Felix Salmon


Felix Salmon
Jan 29, 2010 02:32 UTC

The iPad: a godsend to older types who can’t or won’t get comfortable with computers. And women. — Ultimi Barbarorum, ibid

The wonderful story of the zero-rupee note — World Bank

Weak euro states may have “fatal” impact, says German Minister — Reuters


Let the iPad parodies begin:
http://www.collegehumor.com/video:192855 8

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Why hybrid debt instruments won’t work

Felix Salmon
Jan 29, 2010 02:26 UTC

This time last year, Justin Fox’s idea of a clever blog entry was a video of him skiing in Davos. This year, now that he’s absent from Davos and has a brand-new job at HBR, he’s writing about “the attraction of hybrids like continuous workout mortgages or regulatory hybrid securities”. Staying away from Davos can do wonders for your blog quality! You should read his blog entry, it’s really good — it talks about all the different ways in which debt can be made a bit more like equity, and asks why they haven’t really caught on.

The answer, I think, is that bond investors have no idea how to price tail risk. One of the reasons that bonds are so popular is that they’re easy to price, partly because they do a really good job of hiding risk by pushing it all off into tail events, which then get ignored rather than priced. The slogan is that debt=denial.

The kind of securities that Justin’s talking about, by contrast, are almost impossible to price. If you offer a bond investor optionality on top of the bond coupon, you won’t get paid for it: just look at Argentina, which essentially ended up giving away its hugely-valuable GDP warrants. And that’s a good outcome, for a borrower, compared to securities where the investor can end up losing money even when there isn’t a formal default. Bond investors always want their money back; if there’s a chance that won’t happen, they will charge through the nose. And that’s if they participate at all.

The two main groups of securities are stocks and bonds. Bonds are easy to price, which means they can get away with being illiquid: you don’t need much of a market to know how much they’re worth, and you can hold them on your books at a certain value even when that particular bond hasn’t traded in months. Stocks, by contrast, are pretty much impossible to price, so you need a highly liquid market to tell you how much they’re worth, and you tend to mark your holdings to market every day.

One thing that all of the securities that Justin’s talking about have in common — along with even crazier creatures like CoCo mortgages — is that they’re both hard to price and illiquid. That’s bad for both borrower and lender: the only group who really wins with that kind of security is the investment-banking intermediary. I mean, who would want to buy a mortgage where the interest payments automatically fell if house prices dropped? And who would want to borrow money on the basis of their steady income, if they knew that their mortgage payments could rise substantially just if the value of their house went up? And who would pay for the appraisals which would be necessary to prove that the individual house in question had indeed risen or fallen in value? It’s all horribly complicated and expensive, and those kind of problems are symptomatic of the entire class of these securities. Even the relatively successful Danish model doesn’t really scale to a country the size of the US.

These instruments might reduce systemic risk, but they simply don’t lend themselves to a long and healthy existence being traded in the international capital markets. And therefore, sadly, they ain’t never gonna work, except for on a very small and experimental level. But I’m sure that’s not going to stop Bob Shiller from continuing to come up with more variations on the theme.

The revenue-neutral NYT paywall

Felix Salmon
Jan 28, 2010 21:11 UTC

Journalists love to talk to each other at parties, and Davos, being in many ways one big party, is covered with pockets of hacks gossiping away about off-the-record events. And one factoid which has emerged from the off-the-record fog is a story which will come as a great disappointment to many journalists hoping that paywalls will be the savior of their profession.

I hear that the brass at the New York Times expect its paywall to be revenue neutral — the amount of money they expect to bring in from online subscriptions is pretty much equal to the amount of money they expect to lose from online advertising.

I’ve been running the numbers on the NYT paywall for a while now, and this comes as no surprise to me. But if the NYT doesn’t expect to make money doing this, why are they still going ahead with it?

The answer is that a paywall comes with a certain amount of option value. Once it’s implemented, nytimes.com will have two revenue streams rather than one, and diversification in and of itself is quite a good thing. If the online ad market gets worse rather than better, the subscription base will help to cushion the blow. More generally, a metered paywall is a flexible thing: if it turns out to be costing the paper money, the meter can be dialed back so far that almost nobody ever hits it. On the other hand, there’s a small possibility that the paywall will be an enormous success, and make a large difference to total revenues — maybe not at first, but once you have your subscribers, they tend to be pretty price-insensitive, and will happily keep on renewing even as you continue to raise the subscription price.

