Felix Salmon


Felix Salmon
Jan 31, 2010 21:36 UTC

Remember the famous 2002 debate between Joe Stiglitz and Ken Rogoff? Well, they seem to be in agreement with each other now — World Bank, Reuters 1, Reuters 2

5 Myths about America’s Credit Card Debt — WaPo

“Books are, within reasonable limits, demand-inelastic” — TBM

Cost Dispute Halts Airlift of Injured Haiti Quake Victims — NYT

Amazon buys ebooks from publishers at $10-$14 wholesale, says Blodget — SAI

Treasury Removes Embarrassing Line From Mortgage Modification Report — Atlantic

Somali Pirates Plan to Send Treasures Taken from Rich Countries to Haiti — Racewire

iPad v. A Rock — TechCrunch

Brad Tuttle is even more defeatist than me when it comes to regulating credit cards — Time

Me, on Ingrassia and Maynard, in the NYT Book Review — NYT

Modern art is rubbish — BBC

We Have Seen The Amazing Future Of Apple’s iPad And This Is It — SAI

You didn’t buy back your stock at $50, so why are you buying it now at $125? — 24/7 Wall St

Beautiful visualization of fonts and ink — Flowing Data

Smart take by Sean Park on why the VC world ignores finance in favor of tech — Park Paradigm

Rather than face reality and open their books, Dubai and Sheikh Mohammed Al Maktoum tell S&P to get stuffed — Ian Fraser

Zero Hedge thinks that Morgan Stanley’s research is excellent. So they pass it off as their own — Davian

You thought bank PRs were bad about forcing hacks to “check quotes” etc? Just check out the PRs for UK C-list celebs! — 3am

How To Report The News on TV — YouTube


The regulatory consensus

Felix Salmon
Jan 30, 2010 17:59 UTC

The big meeting this morning between global bankers and regulators is exactly the meeting I was hoping would happen. A large group of bold-face names such as Larry Summers, Brian Moynihan, Alistair Darling, and Mario Draghi, meeting behind closed doors, reportedly came to the obvious yet necessary conclusion that, in the words of Darling, “we are agreed that whatever we do, it needs to be universal. You’re dealing with a global banking system. You need a common approach across the world”. And some good news is slowly emerging: already regulators and banks seem to be coalescing around the need to create a wind-down fund which would allow the orderly resolution of insolvent banks.

It’s easy to say such things, of course: the difficulty is in the international coordination needed to enact them. At the panel on financial regulatory reform today, everybody was at pains to say that every country is different and therefore needs its own custom-built regulatory regime: all we’re really talking about here is something called “regulatory consistency”, which, if the stars align correctly, might hopefully cut off most of the opportunities for banks to engage in regulatory arbitrage.

Yeah, me neither.

Still, a few interesting ideas did emerge. I particularly like the idea that no banks should be allowed to have branches in foreign countries: if you want to set up abroad, you need to have fully-fledged subsidiaries in each company, regulated domestically as if they were domestic banks.

This would have a lot of good consequences. For one thing, it would prevent problems such as those we’ve seen in Switzerland, Iceland, and the UK, where bank assets are enormous multiples of GDP, and consequently bank bailouts can be fiscally disastrous. It’s worth noting that Kaupthing had a subsidiary in Germany, while Landsbanki had branches in the UK; the result is that now the Icelandic government owes enormous sums of money to the UK, and nothing to Germany.

There’s also the Mexico problem, which is true in many other emerging markets as well: the Mexican banking sector is dominated by three foreign banks, all of which are too big to fail in their home country. Should their Mexican subsidiaries be forced to have high capital ratios and low leverage just by dint of the size of the parent company? What will that mean for the availability of credit in Mexico? Perhaps if those subsidiaries were truly answerable to the Mexican regulatory authorities, that might help matters. And it would also help fix the Walmex problem: Walmart has banking operations in Mexico, but it isn’t allowed to do that in the US, and isn’t regulated as a bank in the US. Which means that there really isn’t an ultimate bank regulator for Walmart’s Mexican banking subsidiary.

