Felix Salmon

Christian values, only $25.98

Felix Salmon
Dec 21, 2009 20:25 UTC

Baptist values are going cheap! They’re only $25.27 per share, while Methodist values are $25.55, Lutheran values are $25.56, and Catholic values are $25.98 — the same price as general Christian values.

All these values are brought to you by the good people at FatihShares (“Invest with Conviction”). I’m seeing a long-Baptist, short-Catholic relative value play here; I’m just sad that I can’t get the video of this morning’s NYSE bell-ringing to work. I was hoping for something a bit more transcendant than usual.

(Via Crigger)


…and then there’s “FatwahShares” (invest by prescription)

Posted by Uncle_Billy | Report as abusive

The Fed’s regulatory errors

Felix Salmon
Dec 21, 2009 19:19 UTC

Binyamin Appelbaum and David Cho have a very clear-eyed summary of where the Fed screwed up in terms of bank regulation over the past few years. Two things are clear: that the Fed had the power to prevent the excesses that banks got involved in over the course of the Great Moderation; and that it didn’t even come close to beginning to wield that power until after the Great Moderation had become the Great Recession and it was far too late.

The list of reasons why the Fed was so lax is a long one. But just running down the article, we can find:

  1. Simple analytical failure: Even after the subprime bust started, the Fed was convinced that it would have minimal repercussions on banks.
  2. A belief that the Great Moderation was a sign of lower systemic risk, as opposed to being a sign that enormous amounts of risk were being pushed into tails.
  3. A touching belief in securitization and triple-A credit ratings, which allowed Citigroup and others to build loan pools of 20 times the size of the underlying capital, up from a former cap of 10x leverage. The result was that Citi increased its total assets by 68% while increasing the size of its capital reserves by only 36%.
  4. A feeling that banks had to be able to compete with non-bank lenders which were outside the Fed’s jurisdiction, such as GE and GMAC.
  5. Failure to notice contingent liabilities at banks, especially with regard to SIVs.
  6. Failure to notice deteriorating asset quality, especially with regard to subprime loans.
  7. Overreliance on other regulators, especially the OCC and OTS, which were busy competing with each other for banks to regulate, giving both of them a strong incentive to be very bank-friendly.
  8. Overreliance on internal bank risk officers, and the concept that so long as the regulator keeps a relatively close eye on the risk-management function at a bank, it doesn’t need to spend much time looking at the actual risks themselves.
  9. An unworried belief that banking had become so complicated that regulators couldn’t possibly stay on top of the risks involved.
  10. Failure to pay attention to warnings from economists both inside and outside banks that things were looking very ugly.
  11. Failure to rein in a huge wave of bank mergers: The Fed approved 5,670 of them over the past decade, an approval rate of well over 90%. No one seemed to be remotely worried about the problem of too big to fail banks.
  12. Trust in, and a desire to move towards, Basel II.

I’m sure there are more, but we may as well stop at a round dozen. The question is whether, given all these failures, it’s remotely realistic to hope or believe that the Fed can change its spots and become a smart and strong regulator with teeth. Fed governor Daniel Tarullo, who has been appointed by President Obama to overhaul the Fed’s approach to regulation, thinks it can:

“Supervision of the largest institutions is something that’s going to be very hard to do and to do well,” Tarullo said, “and the Fed is the one part of government that has the resources and the capacity and the expertise to fill this role.”  

My feeling is that he’s more right than wrong. Yes, the Fed screwed up big time over the course of the past couple of decades, essentially giving up most of its important regulatory oversight role. But at the same time it seems improbable, to say the least, that anybody else could do a better job than the Fed.

To put it another way, the Fed’s our best hope here. Its chances of becoming an effective regulator might be slim, but they’re higher than the chances of getting an effective regulator if you give the job to a different agency entirely. Either way, the most likely outcome is probably that banks will continue to act with reckless impunity. But we ought at least to try our best to stop them from doing that. And the Fed’s the only agency which has a chance in hell of succeeding.


The merger data is interesting. The contrast with Canada is striking: while Canada has, for all practical purposes, 5 or 6 banks, they were stopped from merging in the late 90′s by the Chrétien government (probably by Chrétien himself since then finance minister Martin was a Rubinesque figure). America has thousands of banks but the number of mergers in the past decades has created two unmanageable giants that are way too big for anybody’s good.

Posted by lemarin | Report as abusive

Why harsh white-collar sentences make sense

Felix Salmon
Dec 21, 2009 16:52 UTC

Matthew Kelley asks whether the 14-year sentence for the former head of El Paso Corp.’s natural gas trading business isn’t excessive; my feeling is that it makes a certain amount of sense.

