: no wonder Jonathan Egol, who was in charge of these deals, did so well there.

When the mortgage market started to turn, Goldman was smart and nimble enough to realize that it could make money on the way down as well as on the way up. That’s what traders do, and Goldman is the world’s largest and most successful trading shop.

Henry Blodget adds another important point:

Don’t forget that everything is obvious in hindsight. Goldman could have been wrong about the housing market, and its clients could have been right. In that case, we wouldn’t be talking about a scandal. We would be talking about how Goldman got greedy and made dumb bets.

The real lesson here isn’t that Goldman did anything scandalous. It’s just that if you’re making a bet and Goldman is your bookmaker, don’t be surprised if you end up losing.

Mean-reversion vs momentum strategies: The former is safer, the latter can make you much more money — Kid Dynamite

How Stephen Colbert self-censored his White House Correspondents Dinner speech — The Atlantic

The new wave of oyster farmers — WSJ

Beware anecdotal evidence of microfinance’s success (or failure) — Center for Financial Inclusion

Google News overtakes NYTimes — TechCrunch

Taibbi on the human cost of defense earmarks — True/Slant

Young Bernanke — Time

Dan Gross weighs in (on the side of the sensible) re jingle mail — Slate

Hilarious roundup of local-TV jesus sightings — YouTube

Maria Abi-Habib reports:

Gulf News, a newspaper part-owned by a senior government minister in the United Arab Emirates, has told its journalists to avoid using the words “bailout” and “default” when writing about Dubai’s debt crisis…

Reporters for the paper, the largest English-language daily in the U.A.E., were also urged to steer clear of the phrase “debt crisis” and asked to “ensure the following politically correct terminology is used” — words such as “financial consolidation” and “fiscal support” — when describing the sheikdom’s economic problems…

“This is a style guide,” said Francis Matthew, the Dubai-based paper’s editor-at-large when asked by Zawya Dow Jones about the memo. “We’re trying to restrict people from using financially incorrect terms.”  

Remember this, reporters! AIG, Citigroup, Frannie, GM, etc etc didn’t get bailouts, they got fiscal support. Or, better yet, they simply experienced financial consolidation. Sounds so much better than, you know, bankruptcy.

(Via the indefatigable Daniel Lippman)

Mish has found something very odd indeed from Oppenheimer Funds. Its Fixed Income Core Plus strategy was marketed to the Illinois Bright Start college savings plan, with disastrous results: parents thought they were making a conservative investment for imminent college-tuition needs, bechmarked to the Barclays aggregate index, which rose more than 5% in 2008. Instead, they wound up in a crazy leveraged vehicle with total losses of 38% in 2008 and more in 2009.

But at Oppenheimer’s website, the information on the Core Plus fund shows positive returns for both 2008 and the year to date. It’s all very odd, and makes it seem that the college fund investments were invested in something enormously different from Oppenheimer’s own Core Plus fund. Either that, or Oppenheimer is calculating its fund returns in a very odd manner. Can anybody get to the bottom of this?

Update: Mystery solved! There are two Oppenheimers. There’s Oppenheimer Funds, which sold the disastrous investment to Illinois; its Core Bond Fund did indeed plunge in value in 2008. And then there’s Oppenheimer Investment Management, which Mish linked to, which also has a Core bond fund, but which is not part of Oppenheimer Funds at all; instead it’s an affiliate of Oppenheimer & Co, the boutique where Meredith Whitney used to work.

The WSJ’s front-page story yesterday was clear and unhedged:

The Federal Bureau of Investigation is probing a computer-security breach targeting Citigroup Inc. that resulted in a theft of tens of millions of dollars by computer hackers who appear linked to a Russian cyber gang, according to government officials.

The fallout, however, is incredibly muddy and opaque. Citigroup is strenuously denying that there was any breach at all, let alone any losses; it also said in the original story that the WSJ’s smoking gun — the disappearance of $1 million from a Citibank bank account in Mt Vernon, NY — was “an isolated incident of fraud”.

PCWorld says that the story is wrong:

A source within federal law enforcement who declined to be identified said the Wall Street Journal story was inaccurate and appears to have confused a known 2007 hack of Citigroup-branded automated teller machines with a long-running criminal effort to hack online banking customers and move money out of their accounts.