The star of the panel, however, was Davide Serra, the principal of a UK hedge fund named Algebris. He’s caused quite a splash at Davos in 2010, and seems to have built some very strong connections with high-level policymakers in the official sector. He said that if you have 2,800 people at the Financial Services Agency in the UK trying to regulate 1 million better-paid financial-sector employees, that’s “like trying to regulate a Ferrari with a skateboard”. And he also said, quite rightly, that it’s possible to focus far too much on capital ratios: after all, insolvent banks can continue more or less indefinitely, while a bank facing a liquidity crunch can collapse within a day.

Serra noted that the US, with its six different bank regulators, was “a disaster”, and that the UK, with its three regulators, wasn’t much better; the countries which navigated the crisis most effectively had only one regulator. And he had a provocative idea about who that one regulator should be, saying that it should be given, every five years, to the most admired and successful bank CEO of the time. It’s an idea which won’t ever happen, but it does make a certain amount of counterintuitive sense when you start to think about it.

Ultimately, I doubt that the World Economic Forum has really made any difference to the global regulatory agenda, or to the US decision to chart its own course with things like the Volcker Rule rather than try to engineer international consensus. But if it has made a difference, I think it’s done so by forcing the banks to face reality and start making constructive noises about helping to build a new global regulatory regime, rather than simply fighting any proposed rules which might crimp their risk-taking. A world where Barney Frank and Gary Cohn can agree is a world with some hope left in it.


“And he had a provocative idea about who that one regulator should be, saying that it should be given, every five years, to the most admired and successful bank CEO of the time.”
may I remind all here that Ken Lewis, then head of Bank of America, won “Banker of the Year” when Bank of America bought Merrill Lynch, only to have it revealed after the merger closed that Merrill Lynch had in fact lost twice as much money as it had disclosed at the time of the Bank of America’s shareholders’ vote in favor of the merger. Eventually even the board of Bank of America forced Lewis out.
The most succcessful and admired bank CEO — like the most successful and admired CEO of, say, energy companies, such as Enron? — may only be the biggest empire-builder.

Posted by Eastvillagechic | Report as abusive

What’s wrong with economic reporting?

Felix Salmon
Jan 30, 2010 12:08 UTC

Justin Wolfers wonders about what he sees as an economics-reporting arbitrage: given this chart, he says, why aren’t editors and reporters doing a better job of moving resources into economics reporting?


Justin’s list of possible reasons is a good one; I’d add a couple more.

Firstly, the question asks not about what Americans think of reporting on the economy, but rather what Americans think about the reporting on policies and practices of the Obama administration as they relate to the economy. Historically, reporters who understand economics and finance have generally been in New York rather than Washington — while the Wars and Terrorism reporters have been in Washington all along. But if you’re reporting on the Obama administration’s economic policies, you need to be in DC. The move to DC is happening, but it’s maybe not happening as quickly as the public would like.

Secondly, the simple fact is that the Obama administration has been much less good at communicating its economic policy than it has been at communicating its policies on other matters. Tim Geithner is not a great communicator, and the administration’s economic policy in general is very complex: it’s hard to reduce it to a simple choice like “Afghanistan: stay or go”, or “Healthcare: should there be a public option or not”.

More generally, I think the answer to the question is simply a function not of the quality of reporting on the economy, but just of the degree of confusion and anger that Americans have when they look at what has happened over the course of the Great Recession. That’s something that the news media can attempt to address, but it’s a very tough job, and they’re certain to fail with a large amount of Americans a large amount of the time. For all we know, this 40% figure is actually much lower than might be expected given the depth and complexity of the recession.

Still, I hope that the news media will use the results of this poll to increase the quantity and quality of their economic reporting. Right now, you can never have too much.