Essentially, then, the paywall looks, on its face, a bit like a free lottery ticket for the NYT. It probably won’t pay out, but it might, and if it doesn’t, at least the paper won’t have lost much if any money.

What’s sad here, of course, is that the NYT has given up its dream of winning the other lottery: becoming such a popular and high-value global news source that it will be able to make a very large amount of money from a free website. And it’s also sad that the NYT is happy to risk losing its paper-of-record status online for the sake of making this bet.

My feeling is that there’s a very good chance — say 1 in 3 — that the new NYT paywall will end up bringing in less money than the failed TimesSelect managed to generate. I never suspected until now, however, that the internal analyses at the NYT might be saying exactly the same thing.


“There is a great value to quality journalism, and clearly history has proven people will pay for it.”

The evidence history provides is that advertisers will pay for access to the audiences that assign value to journalism. There is, to my knowledge, no evidence in history whatsoever that the audience itself will foot the bill.

The problem is, the audience’s aversion to advertising has now outpaced their appetite for journalism. The result is the continuing death-spiral of advertising, taking journalism with it as collateral damage. (It doesn’t help that the internet provides the metrics that the degree advertising increases sales is within the margin of error, so it’s become quite difficult to justify ad buys to the shareholders.)

If you haven’t read Bob Garfield’s “Chaos Scenario” piece in Advertising Age, you might want to consider it. It also is from 2005, and it has been eerily prescient.

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Youthful swearing at Davos

Felix Salmon
Jan 28, 2010 17:53 UTC

I like James Gibney’s evisceration of Davospeak:

Dr. Schwab and Company have made a handsome business out of enabling old-fashioned clubby capitalism by wrapping it in feel-good globoblather: “unprecedented multistakeholder, multimedia dialogue…look at all issues on the global agenda in a systemic, integrated and strategic way…intensify collaboration and develop innovative solutions…generate an unprecedented process of discussion and deliberation.” As George Orwell tellingly observed, “When there is a gap between one’s real and one’s declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.” The next time you hear “multistakeholder,” remember that, in Davos at least, corporations hold the biggest stake.

It was probably unfortunate, then, that no sooner had I read that than I stumbled across the Global Business Oath of the Young Global Leaders. What is a Young Global Leader? You really can’t make this stuff up:

The Forum of Young Global Leaders is a unique multi-stakeholder community of exceptional young leaders who shares a commitment to shaping the global leader.

These young leaders have now started taking an oath which culminates with this:

7. I will actively engage in efforts to finding solutions to critical social and environmental issues that are central to my enterprise, and

8. I will invest in my own professional development as well as the development of other managers under my supervision.

As far as I can make out, this is essentially code for “I will continue to attend Davos even when I’m over 40 and no longer a Young Global Leader”. Or, to put it another way, it’s Davos’s way of getting these people to pay to come to Davos once they’re established, after flattering them with free passes in their youth.

“Young Global Leader”, to the World Economic Forum, is code for “people who will be in a position to spend large amounts of money on sponsorships in years to come”. But hey, at least they get an oath out of it.

Update: The Oath doesn’t just have a website, it also has a Twitter feed! Thanks to that, we can all now rest reassured that Stefan de Rothschild (typical tweet here) has accepted the Global Business Oath.

Over on his personal blog, the father of the oath, Ángel Cabrera, says that this project was five years in the making. Wow.

Update 2: Turns out Stefan de Rothschild is a hoax; he’s not a YGL, and he wasn’t at Davos. But David de Rothschild and Nathaniel Rothschild are YGLs. I don’t know whether they’ve taken the oath. (Thanks to commenter oscarlechien)


It would seem, according to the Wikipedia Review, that perhaps young Master “de Rothschild” is perhaps not who he pretends to be : http://wikipediareview.com/index.php?sho wtopic=28361

His wikipedia articles were deleted as hoaxes. He has also posted under the name of “Stefan Roberts” : http://poppycockandbalderdash.tumblr.com  /

So, perhaps his comments “from” Davos need to be taken with a rather large grain of salt?