“They’ve screwed up so many different things,” he said.

ABC has weighed in too, deciding that Citigroup and the WSJ are both wrong, and that “the truth here is somewhere in the middle”, whatever that’s supposed to mean.

Paul Murphy has an interesting theory:

Citigroup, like every major bank in the Western world, is covering up the fact that online fraud — both sophisticated and unsophisticated — is running at epidemic levels. But it can’t be seen to be singled out as an institution with weak controls, where the public at large might be fearful of depositing their money. So it goes on the denial warpath.

But hang on, you say! How about the Citi guy saying: “We had no breach of the system and there were no losses, no customer losses, no bank losses.”

Well, maybe the Russian crooks were siphoning cash out of a Citi customer’s account, using his or her computer. The customer would suffer no loss because the bank routinely makes good on the missing money; the bank, meanwhile, makes no loss because when it discovers a fraud such as this it simply contacts the correspondent bank in Latvian/China/Ukraine/Russian to which the money was transferred and demands it back.

Murphy is convinced that banks are losing billions of dollars to cyber thieves, just because they can’t afford the IT investments needed to stop such theft, and in any case have no assurance that such investment would actually be successful in preventing further theft. All they can do is quietly reimburse any customers who are hit, while keeping the scale of the problem as secret as possible.

It does seem to me that the biggest problem with the WSJ story is not its accuracy, but rather its scope. The paper here concentrates on a single alleged theft, the outcome of which is unclear, even to the reporters involved: one of them, Siobhan Gorman, told Ryan Chittum that she was “in the process of clarifying with sources” what exactly had happened.

But by concentrating on a single instance at a single bank, the WSJ and papers like it force banks into a defensive crouch where they deny that any theft has taken place at all. After all, if Citibank were to say that the story was true, that would make it seem that Citibank was less secure than its rivals. As the original story reported:

U.S. banks have generally been loath to disclose computer attacks for fear of scaring off customers. In part this is an outgrowth of an experience Citibank had in 1994, when it revealed that a Russian hacker had stolen more than $10 million from customer accounts. Competitors swooped in to try to steal the bank’s largest depositors.

I think then it’s important for stories like this to try to make clear whether they’re talking about individual thefts which could and should have been prevented, and which would not have happened at a safer bank, or whether on the other hand they’re talking about symptoms of a much broader system-wide problem. If banks always refund thefts and the thefts are rare and isolated, there isn’t a problem here on a systemic scale, and there isn’t a risk to depositors either. On the other hand, if Murphy is right and cybertheft is endemic, then that poses a systemic risk to the banking system which ought to be addressed in a high-profile manner, in conjunction with regulators who are charged with overseeing the safety of the system as a whole.

Go read Barry Ritholtz’s attack on gift cards, and then read Andrew Leonard’s response. Actually, don’t do either: you should instead take advantage of the fact that absolutely nothing seems to be going on today to go out and buy a proper present or two instead.

At heart, the debate over gift cards isn’t really about gift cards at all: it’s about individual attitudes towards the fungibility of money. Barry’s a great believer in giving cash, or, failing that, giving something which is “practically cash”, like a prepaid credit card. Andrew, by contrast, fears that giving cash is a waste:

Cash, like it or not, carries with it some assumption of responsibility. You don’t want to waste your cash frivolously, or you might feel compelled to save it for some greater goal…

If you gave me cash for Christmas, I’d probably save it to pay for groceries. But if you gave me a gift card redeemable at my local bike shop — I’d be utterly delighted to splurge on new gloves.

I’m surprised that Barry Ritholtz, hard-charging econowonk and hedge-fund manager, seems to believe that money stops being fungible when it’s gifted, while Andrew Leonard, bearded west-coast pinko, is the kind of person who deposits gifted cash into a bank account, where it dissolves into the pool of money needed to buy toilet paper and pay the rent.

I’m more like Andrew than Barry: if you tuck a check into my birthday card I’ll be very grateful, but I won’t mentally ring-fence that money and feel permissioned to splurge it. But I’m also very close to people on Barry’s side of the debate, who feel morally compelled to buy something they don’t really need if they get cash as a present.