Dear Author,
Happily reading and grasping of your latest reports on America!s economy,social and political insights to us.
All your writings to this subject will be much more useful to world economics schools and to research scholars on economics and politics from well developed nations.
Please keep it up and expecting to get more lively writings from you and other reporters from Reuters news,service provider to the world.

Posted by mdspatsy | Report as abusive

World hunger and the locavores

Felix Salmon
Jan 30, 2010 09:48 UTC

Every so often at Davos you have a short, startling conversation which completely changes the way you think about a subject — and I just had one of those standing next to Dan Barber, the chef of Blue Hill Farm. He’s a very smart, very funny guy, who’s passionate about food on every level from preparing the ingredients of the dishes in his restaurants to the logistics of feeding the planet.

I bumped into Barber as we were milling around the Davos conference center, waiting for the panel on “rethinking how to feed the world” to begin. I asked him what he thought of the food in Switzerland; he compared in unfavorably to what he was fed by the airline on the way over here. “I haven’t seen a vegetable since Thursday,” he added, looking a bit overwhelmed by the number of things that the Swiss seem to be able to do with bread, cheese, and bit of veal.

When the panel started, I could almost see the steam coming out of Barber’s ears. It featured two heads of state; two agribusiness CEOs; a representative from the World Bank; and Bill Gates. All of them looked at food mainly as a matter of logistics and problem-solving, and they seemed to do so with real good will and good motives. (Well, maybe not the CEO of ADM.) But they were all very much bought into a model which looks, to Barber’s eyes, incredibly shaky.

Essentially the problem is that the people on the panel have internalized the principles of comparative advantage and free trade to the point at which they are more or less incapable of thinking any other way. In a Ricardian world it makes sense for Ohio to overwhelmingly grow corn and soy, since growing corn and soy is what it does best. And because of economies of scale, it makes sense to grow just one type of each, on farms of mind-boggling size. Ohio can then trade all that corn and soy for the food it wants to eat, and everybody is better off.

Except in reality it doesn’t work like that. Monocultures are naturally prone to disastrous outbreaks of disease, which can wipe out an entire crop. The panel at Davos has a favored method of dealing with such things: the development of disease-resistant crop strains, often through high-tech and patentable genetic modification. Bright research scientists create clever transgenic crops, and then people like Bill Gates and the World Bank try to get them broadly adopted while setting well-intentioned staffers to work minimizing potential problems with IP licensing. Innovation through agricultural technology is the obvious and necessary solution to the problem of global hunger.

Barber isn’t anti-science, nor is he anti-innovation. But he knows (and the panelists know too) that a system of globalized agriculture can break down, as we saw during the commodity boom of 2008. As the price of soy and rice and wheat soared, exporters started hoarding rather than selling, and importers couldn’t obtain necessary supplies at any price. As the World Bank’s Ngozi Okonjo-Iweala noted, Ukraine had 5 million tons of surplus wheat, but the international food markets were very thin, and it was extremely difficult to get that wheat exported. The system didn’t work like it was meant to: when put to a real-world test, it broke down.

Problems associated with monocultures can pop up even when there isn’t a commodity-price bubble, too: look, for instance, at the tomato plight which devastated the northeast US last year. Barber explains clearly what happened: millions of more-or-less identical starter plants were transported across the US by huge corporations like Home Depot and Wal-Mart which have neither the inclination nor the ability to notice when the plants are showing signs of blight. Those starters, planted by enthusiastic amateurs across the nation, then started “transferring their pathogens like tiny Trojan horses” into the local biosphere.

The solution to this problem, in Barber’s view, is indeed disease-resistant plants, but not in the sense that a company like DuPont thinks of such things.

To many advocates of sustainability, science, when it’s applied to agriculture, is considered suspect, a violation of the slow food aesthetic…

That includes the development of plants with natural resistance to blight and other diseases — plants like the Mountain Magic tomato, an experimental variety from Cornell that the Stone Barns Center is testing in a field trial. So far there’s been no evidence of disease in these plants, while more than 70 percent of the heirloom varieties of tomatoes have succumbed to the pathogen.