For one thing, there are lots of excessive sentences in US jurisprudence, and there’s no reason why white-collar crimes should be exempted from that phenomenon. Indeed, the opposite is arguably the case: in the case of most crimes, it’s pretty obvious in the wake of the crime that a crime has taken place, and as a result a police investigation is immediately launched. Much of the attraction of white-collar crime, by contrast, lies in the fact that if it works, there’s a very good chance that no one will ever know that a crime ever happened at all.

As a result, a much lower proportion of white-collar crimes is investigated than of crimes as a whole — and that’s before you get to the question of whether or not they can be successfully prosecuted. After all, these are complex things, and hard to prove beyond reasonable doubt, as the prosecutors of Ralph Cioffi know full well.

Given (a) the low probability of being investigated, then, along with (b) the far-from-certain probability of being successfully prosecuted even if you are investigated, and (c) the enormous potential rewards, it’s easy to see how white-collar crime is very attractive. And the government has very few tools against it beyond very stiff sentences for those criminals who are investigated and tried and found guilty.

Against all of that one has to put the strong principle that the punishment should always fit the crime — and in this case, which is arguably victimless, a 14-year sentence does seem harsh. Still, it’s important to remember the amount of money involved in these cases. Few Texans would object to a 14-year sentence for a simple thief who stole $1 million, and I’m sure that James Brooks ended up making much more than that in excess bonuses tied to his fraudulent reporting.

More generally, it’s easy to lose sight, in the high-speed world of trading, of the fiduciary responsibility shouldered by people moving billions of dollars of other people’s money. A huge amount of the anger directed at Wall Street, especially in the wake of the financial crisis, is a result of the fact that this is real money we’re talking about here, and a lot of the brash young traders on the Street seem to have no conception of the value of a dollar. If sentences like this help to sober them, that’s undoubtedly a good thing.


“For one thing, there are lots of excessive sentences in US jurisprudence, and there’s no reason why white-collar crimes should be exempted from that phenomenon.”

So because one sentence is excessive all sentences should be excessive? What logic! Kind of along the lines that since you broke one arm, you should break the other just for parity’s sake.

How about levying sentences that are appropriate to the offender’s role, culpability, etc. and that meet the purposes of punishment. That means amending overly harsh sentences. It also means sentencing white collar criminals to fines and prison terms that refelct culpability and is informed by societal demand for punishment, rehabilitation, etc.

I know I’m late to comment on this post. But for goodness sake…

Posted by mixlpixl | Report as abusive

What price better credit

Felix Salmon
Dec 21, 2009 15:54 UTC

First Premier Bank is (still) offering one of the most usurious credit cards I’ve ever seen. The APR is reasonable, at 9.9%, but just check out those fees:

Account Set-up Fee: $29.00 (one-time fee)
Program Fee: $95.00 (one-time fee)
Annual Fee: $48.00
Monthly Servicing Fee: $84.00 Annually
Additional Card Fee: $20.00 Annually per card, (if applicable)

All this on a card which has a total credit limit of as little as $250. You’ll notice that even without the Additional Card Fee, the compulsory fees add up to $256, and so First Premier helpfully charges $7 a month instead of $84 up front for the monthly servicing fee, to prevent you from exceeding your limit without spending a penny. Even so, the amount of credit you actually get to spend will be a maximum of $71 on a $250 card.

The good news is that this kind of rip-off will soon be illegal; the bad news is that First Premier, undaunted, is simply getting around those restrictions by jacking up the APR to 79.9%.

Who would voluntarily sign up for that kind of offer? There’s talk from CardHub CEO Odysseas Papadimitriou of “people in true emergencies”, but the fact is that if you’re really in a true emergency, you’re unlikely to have the time or the ability to apply for the card, wait for it to arrive, and then make your payment using it.

There’s another group of people who sign up for offers like this, however: individuals with bad credit who think that the best way of improving their credit score is to borrow money and show that they can pay it back — even if they actually have the cash they need to make their payments up-front. The fees and interest payments associated with the card then become a direct cost of improving one’s credit score.

This doesn’t only happen on cards with $250 credit limits, either. Check out this application for a $21,250 loan at Lending Club: it’s someone with a loan grade of B5, who will borrow at 12.53% over three years to then lend the money back to people with better credit than himself. He’s guaranteed to lose money, but he wants to “improve my credit history for better future loans” and thinks this is a good way of going about that.

The loan is still being underwritten by Lending Club, and might not be approved — although ultimately all they can do is check to see whether he can repay the debt, it’s not up to them to make a judgment on the wisdom of investing the proceeds of the loan in other loans.