So I’ll come down in the middle on this one: cash generally becomes more of a present the more likely the recipient is to treat it like a present. Gift cards, by contrast, might be a better bet for someone like me. Yes, there’s a deadweight loss to them — but as Joel Waldfogel demonstrates, there’s a deadweight loss to nearly all gifts. In a way, it’s the deadweight loss which makes them gifts.

One thing I’m unclear about, though: do gift cards generally cost more or less than the present which would otherwise have been bought? Do people have a mental budget for gifts, which they can easily spend in full on a gift card? That would imply that gift cards cost more than presents. Or do people mentally take account of the increased utility and cash-like characteristics of gift cards and scale back their spending accordingly? Has anybody done any studies on this?

So you’ve caught a pirate. Now what? — Miller-McCune

Me, on financial journalism — BNN

Darth Vader rings the opening bell at the NYSE. Avoids cackling — Clusterstock

Google’s $20m holiday gift — Google

Gay marriage passes the legislature, 39 to 20, in Mexico City! — Mexfiles

Brauchli takes chat question: “Why has WP chosen not to compete as a national newspaper?” — WaPo

Natasha Chart’s critique of Naomi Klein’s self-indulgent climate politics — Open Left

Did Greek debt tighten after the downgrade, or did it widen sharply? — Reuters, FT

If Wall Street Ran the Airlines — Baseline Scenario

Warren Buffett probably won’t be particularly happy with Mattathias Schwartz’s cover story in the latest Harper’s, behind a subscription firewall here. It’s another pilgrimage-to-Omaha story, but this one has a twist: Schwartz finds that Buffett’s folksy wisdom really isn’t the slightest bit contagious.

Among the pilgrims are RJ Meurer Jr, a senior vice president at Morgan Stanley who storms into Buffett’s barber with his entourage, telling the Brazilian man getting a shave that “You got to get out. We got this barbershop booked.” Or there’s Matt Kelley, a Chicago public-school teacher, who failed at trading in and out of a single Berkshire B share at the same time as conspiring to lose $200,000 of his $150,000 net worth trading on margin; he eventually maxed out his credit card to continue to make leveraged bets.

But Schwartz saves the worst for last, when he finds Talia Eisenberg, along with her father’s girlfriend, getting thrown out of an Omaha bar for being drunk. Talia is the daughter of Robert Eisenberg, who himself is the son of an early investor in Berkshire. With her unearned riches she has opened an art gallery on the Lower East Side; she also receives glowing press from NYC society blogs, complete with comments extolling “her generous heart”.

She’s not going to be happy about this:

“Do you even know who we are?” Talia asked. She thrust her hand into her purse. Out came a grip of shareholder credentials.

“I don’t care,” said the manager. “You’re getting out of this restaurant. Now.”

The women strutted out to a black Mercedes-Benz. As Talia drove, she enumerated a few of her present frustrations. She hated the tacky nowhereness of Omaha. She hated the gawking shareholders who think they own it for a weekend. Most of all, she hated Gorat’s for unjustly ejecting her from the premises. “They thought I was a whore because I’m good-looking and rich!” she exclaimed. “What can I do?”

“They never see the likes of us around Omaha,” replied Tanya.

“We have more shares than all those fuckers,” Talia said…

“Where were you at the cocktail events?” Talia asked me. “We were there with all the ballers. The real deal. You didn’t go to Borsheim’s, did you? That’s where all the suckers go, with one baby B share. The big parties are up at the houses.”

This is what happens to the millions of dollars that Buffett earns for his earliest and most loyal investors: they end up fueling the very snobbery and condescension that Buffett himself could never abide.

Talia’s young, and she was drunk (and she was driving drunk, to boot), but maybe it’s only the young and drunk shareholders who will ever come out and say — to a journalist, no less — what most of the people “up at the houses” are thinking.

All of which only confirms me in my view that once Buffett has gone, Berkshire Hathaway will not remain long in its present form. Look at its owners, ex Buffett and Munger, and you see people who simply don’t have the constitution to patiently make careful, idiosyncratic, multi-billion-dollar bets with century-long time horizons. The ghost of Buffett might hang around for a while, but eventually the new CEO will start talking about “shareholder value”, and that will be the end of that. Not that it’ll make any real difference either way to the likes of Talia Eisenberg.