Mountain Magic is an example of regionalized breeding. For years, this kind of breeding has fallen by the wayside…

Healthy, natural systems abhor uniformity — just as a healthy society does…

What does the resilient farm of the future look like? I saw it the other day. The farmer was growing 30 or so different crops, with several varieties of the same vegetable. Some were heirloom varieties, many weren’t. He showed me where he had pulled out his late blight-infected tomato plants and replaced them with beans and an extra crop of Brussels sprouts for the fall. He won’t make the same profit as he would have from the tomato harvest, but he wasn’t complaining, either.

This kind of thinking involves education, but not education of the top-down, web-enabled type that one hears so much about at Davos every year. Instead, it’s a slower but more robust form of bottom-up education, enabling farmers to identify problems, find their own individual solutions, and reject one-size-fits-all approaches. Everybody in the audience was excited when Bill Gates started talking about how much extra wealth flood-resistant rice strains brought to some of the poorest rice farmers in south-east Asia. But no one talked about creating relatively small and self-sufficient agricultural communities: the model is still very much that you sell your one crop for money, and then use that money to buy whatever other food you might need.

And there are big problems with that model, not least because the hungriest nations on earth tend to lack the transportation infrastructure necessary to affordably get different crops from one side of the country to the other. There was some interesting talk on the panel about what the CEO of ADM called “post-harvest innovation” — research into the questions of how to get food from big producers of single crops and into the mouths of the hungry without it spoiling or getting somehow diverted or lost. And there was lots of talk based on a simple — indeed, simplistic — syllogism: there are 1 billion hungry people in the world who suffer from malnutrition, therefore there isn’t enough food in the world and we need to invest in agricultural innovation so that we can produce more.

But Barber doesn’t buy it: there’s more than enough food in the world already, he says. Literally more than enough: look at what’s happening to obesity rates, and look at how much food is wasted every day. In a world producing corn and soy on a mega-industrial scale, more food doesn’t necessarily mean less hunger: it’s much more likely to simply result in more waste and worse public health.

Barber’s vision of farmers listening to nature and producing a wide variety of crops suited to the local terroir is compelling, even if it isn’t a panacea: I’d urge you to watch his TED talk, especially where he ties it all together in the final three minutes. Food will always be a commodity, and as the world becomes increasingly urbanized, it will always be trucked in to massive cities over long distances. But there’s no reason why different cities in the same country should increasingly eat exactly the same food. Localization and heterogeneity have to be part of the solution, and there was no sense of that at all on the Davos panel.

When I was at Davos two years ago, Michael Pollan and Alice Waters were big draws. This year, Barber is getting a lot of attention. But there seems to be a disconnect: people think of the locavores as solving a luxury problem of how to eat healthier and more delicious food in rich countries, and they’re not asking whether they have anything to teach with respect to big questions like world hunger.

That might be changing: Barber told me about a brief conversation he had with Bill Clinton, where Clinton said that he now greatly regrets a lot of the agricultural policies he put in place as president. And Clinton, of course, is thinking long and hard about designing agricultural systems these days, given that agricultural production accounts for most of the wealth of Haiti and needs to be rebuilt more or less from scratch. Here’s hoping that Clinton helps to build an agricultural system in Haiti which is designed first and foremost to feed Haitians through diverse local food production, and only secondarily to provide export income to buy food and other necessities. Because the cash-crop model, as we’ve seen many times, is far too prone to disastrous failure.


Thank you to all of you….i had begun to despair of ever reading a civilized discussion of any merit on a comment board, so thanks to the moderators…seeing this kind of discourse gives me hope for all of us and reminds me that there are a lot of smart people out there (smarter than me thank goodness), and the fact that they disagree and can do so in a manner that grapples with the ideas and not the person having them is refreshing….