All of this makes me rather sad. People don’t want simply to be in control of their finances; they specifically want a higher credit score, and they’re willing to pay up to get one — even if doing so at the margin hurts their financial situation. It’s a bit like someone deciding they need to get healthier and then judging their progress by weighing themselves, and ending up going on a disastrous crash diet to lose weight: it defeats the ultimate purpose. But the need for external validation of progress towards a certain goal is so strong that people will act in self-defeating ways to get it.

I would love to see much less emphasis on credit scores when it comes to financial literacy — financial educators often leave their clients with a desperate need to achieve a higher credit score at any cost. Instead of looking at scores, people should just try to concentrate on overall financial health, and check their credit reports (not scores) at annualcreditreport.com in order to make sure there aren’t any errors there. But it’s not going to happen: the entire financial industry — including many non-profit financial education outfits — is far too caught up in these scores. More’s the pity.


People specifically want a higher credit score rather than to be in control of their finances because to “the market” scores matter substantially more than anything else. Apply for a job? They’re going to look at FICO first. Apply for a mortgage? Underwriting is dead: FICO first. Security check? FICO first. Ask around; I am not making this up. For pretty much anything that matters these days it’s FICO first, facts last.

So it is not sad that people care about scores first and are willing to jump through whatever hoops Fair Isaac’s model tells them to. That is the rational response to a dysfuncitonal market. What’s sad is that despite clear, uncontroverted failure of Fair Isaac’s models and the victory of logic, facts and old-fashioned underwriting, “the market” still thinks, FICO first.

FD: I have a ‘thin file’ which means that despite a top-decile household income, zero debt and two decades of paying my bills, a college student with no job but a ten-year history of scraping up payments for department-store credit cards has a better FICO than I.

Posted by wcw | Report as abusive

The winner-takes-all smartphone

Felix Salmon
Dec 21, 2009 14:44 UTC

Baruch reckons that Apple has pulled off something very clever indeed: a “phase transition” in the mobile-phone market.

Before Apple came along, he says, phones were a bit like PCs, or blenders: a handful of different manufacturers would fight for market shares which had a tendency to mean-revert. But the iPhone has changed all that: because the iPhone is much more about software than hardware, the market-share characteristics in the smartphone space are going to look much more like the kind of markets dominated by Google or Microsoft or Autonomy or Oracle.

Apple’s achievement has been to shift the focus of the high-end handset market from voice to apps and browsing. Any old hardware would do for voice and SMS… now it is how nicely your phone can email, surf the web, and most of all, how rich and easy is the ecosystem of applications, that determines whether people buy your product or not. That’s software; precisely the type of market where monopolies or duopolies emerge.

You can see why Joseph Menn says that the iPhone app store “might prove to be the most important thing Apple has ever created”. It locks people into an Apple-controlled ecosystem, just like the iTunes Music Store did with iPods.

The app store isn’t perfect: the system for getting apps approved is lengthy, capricious, and bereft of accountability. And for all the obstacles which exist before your app is approved, Apple never seems to unapprove an app if the quality of service suddenly falls off a cliff. (It’s a bit like the ratings agencies in this respect: you have to sweat and pay to get a bond rated in the first place, but once the rating exists, it’s rarely revisited.)

But then again, no one ever said that Windows or Office was perfect, either, and both of them retain their cash-cow monopoly status to this day. The iPhone will always have competition, of course. But will it fight for every percentage point of market share, eventually ceding ground to a better product? Or will it end up dominating a new category — what David Pogue calls “app phones” — in much the same way that Google dominates search?

My feeling is that Baruch is right, and the latter outcome is likely to prevail. Consumers are lazy: outside the hard core of gadget geeks, people don’t spend a lot of time worrying about whether they’ve got the best phone on the market: instead, they’ll just buy an iPhone and be done. Assuming, that is, that Apple drops its exclusivity arrangement with AT&T. Because that really can be a dealbreaker.


Who is this Baruch anyway? Someone whose opinion neither greatly matters, nor is open to innovation, would apparently be the short answer.

Anybody “ringside” hyping up a match which really hasn’t even begun yet between Apple and Google would not only be sheerly premature and queerly addicted to gossip, but also sensationally immature.

Fixating on the hardware, which is a minute fraction of what is at stake and also constantly changing, is an utter waste of discussion time. The Baruch view is Old-Economy oriented, rather than tuned to the very real possibilities of a New Economy approach. also taking for granted that no alteration in the PDA service industry landscape is likely – whereas a major shake-up in the shape of the market itself is long overdue, as well as highly probable.

So, to hell with Baruch. On with the show – Apple hasn’t revolutionized the smartphone sector nearly as much as it could have or ought to.