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When Winkelried left Goldman

Felix Salmon
Jan 28, 2010 16:12 UTC

Bill Cohan gets an interview with Jon Winkelried, who left Goldman Sachs abruptly in February 2009 from his position as one of two possible successors to Lloyd Blankfein:

Blankfein urged Winkelried not to resign when Winkelried brought up leaving at his annual review in December. Over the holidays, at their ranch in Colorado, Winkelried and his wife reached the decision that as soon as he “was comfortable” that the firm was “on sound footing in terms of the future,” he would retire. That moment came on Feb. 12, 2009. “What was clear to me was that Goldman was probably going to be net-net a beneficiary of what happened,” he says.

Winkelried went to talk to Blankfein one final time and told him he intended to leave at the end of the first quarter. Blankfein was not pleased.

How believable is Winkelried when he says that Goldman was on a sound footing in February 2009? Well, here’s the chart:


Goldman stock was over $200 a share going into 2008, but ended the year at barely over $80. In mid-February it was still very much in its post-crash trough: on February 12, the date that Winkelried made his decision, it was about $95. Today, even in the wake of Obama’s new war on investment banks and prop trading, it’s still over $150.

My sympathies, then, are with Blankfein on this one. Winkelreid got paid $53.4 million in 2006, and $67.5 million in 2007. That should have bought a bit more loyalty than this: instead, Winks upped and left when Goldman’s continued existence was more in question than it had been in decades. Sure, his chances of becoming CEO one day might have been diminishing. But he didn’t show a lot of loyalty to the firm.


It’s cute that you bought the cover story.

Winkelreid blew himself up and was forced out.

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The US loan-mod fail

Felix Salmon
Jan 28, 2010 09:48 UTC

Mike Konczal has an excellent two-part blog entry on the state of the mortgage market, and it only reinforces my belief that the crisis isn’t over and that both the housing and the banking sectors are going to get much worse.

Konczal describes the government’s HAMP loan-modification program as “a long, stressful process which appears to leave nobody better off”, and highlights this chart:


The key thing to note here is the bottom, darkest line: while delinquencies and initiated foreclosures have been rising, there’s a limit to how many foreclosures can actually be completed, and that limit seems if anything to be falling.

What this says to me is that while we aren’t going to see a wave of foreclosures, we are going to see a large and more or less constant number of foreclosures for the foreseeable future — with all the gratuitous value destruction that implies.

Konczal also looks long and hard at the banks’ refusal to write down the principal on their loans, despite the fact that if you modify a loan so that it remains seriously underwater, you’re pretty much guaranteeing an extremely high redefault rate. After all, negative equity is pretty much the best single predictor of delinquency.

Why are the banks behaving like this? I think the obvious answer is the right one: they’re holding these loans on their books at much more than they’re really worth, and they can’t afford to take the write-downs which would accompany principal reductions of roughly the same magnitude as the decline in housing prices. This kind of head-in-the-sand behavior can only possibly work if housing prices suddenly rebound in the next couple of years, and that ain’t gonna happen.

Both the Bush and the Obama administrations tried to put together programs to deal with the banks’ toxic residential real-estate assets: the original TARP was one, the PPIP was another. Neither went anywhere, and as a result the problem is just as bad now as it’s always been. Remember that, when you look at the enormous 2009 bank bonuses, and ask yourself whether any of them will be clawed back if it turns out that last year’s profits were dwarfed by the write-downs that banks should have taken and didn’t.

Global financial regulatory reform falls apart

Felix Salmon
Jan 28, 2010 08:33 UTC

Is financial reform shattering into so many different pieces that it’ll never become the strong, coherent, globally-unified project that it needs to be to get popular support and avoid regulatory arbitrage? I fear so.

For one thing, there are literally more representatives of Bill Clinton here in Davos than there are of Barack Obama. If the Obama administration is serious about its newest ideas for regulatory reform, especially the Volcker Rule, it would have made a great deal of sense to send Paul Volcker — or at the very least someone like Austan Goolsbee — to Davos, to try to get the rest of the world excited about it. But they didn’t.

And even the president himself doesn’t seem to wedded to it. Here’s the relevant bit of his address last night:

I am not interested in punishing banks. I’m interested in protecting our economy. A strong, healthy financial market makes it possible for businesses to access credit and create new jobs. It channels the savings of families into investments that raise incomes. But that can only happen if we guard against the same recklessness that nearly brought down our entire economy.

We need to make sure consumers and middle-class families have the information they need to make financial decisions. (Applause.) We can’t allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy.