As to the global food situation, i believe that right resource sharing is at the root of many of our issues going forward, what a wonder it is just to be alive and then find our selves in a world so abundant that we thought it could not support 2 billion and now it can support 7 and soon 10… so to put the most outrageous solve out there, how about a world government that taxes all super rich and corporations at a high enough rate, and provides income/credit to all at a base level that enables them to survive…sort of a living stipend…it is my belief that life is hard enough without having to worry whether or not you’re going to eat tomorrow….

How you say? Well get rid of weapons spending and you’re done…Listen we in the West are already doing a lot of “make up” jobs anyway…let’s see we have cereal restaurants…personal shoppers, and Bloggers :) Why not use the robots and automated economy for all of our benefit?
After all in the end we’re all in this together…

Here’s how it works every one gets their 2K a month and they can do as they will…now you can still work a “normal” job and we hope you will…i wonder how much teacher’s or trash pick up personnel would get in the new world economy?….in the beginning we all have to put in 10-20 years etc to get funded in….and if you want to make more fine….but what if we agreed to a cap on personal income, you know let’s say $10,000,000 per year?

And if you make more, fine we’ll name the park bench/escalator or street light after you….Let’s face it you didn’t make that much without help from a lot of other people…

You people are smart you can help me figure out the details….And sure i know it’s idealistic and could probably not happen in our lifetimes, but hey i for one think it’s nice to imagine a world where money is not the highest value….

(e.g. “One last point. It is a fact that the continued existence of malnourishment in the world is a consequence of income (mal)distribution. It is true that the existing output of food is enough to feed the hungry. So why are 1 billion people hungry? Well, because they can’t afford to buy food, i.e. food prices are too high relative to their incomes.”)

And that scarcity is not our mindset…”We are all One, and there is Enough”—N.W. Walsch

Posted by rumwolf | Report as abusive

Talking to Nouriel

Felix Salmon
Jan 29, 2010 15:44 UTC

I’ll be doing a live video interview with Nouriel Roubini here on Reuters.com in a couple of hours (6:20pm Davos time, 5:20pm GMT, 12:20pm ET), asking him questions from readers. So if you have anything you want me to ask him, leave a comment on this blog or on the liveblog, or send a tweet with the #askroubini hashtag. It should be fun!

Update: Here it is!


I think Felix is in love with the man, just look at how he smiles to him.

Not that there’s anything wrong with that.

Posted by Developer | Report as abusive

Don’t exclude Treasuries from the bank tax

Felix Salmon
Jan 29, 2010 13:02 UTC

I’m not a fan of excluding Treasuries from the proposed new bank tax. For one thing, Treasuries are assets, not liabilities: they’re technically not covered by the tax in the first place. What’s really being talked about here is the repo market, which has grown far too big, and which has made it far too easy for banks to borrow money at ultra-short maturities.

It’s true that if the repo market shrank dramatically, that might conceivably reduce demand for Treasuries so much that, as JP Morgan has suggested in a research note, the revenue from the fee could be completely offset by the Treasury’s increased costs of borrowing. On the other hand, estimates of the effects of reduced demand on Treasury prices are notoriously unreliable.

Against that is the fact that shrinking the repo market is probably the easiest and most painless mechanism that we have for shrinking the banks — and we want to shrink the banks. In that sense, the deleterious effect of the new fee on the repo market should probably be considered a feature rather than a bug. Let’s keep it in.

Simon Johnson joins HuffPo

Felix Salmon
Jan 29, 2010 11:56 UTC

This is a great hire: the Huffington Post has brought on Simon Johnson as a contributing business editor, underscoring the way in which the historically staid and boring intersection of politics with economics is pretty much the hottest game in town right now.

The hire works both ways: Simon bring with him a huge amount of credibility and expertise, a fantastic nose for newsworthiness, and his equally-bright partner at Baseline Scenario, James Kwak, who understands intuitively the speed and power of the blogosphere. At the same time, Simon and James now get access to the HuffPo’s reporting staff, who have been doing great work of late, and who are a great resource with a truly complementary skillset to that of the Baseline Scenario team.