The Apple “synch” limitations are almost as bestial as the machinations of its billing partners at ATT. Users cannot properly use their iPhones or iPods as devices for real data handling. Users pay through the nose for “apps” that should by rights be billed per-use and not as though they were possessions, which they are not. The dead-end API coding structure of iPhone amounts to peonage of the developers in indentureship to Apple and is fundamentally unworthy of trade-law recognition.

End-users should never be chained to a carrier monopoly, as they are with iPhone. Most ridiculously, what’s the use of a camera-phone of any shape or form, one without a flash at that, when you can barely send MMS across the (ATT) network? And I haven’t even saddled my pony yet…

Apple began failing its “early adopters” before the iPhone market had come close to any acceptable form of maturity. Part of the failure is ATT, part of the failure is sales(un)manly pandering to the Outlook Express user market, yet another large part being the lofty Apple attitude that users will only ever want to “synch” a la Apple and not use a la carte the features and data items they’re likely to expect from their smartphones the moment they walk away from their static desk-side computers. It should never be about “that’s the way iPhone does it” so much as, “can I do it, yes or no?” with the honest answer on iPhone too often being “no, you can’t”. In the cold light of day, the lifestyle “convenience” of an iPhone simply isn’t worth a fraction of what it winds up costing.

Apple synching is restrictive, Apple’s MobileMe is inhibited and lame – more so than iDisk which it replaced – the iPhone user network isn’t nearly as stable or territorially uniform as ATT claims in its self-promotion, and the international iPhone user is in even worse shape than those who stay at home, that much closer to a land-line.

The fat lady hasn’t even got her lyrics onto iTunes yet, so there’s plenty of room for Google to clean up where Apple leaves off by not trying to bleed consumers dry at every turn, by not trying to make a quick buck when there are many more Billions to be earned in the longer run by satisfying modern communications market requirements with dynamic user customization and an open-ended library of pay-as-you-go services at fair market pricing.

If there’s a victory in this match, or a match at all, it lies somewhere ahead. In the long run, what works for consumers is what works best for developers too. Meanwhile, Apple fully satisfies neither.

The real revolution has yet to come. Open source and unlocked networking is the way of the future, with or without Apple and ATT in attendance.

Posted by HBC | Report as abusive


Felix Salmon
Dec 18, 2009 23:26 UTC

Against the handwriting Nazis — Miller-McCune

You think that walking away is a Bad Thing? Tell that to Morgan Stanley! — Ritholtz

Facebook issues a statement about the Overstock/Deep Capture sockpuppetry — Weiss

Krugman teams up with DeLong against Bernanke on inflation targets — NYT

The WSJ tries to charge $60/year for a “daily news summary” on top of its subscription price — WSJ

Meredith Whitney’s ridiculously overprecise Goldman EPS estimates — Matthews

Ned Phelps: “little or no economic dynamism comes from our stock of housing as against, say, our stores of clothing” — BEPress (PDF)

Phew! I got all 3 questions right on this algebra quiz. But I did feel I was using muscles I haven’t used in years — WNYC

Can magazine publishers reinvent themselves for the e-book age? I think the answer is no — Hammersley

The Copenhagen conference might be a bust, but at least it’s got a good logo! — Reuters, Under Consideration

The Bank of England financial stability report — BoE


A little housekeeping of the comments section would help to keep up the professional quality of the blog. If the blog is sloppy, its gravitas diminishes, and a blog by you deserves better.

Mainly ones laced with profanity such as one by @Whatzupwitdat in “Is this just the beginning of a depression?”. In another example, the first pages-long comment under “Those Harvard swaps: Even more of a fiasco than we thought” appears to have been written by someone who is hypomanic and off their meds. Sincerely.

Posted by DanHess | Report as abusive

Distressed debt datapoint of the day

Felix Salmon
Dec 18, 2009 23:18 UTC

Henny Sender reports:

Bonds trading at less than 50 cents on the dollar now account for only 1.1 per cent of the high-yield market, or $8.9bn in securities, down from 27.5 per cent, or $202bn in bonds, a year ago, according to JPMorgan data.

This isn’t a bubble, either, where bonds rise in secondary-market price but where there’s still no primary market for new issuance. To the contrary, private-equity shops and others have been quite successful of late in refinancing their leveraged loans in the high-yield market.

I’m not sure where all this demand for risky debt is coming from, given that everybody still expects a significant wave of defaults over the next couple of years: there can’t be that many fixed-income investors who are happy converting their debt to equity and taking control of a distressed company. Maybe junk bonds are the new equity: somewhere you can make a lot of money by spotting a compelling story, even if the rest of the market is moving in an unpredictable manner. Just don’t come crying to me when it all ends in tears.