You’ve heard by now about Steve Cohen’s appearance on a UK daytime talk show in 1992. The Post seems to think that the story is that he was sleeping with both of his wives at the same time; the first reaction from the rest of us was sheer astonishment that he went on a talk show at all.

But buried in the story is another interesting nugget: 1992 was the year that Cohen launched SAC Capital, and began a hedge-fund career that would rank among the greatest of all time.

Now, if you had the opportunity to invest with Cohen in 1992, then clearly, with hindsight, you should have put every last penny into his fund. But at the time he was being excoriated by his wife on a show called “Cristina”, after its eponymous bleach-blonde host. The obvious thing to do would be to run very far in the opposite direction. Which just goes to show the advantages of being contrarian — and the difficulties of picking a fund manager.

That said, I’m pretty sure that at this point a strategy of “invest with any hedge fund manager who appears on a daytime talk show while raising money for his first fund” has performed extremely well. Maybe other hopefuls should try to go down the same route, to see if they can capitalize on the momentum trade.

Update: It was an English-language talk show, not an English talk show. It broadcast in the US, not the UK.

I was pleasantly surprised by the volume of email response I got to a passing reference to Kripkenstein on this blog — clearly quite a lot of you enjoy a bit of analytical philosophy! I went out to lunch today with a couple of philosophically-inclined finance types as a result, and, since I’m still high on Sichuan peppercorns and it seems to be something of a slow news day, I thought I’d put up a poll.

Remember this wonderful graph, from Paul Kedrosky, showing the price of gold in gold? Pay attention, there will be a quiz.

So here’s the question, for those of you who remember the analytic-synthetic distinction:

Or to put it another way: Can an analytic a priori statement be funny?

Update: With 125 votes cast, a clear majority of you (59%) are voting for the first option, analytic a priori. But you’re wrong, as dsquared explained to me in an email this morning — what happens to the graph if the price of gold goes to zero?

The assertion that the price of gold, in gold, is 1, is not analytic because it depends on the truth of at least one other proposition (that gold has a nonzero price) and is not a priori because there are possible worlds in which gold does not have a nonzero price.

Which just goes to prove, if nothing else, that philosophy is probably not best conducted by polling blog readers.

Update 2: Natecha defends the analytic-a-priori crew against dsquared, saying that the statement “x/x=1″ isn’t false when x=0, just undefined. He adds for good measure that “Daniel’s comment flies in the face of philosophical orthodoxy about analyticity and apriority”. Which is a statement I daresay Daniel would agree with.

John Quiggin reminds me of Richard Dorment’s wonderful NYBR essay on Andy Warhol and the authenticity of his 1965 Red Self Portraits. While my blog entry on the essay was basically about non-profit politics and the art market, the essay itself was largely about the way in which Warhol reinvented authenticity:

By the 1970s Warhol no longer had any sustained involvement in the mass production of his paintings. In his book about Warhol, Holy Terror, Bob Colacello quotes Warhol’s longtime printer Rupert Smith:

We had so much work that even Augusto [the security man] was doing the painting. We were so busy, Andy and I did everything over the phone. We called it “art by telephone.”

The question is when Warhol started doing this, and Dorment makes a very strong case that he started in 1965, with the Red Self Portraits.

Warhol told Ekstract to send the acetates to a commercial printer for silk-screening. Morrissey further says that Warhol spoke to the printer over the phone to give him specific, detailed instructions regarding the colors he wanted the printer to use. Both Warhol and Morrissey communicated with the printer, but Morrissey is clear that neither was present during the silk-screening process.[5] After the printing, Ekstract returned the acetates to Warhol…

Few artists in the twentieth century were as restlessly experimental as Warhol. This ruling by the board represents a complete misunderstanding of the very nature of what he achieved, and how his approach to making his work changed Western art. Innovation has to start somewhere, and it is precisely because the 1965 Red Self Portraits were made without Warhol’s on-the-spot supervision that they are so critically important.