Up until quite recently, the blogosphere was almost entirely parasitical on the MSM: newspapers would do the shoe-leather reporting, and then bloggers would add layers of conversation, commentary, and debate. The exception was the world of technology and media blogs, where the likes of TechCrunch and PaidContent have been breaking news for years. Now, as the likes of Politico and HuffPo start aggressively reporting in their own right, the blogs are moving into the world of original political reporting; inevitably, over the next couple of years, we’ll see the same thing happening in finance and economics.

Reporters are expensive, of course, and you can’t expect them to post multiple times per day if they’re chasing down a breaking story. But as the FT and the WSJ retreat behind their firewalls, there’s a wide-open opportunity for a fast-moving and well-financed financial site to start becoming a must-read on Wall Street in the way that TechCrunch and Politico are in Silicon Valley and DC respectively. Maybe if Simon helps to build the HuffPo business section into something agenda-setting, the next step might be for Arianna to move into the world of finance, competing with the likes of Henry Blodget, and making the financial blogosphere in general something much richer and deeper than it is right now.


csodak: It’s loonier out there than it is in here, by a good measure.

Emiliano: We’d all do well to pay attention to exactly what HuffPo is doing, and why. It has achieved great success and established itself at the top of the credibility heap in a very sophisticated way. It is viewed as a bit anti-establishment and much more trustworthy than the MSM. In fact, it has become MSM and employs many writers that came from the crumbling mainstream world.

Arianna herself started out working publicly with very conservative organizations and people. She used to work for the National Review, for goodness sake and supported Newt Gingrich and Bob Dole. She went after religious conservatives to support her husband’s run as Republican for the House of Representatives. Change of heart? Not buyin’ it. She’s a product of Cambridge, with a degree in economics. She’s also an actress. Classic sheep’s clothing situation.

The article that you link to is itself interesting. It’s what’s known as “limited hangout,” where you focus in on a particular limited issue to avoid the larger, more problematic one. Yes, we all know the Fed is evil, and many of us know already that they’ve got their fangs into academia. But the Fed is part of a larger problem. The article picks up on a theme I’ve been writing about for the past 4 years, which is the use of academics to justify policy. Follow the money. The amount that flows to academic economists from the Fed is tiny compared to what supports the whole industry from the NBER, CPER, private fellowships and foundations.

The article picks up on the way they coopt the economists — no one gets published unless the papers fit the leanings of the journals. You get tenure if you play ball and say all the right things. You get swedish nobel prizes if you deliver something really juicy like Black-Scholes or Efficient Market Theories.

Right off the bat the article gives us Josh Rosner. The paper they delivered at the Hudson Institute back in Feb. of 2007 is painted as toxic. They could only present it at the conservative Hudson Institute, so the narrative goes. Bullshit. Prove that. It was in all likelihood custom-ordered, and served a very particular purpose: to prick the bubble. The entire bubble was built on confidence, enabled by the ratings agencies and their godless AAA’s. Rosner and Mason come along, the good samaritans that they are, and write a paper that demonstrates that it’s all a fraud. *Poof* entire house of cards gets blown away over the next 5-10 years. Rosner used to work at Medley Advisors, which you might want to look into. Basically one of the highest power lobbying companies in the world. Up until this article he was invariably titled “Independent” analyst. The “independent” was studiously avoided in this article. Mason went on shortly after the bubble blew, to a tenured position at LSU, IIRC. Quid Amateur Quo.

If the same people run HuffPo that run the Fed, NBER, and all the other muck, why would they let HuffPo impugn the Fed? What’s to lose? Most thinking people already know how dirty the place is, so what’s more mud. Scapegoat heaven. Heck, what are we going to do about it… reappoint Ben while we’re at it.