This huge liquidity needs an outlet, be it equity market or the high risk bond market.

Remember Alan Greenspan, he had dropped rates so low for so long that he affectively chocked the fixed income market. So to cater for this pent up demand, market came up with rather exotic instruments, bundling all kinds of different risk assets and create a high yield fixed income instrument. We know what that led to.

Reasons are different but we again have high liquidity, we are again seeing the same demand for assets, but we are saying not not again, at least not so soon. This is no bubble.

Posted by SLJ | Report as abusive

Wine inflation

Felix Salmon
Dec 18, 2009 22:31 UTC

The Economist has a brief history of the wine industry:

Sir Robert Walpole, Britain’s first prime minister, used navy ships to smuggle his favourite wines from France. The most expensive one he bought was old burgundy, but that—as now—was available only in tiny quantities. So he relied largely on claret, buying four hogsheads of 24 dozen bottles of Margaux and one hogshead of Lafite every three months. In a single year his wine bill amounted to over £1,200 (£100,000 today).

By my calculation, that works out at about $28 per bottle — for wines which would cost you about $500 per bottle today. No wonder the English drank their claret in such great quantities!

(HT: Daniel Lippman)


“Wages do a better job of denoting affordability, but fail to show how wine was relatively better value compared to other items.”

It would be more accurate to say that premium wine failed to depreciate with respect to wages by the same amount as steel cutlery or underpants.

Apparel manufacturing has been revolutionized during the last two centuries and the amount of labor that goes into one pair of underpants is, indeed, down by the factor of ten or more. And the industry is sufficiently commoditized that profit margins are fairly thin.

On the other hand, premium wine industry successfully resisted commoditizing, in part because big part of “premium” is first growth status, and we aren’t making any more of those. Chateau Margaux still has the same 200 acres under grapes as back in 1700. There may have been some yield improvements due to the use of pesticides and such, but overall the winery does not produce much more wine today than it did in 1700. At the same time, market for first growth wines has expanded by a factor of ten or more (just the population of the United States today is ten times larger than total population of France, England, Scotland, and English colonies in North America three hundred years ago).

Posted by Nameless | Report as abusive

Those Harvard swaps: Even more of a fiasco than we thought

Felix Salmon
Dec 18, 2009 16:09 UTC

Bloomberg takes a dive into the Harvard swaps fiasco today, and uncovers some pretty juicy information. For instance, check out Larry Summers’s state of mind when he was entering into the swaps:

Summers told Faculty of Arts & Sciences professors in May 2004 that he hoped they wouldn’t be “preoccupied with the constraints imposed by resources, for Harvard was fortunate to have many deeply loyal friends,” according to minutes of a faculty meeting.

“Harvard would be able to generate adequate resources,” according to the minutes. “The only real limitation faced by the Faculty was the limit of its imagination.”

Money? Don’t worry about money. Larry can take care of all that. He’s Larry! And Larry was certain of two things: firstly that his beloved Allston project was a go — despite the fact that he hadn’t raised the funds for it, and secondly that interest rates would rise by the time construction started. Therefore, he decided to lock in funding costs by using forward swaps.

At the same time, Larry decided to be cheap (in a move which turned out in the end to be incredibly expensive). He could lock in funding costs simply by buying an option, but that would, you know, cost money. The swaps, by contrast, required no money up front. So, that makes them better!

We all know what happened next: Summers was ousted as president of Harvard, interest rates plunged, and the university decided to issue new bonds in order to be able to pay a billion-dollar ransom to get out of the swaps contracts.

You can’t blame Summers for the timing of the exit, which couldn’t have been worse: Bloomberg quotes swaps adviser Peter Shapiro as saying that “December 2008 was, by an enormous amount, the worst time in history” to terminate the swaps by borrowing money. Not only was the 30-year swap rate a mere 2.69%, down sharply from 4.25% in November, but the credit spread for non-sovereign AAA-rated issuers like Harvard also hit an all-time high, maximizing Harvard’s borrowing expense.

In hindsight, the decision to exit the swaps was just as disastrous as the decision to enter them: swap rates are now back up to their December 2004 levels, which means that had Harvard simply waited, it could have exited at no cost whatsoever.

The big winner here is JP Morgan, which both wrote most of the original swaps and which underwrote the bond deal which allowed Harvard to exit them. After the bond deal closed, JP Morgan bankers went out to dinner at Mistral in Boston to celebrate with Harvard officials.

Not that they picked up the bill. To the contrary, JPMorgan invoiced the Massachusetts state finance agency $388.78 for three employees who attended. Classy, that.