All of which came back to me when I visited MoMA’s wonderful Bauhaus show a few days ago, and saw László Moholy-Nagy’s beautiful EM 2 and EM 3, which date from 1922-3:

Moholy–Nagy’s Telephone Pictures were made in Berlin via the processes of modern technology: Moholy–Nagy dictated the paintings’ specifications by telephone (a relatively new invention at the time) to the foreman of a sign factory. Three paintings were made, each with identical images, but in different sizes. The telephone was a new studio tool that allowed Moholy–Nagy to produce work independent not just of his own hand but of his presence. The fact that the paintings were made by ordinary laborers demonstrates his commitment to a non–elitist approach to creative work.

Maybe then it’s the very debate over the Red Self Portraits which makes them important. When Moholy-Nagy was doing something functionally identical more than 40 years earlier, no one denied that he had authentic authorship — it was all part of the iconoclastic culture of the times.

In the case of the Warhols, however, there’s a huge fight with the Andy Warhol Foundation over their authenticity — and as a result you’re not going to see any of them exhibited at MoMA or any other museum any time soon.

Quiggin says that all this obsessing over authenticity is really only important in “the market for collectibles, a class that happens to include paintings”, and I think he’s right — although clearly he’s also right that we’d see a lot less of certain Shakespeare plays (or Mozart operas, for that matter) if they were found to be written by someone else. I’m beginning to think that the only thing that really matters is when there’s a fight over authenticity. That’s always when things get interesting, after all. Maybe someone should set up a museum devoted only to disputed works!

Did you know that it’s possible to get a PhD in financial journalism? Lennie Fuller does — he’s a former Lehman executive who’s now thinking of doing exactly that at Stirling University. He asked me if I had any ideas about possible thesis topics, and I thought in my bloggy way that throwing the question open might be interesting. So what do you think the big open questions in or about financial journalism are?

Fuller is a qualified Scottish Chartered Accountant, and wonders whether something similar to the CFA might not be implemented in financial journalism: should journalists be regulated or qualified before going to work? If you don’t really understand something like structured finance, is it possible to write sensibly about it?

My feeling on this one is that the arguments against such a scheme are so overwhelming as to render any thesis on the subject pretty moot. Freedom-of-speech principles alone would more than suffice, as would the simple fact that the public would not be well served by any scheme which served to further perpetuate the degree to which journalists have been captured by the financial institutions they cover.

That said, one interesting thesis topic might be an empirical look at the expertise of the people who produced the best journalism of the crisis. Certainly the trade press, where one finds a great deal of narrow expertise, failed utterly to grasp the bigger picture. What kind of qualifications or knowledge, if any, did the best journalists of the crisis have in common? My feeling is that the main qualification that journalists needed was a strong and healthy skepticism of authority figures, including senior bankers, central bankers, and regulators. And that’s not a trait one learns by studying overcollateralization waterfalls in detail.

Fuller also wonders whether financial journalism “should only be investigatory as all other information is freely available in the market” — which seems to me to ignore the mechanism (journalism) by which an enormous amount of information enters the market. (There’s a reason why all those trading floors are surrounded by screens tuned to CNBC, while the trading screens themselves invariably have full feeds from Reuters and Bloomberg.) More generally, I think that people like Fuller, who are looking at financial journalism largely from the perspective of a financial-market professional, have to be careful to remember the crucial public role played by journalism. Just because information is “in the market” doesn’t mean that it’s known by the general public. And it’s the job of journalists to intermediate between the two.

More generally, it’s the job of journalists to interpret what financial-market professionals are doing and to explain it to a generalist audience. Yes, market activity can be complex, and as a result some of the subtleties will be missed. The professionals might not like that, but if they already know everything that the article is talking about, then it’s not aimed at them anyway. One of the biggest lessons that financial journalists have learned over this crisis is that we collectively spent much too much time writing about deals for bankers and lawyers, and much too little time writing big-picture articles for the general public which would require broad, rather than narrow, understanding of what was going on.

Finally, Fuller asks when sources become insider trading: the simple answer is never, if you don’t trade, and there’s really no reason for journalists to engage in such activities. More generally, the only insider information that journalists ever really have is the inside information of what is going to appear in tomorrow’s paper. If you trade in advance of a market-moving story appearing, that’s very bad. In other cases, you’re not an insider, so you can’t be guilty of insider trading.