So your inclinations are right. This is, in the words of William Black a massive “control fraud.” The entire country (daresay the entire world) is in the hands of some very bad people. If you want to see how this can happen on a smaller scale, look up the Phenix City Story. In the case of Phenix City, they had to call in the National Guard to kick organized crime out of a small time. They had assassinated the attorney general. In our case, they run the people that run the national guard. Who’s left to call, except ourselves and each other.

Posted by Uncle_Billy | Report as abusive

Arbitrary CAPM

Felix Salmon
Jan 29, 2010 11:08 UTC

Emanuel Derman passes on an email from a former student, who’s now working at ****:

Will Sharpe came up with his Capital Asset Pricing Model (which we use at **** all the time, in its most simplistic form) and now it is part of the dogma that asset returns are linearly related to market returns. What is the logical basis to assume a linear relationship here? He could have just as easily assumed a cubic relationship (which will almost by definition fit past data better) and done the same work. His math would have probably gotten messier, but it is hard to find any merits to the linear assumption other than the fact that it is simple. I am all for simplicity, and perhaps if I asked Sharpe he’d tell me that was just a reasonable first approximation, but that is certainly not the way in which people use it now (maybe they are not so rational after all?).

The fact is that **** could be pretty much any buy-side or sell-side firm in the world. And so long as they all talk about concepts like “alpha” in more or less the same way, as though it’s a real scientific thing, in a way it doesn’t matter whether it’s based on empirically-justifiable principles or not. Still, this is a useful reminder that when finance types start blinding you with science, it’s not science in the sense of actually reflecting reality. At best it’s a useful fictional construct, at worst it can help cause a global economic meltdown.


unless I’ve forgotten or misremembered (which is entirely possible), mean-variance optimisation is optimal for a) anyone who has a quadratic utility function whatever the distribution of returns or b) anyone of any sort of utility function if returns are lognormally distributed.

Posted by dsquared | Report as abusive

Goldman-bashing at Bloomberg and Fortune

Felix Salmon
Jan 29, 2010 10:30 UTC

It’s Goldman-bashing time again (when isn’t it), with Michael Lewis returning to the same source of comedic gold that he’s mined in the past. His new column should be here, but isn’t; Alphaville has excerpts.

I have no problem with this kind of thing; I only wish it were a bit funnier. I’m all in favor of opinion columnists bashing Goldman every so often; I certainly do it often enough myself. On the other hand, they shouldn’t be allowed to get away with outright falsehood and extravagant stupidity. So why is Ben Stein writing for Fortune, and why are they letting him exude this kind of crap about Goldman Sachs?

Obviously, Goldman can put any disclaimer it wishes in the boilerplate of the offering documents. But as underwriters, it has a duty to deal fairly and honestly with its buyers, and to deal as a fiduciary, putting clients’ interests first if the buyer is a client of the firm. It holds itself out to the world that way, too. It holds itself as “adding value” when its works for a pension fund or any buyer by selling him securities. Read the annual report.

That is, it, Goldman, has a legal duty to not take advantage of the people to whom it acts as a fiduciary.

Does Stein think that if he uses the word “fiduciary” often enough, he’ll be able to change what it means? A broker-dealer, by its very nature, is an intermediary, a middleman. If you trade with Goldman, it’s either acting as a broker — finding someone else in the market who wants to buy what you’re selling, or sell what you’re buying — or else it’s acting as a dealer, and taking the opposite side of the trade itself. In neither case can it be a fiduciary.

A fiduciary is someone who invests someone else’s money on their behalf; Goldman Sachs Asset Management is one such institution which does indeed have a fiduciary duty to its clients. But Goldman’s traders are by definition the opposite: far from having their interests aligned with the people they’re trading with, they actually take the opposite side of the trade. Besides, when Goldman underwrites an offering of new securities, its client is the issuer, not the buyer of the paper. If Goldman had a fiduciary duty to its client in such matters, it can’t also have a fiduciary obligation to the investors in the deal.