Now, the House has already passed financial reform with many of these changes. (Applause.) And the lobbyists are trying to kill it. But we cannot let them win this fight. (Applause.) And if the bill that ends up on my desk does not meet the test of real reform, I will send it back until we get it right. We’ve got to get it right. (Applause.)

This is all so vague as to be meaningless; the one thing that’s for sure is that House has not passed financial reform with a Volcker Rule embedded — mainly because the Volcker Rule didn’t exist when the House was putting its bill together. Yet it seems that Obama is reasonably happy with the House bill in its present form.

What I’m worried about here, then, is that the Obama administration’s financial-reform proposals are being driven much more by domestic political calculus than by a coordinated international attempt to create a global financial system that is less leveraged and more stable than the one we’ve grown used to.

Obama proposed in his speech “that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat” — which is a good idea, and one I support, with strong echoes of the admirable Move Your Money campaign. (And, just like that campaign, I hope and trust that the concept of “community banks” will be expanded to include credit unions.) But this is a tactical move on the fiscal front, not a strategic one on the regulatory front. And my biggest fear right now — one reinforced both by Obama and by what I’m seeing in Davos — is that global financial regulatory policy is being constructed on an ad hoc, country-by-country basis. That doesn’t bode well for the future.


If Eliot Ness had said, “I am not interested in punishing gangsters, just in keeping everybody sober…” the results could not have been less, shall we say, popular. Or, in the end, meaningful.

Everybody knows you have to be drunk to appreciate Davos.

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Felix Salmon
Jan 28, 2010 01:18 UTC

An astonishing chart of European sovereign vs financial CDS spreads — Alphaville

Kinsley Out as Editor of Atlantic’s New Business Site — Daily Finance

The formerly-secret AIG Cusip numbers now owned by the government and run by Blackrock are revealed; world doesn’t end — Reuters, HuffPo

The 6 Most Statistically Full of Shit Professions — Cracked

Tim Geithner is so captured by the big banks that he thinks reasons to leave them are in fact reasons to stay — Baseline Scenario

Citigroup paid its employees $24.9 billion in 2009 — NYT

Some seriously hardcore geeking out with paywall modelling — Nieman Lab, Albert Sun

This is the title of a typical incendiary blog post — Faultline

Nassim Taleb: “Soros has 2 million times more statistical evidence that his results are not chance than Buffett does” — Asset Intl

European banks need €83bn — Buzzup

I thought Larry Lessig was moving on from his copyright fight? Evidently not: here’s another 6700 words — TNR

Wherein Yale’s VP describes its Davos party at the Belevedere (by far the poshest hotel in a very posh town) as “being frugal” — Bloomberg

Three months after pay wall erected, Newsday.com has 35 paid subscribers — NYO

How to give a Davos opening address

Felix Salmon
Jan 27, 2010 17:59 UTC

Nicolas Sarkozy gave a rather predictable speech to kick off the World Economic Forum today. He started out with fiery populism, talking about how “without state intervention, the world would have imploded”, and how globalization had created, pre-crisis, “a world where everything was given over to capital, and nothing to labor, in which the entrepreneur gave way to the speculator”. But then, after bashing excessive pay packages and warning of dire consequences if Davos Man didn’t change his ways, he spent most of his speech becoming vaguer and vaguer, devolving into standard Davos platitudes, and talking — as all Davos speakers do — about being bold and tackling poverty and changing the world and so on and so forth. By the time it was all over, he had proposed absolutely nothing concrete, and the assembled plutocrats were happy to give him a loud ovation.

I suspect that what we saw with Sarkozy is Davos 2010 in a nutshell: while seeming to make a decisive break from the past, in reality it’s just more of the same. Sarkozy will fly back to Paris convinced that he confronted the delegates with harsh new realities; the delegates themselves, meanwhile, will feel that they belong to the future rather than the past and that they’re part of the solution rather than being part of the problem.

Now, if you’ll excuse me, I must dash. I’ve been invited to a fondue dinner being thrown by JP Morgan. I’m sure that no one there will feel in the slightest bit threatened by Sarkozy’s pro-forma rhetoric.


Yes Felix, Pluto is the operative word here.

From other articles, notably Peter Thal Larsen, it is clear that banks will simply continue capitalising on changing circumstances. They are actually the fourth political party after the Independents, but simultaneously, and factually, before the Ruling Parties, i.e. globally too.

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