But that’s just Fuller’s ideas. What other ones are there? I’d be interested in looking at the difference between the trade press and the consumer press, for starters, and how they can learn from each other. I’d also be interested in asking whether there’s a fundamental conflict of interest in the financial-press business model: how can we financial journalists be expected to hold the industry to account if we’re ultimately being paid by that very industry?

And does anybody know of any other PhD programs in financial journalism? What have the results been to date?

Alicia Keys and Stephen Colbert. Oh yes — Hulu

There are 4.22 Citi shares for every person in the world — BIG

The bizarre story of CommuterOutrage.com – complete with Pentagon connection! — Streetsblog

How much is a blog worth? The once popular but now rarely updated PVRblog.com just sold for $12k — eBay

Iceland Levies Europe’s Highest (25.5%) VAT to Help Finance Budget Gap — Bloomberg

The problem with contingent debt: it brings shareholder risk down while increasing systemic risk — SSRN

Fall Internship Pays Off With Coveted Winter Internship — The Onion

Time’s Justin Fox has a new job “identifying leading-edge content in key topic areas across all of HBR’s publishing platforms” — Businesswire

Please to explain, Ben Stein, why Obama is “people who don’t pay their grocery bills” — Fortune

How MBAs killed GM — TNR

“Anarchic rockers Rage Against the Machine have pulled off one of the biggest shocks in UK chart history” — BBC

Did Cravath’s first-year-associate bonus fall from $7,500 (WSJ, Nov 2) to $5,000 (Bloomberg, today)? — WSJ, Bloomberg

Will @TheEconomist reach 750k followers in 6 months? I’ll bet no — FT

Feynman on Rubber Bands — YouTube

Woman survives 120-foot suicide jump from Brooklyn Bridge into the icy East River, plus 5-10 mins in the water — NYDN

AIG, Show Us the E-Mail — NYT

Carmen Herrera = rockstar — NYT

I.D. magazine “had the exact same web template as that of sister publication Deer & Deer Hunting” — Fast Company

Roa in London — Unurth

Steve Waldman has been doing a spectacularly good job of teasing out the moral and financial implications of homeowners walking away from their mortgage obligations, and delivers another great post today:

I think that underwater homeowners ought to walk away from their loans for the very same reason McArdle want us to consider them jerks for doing so. We both want to see norms we consider valuable enforced. I think that banks violated a great many norms of prudence and fair dealing in their practices during the credit bubble, and that they violate the fundamental norm of reciprocity by fully exploiting their own legal rights while insisting that borrowers have a moral obligation not to exercise a contractual option. In order to strengthen norms I consider crucial, I hope transgressors face legal and social consequences (strategic default and reduced shame attached to default) that will alter their behavior going forward…

McArdle favors a world with both easy credit and easy bankruptcy. I favor the easy bankruptcy, but not the easy credit. I think that debt arrangements are hazardous and should be entered into only with great care. I don’t consider increasingly leveraged homeownership and aggressively accessible consumer credit to have been positive developments. As a practical matter, I think we must rely on creditors rather than potential debtors to differentiate between wise and unwise loans. So I consider it a feature rather than a bug that holding creditors accountable will encourage them to think twice before sending out convenience checks.

While you’re chez Steve, you should also check out the letter he got from a soldier on the same issue. The basic insight here is that if a large number of morally serious individuals refuse to walk away from their debts, then we as a society are essentially letting banks off the hook for systemically-dangerous atrocious underwriting. Meanwhile, the banksters are grinning from ear to ear: to the extent that they haven’t been bailed out by the government, they can happily get bailed out by individuals who will end up paying hundreds of thousands of dollars just so they don’t need to worry about being considered to be “jerks”.

If there’s less shame attached to default, we will end up with exactly what we want — less badly-underwritten credit, a more solvent society, and much less tail risk. We went far too many years believing without really analyzing the proposition that credit is nearly always a Good Thing. Now that we’ve learned just how harmful it can be, it makes sense to reorient our aspirations and norms in the direction of a world where credit is both rarer and safer than it is right now.