But Stein hasn’t reached the heights of its idiocy quite yet. He continues:

Obviously, it’s different if Goldman is trading with a hedge fund or a canny wealthy trader who is not a client, who takes all kinds of risks. But when underwriting and selling to clients, such as pension funds, Goldman has a legal and moral duty…

The problem, of course, is for Goldman to be able to discern, for any given counterparty, whether Ben Stein would consider them to be “not a client” or a client. The bank is providing exactly the same service to the “canny wealthy” types as it is to “clients such as pension funds” — but Stein seems to think that every trader should have a red phone and a blue phone, with one used for “clients” and the other one used for “not a client”s. How to tell them apart? Maybe the traders should phone Stein first, every time, just to be on the safe side.

What kind of magazine prints this stuff? What kind of editor allows a columnist to get away with something like this?

Simple fact: if the banks’ proprietary trading had been consistently profitable, they would not have needed to be bailed out by the taxpayers in 2008.

Does Stein really think that the losses suffered by the banks in 2008 were the result of prop trading? That somehow the hundreds of billions of dollars in writedowns on toxic loans were so small that a consistently profitable prop-trading operation could have more than made up for them and obviated the need for a bailout?

Of course not: Stein doesn’t think. But as a result, his columns are neither interesting nor provocative: they’re just stupid. And I can’t for the life of me work out why Fortune is publishing them.


I think you are missing Stein’s point, Felix. He is not referring to broker-dealer status when he uses the term ‘fiduciary’. He is referring to Goldman’s status as an investment bank. An IB has a higher standard, because it is an advisor and advocate for investment management.

It makes me chuckle every time I read all the finger wagging responses and editorials. Obviously, most of this readership never earned a living as an intermediary. If they did they would understand how this financial crisis and aftermath is not the result of collusion and willful ignorance on the part of “big bankers”. Maybe the wage earners among you all should try to imagine themselves in a world where they desired to earn as much profit as possible, had a seemingly endless supply of capital(Institutions, governments, and the super-rich) that demanded the highest return with the highest safety available (Mortgage securities)on one end and hundreds of millions demanding to buy, invest, build, and create with on the other end. Imagine, if you can beyond your own narrow wage-earner world, what you would do if you were in the middle of those two forces. Imagine the frenzy of competition, imagine the frenzy of capital seekers, imagine the frenzy of capital providers…now imagine that frenzy sustaining itself for half a decade.

If you can get that far in your thinking, you will begin to understand that the common folk are not being consumed by big evil cigar chomping bankers, but rather the common folk just like everyone else were willing participants in everything that led to this financial crisis. Everyone was happy when the going was good. People got to buy homes without having to save decades for a the usually necessary down payment, people had jobs in growing companies fueled by consumer credit, folks who wanted to start a business without having to beg thiwr friends and family for start up capital could now go to banks where they could get sba guaranteed loans. Everyone liked it and everyone demanded it.

The government engineered this whole mess. They gave the IBs and CB’s the cheap capital, they asked intermediaries to make full use of leverage, they provided loan guarantees or suggested guarantees, they created huge mega-million project financing guarantees and gov’t backed bonding. They lowered interest rates and bought Treasuries on borrowed money. They did all this over and over again to the tune of trillions of dollars. And everyone thought it was a great idea.

You all are pointing your finger at the wrong culprit. Point your finger at the Fed Govt. …because they are still doing the same crap….shelling out dough for high speed rail, buying a trillion dollar health care boondoggle while cutting taxes and shelling out tax credits…how’s that going to balance the budget?

Quit looking for someone to blame, because the blame is you…and its me…and its everyone who demands justice. There is no justice, we are all ingredients in the stew. We need to better manage the cook who’s stirring the pot- the Fed Gov. Quit sniveling and bring some real thought and ideas to the discussion!

Posted by Dr.Savage | Report as abusive