Felix Salmon

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.

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

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.

“A California Banker” writes to Mish, giving yet another reason why banks aren’t lending:

If you’re a bank with a relatively healthy balance sheet with adequate capital, (like us)you want to maintain surplus capital in order to stay on the FDIC’s list of banks they can transfer the loans and deposits from a failed institution into.

This is a home run for the acquiring bank and far more of an instant benefit than any new lending.

The problem here is that healthy banks end up competing with each other to have the largest capital surplus and therefore the greatest chance of being anointed in this manner by the FDIC. If everybody was lending, the FDIC would still have to place failed banks’ assets and deposits with someone. But instead we get the opposite corner solution, where nobody is lending — except, presumably, for banks which are close to failure and need all the interest income they can get. I wonder whether the FDIC has anybody thinking about how to counteract this syndrome.

John Gapper and Nadav Manham have both picked up on Warren Buffett’s explanation of how he thinks about M&A, especially when a company is paying with stock:

Kraft, in my judgment, well just in the past two weeks there’s been two things that caused me to feel poorer. They sold a very fine pizza business and they said they got $3.7 billion for it. But, because it had practically no tax basis, they really got about $2.5 billion. They sold a business for $2.5 billion that Nestle is willing to pay $3.7 billion. Now can Nestle run it that much better than Kraft? I doubt it. But that business that was sold for $2.5 billion earned $280 million pre-tax last year. But they sold that at less, right around nine times pre-tax earnings in terms of their own figure.

Now they mentioned paying 13 times EBITDA for Cadbury, but they’re paying more than that. For one thing, EBITDA is not the same as earnings. Depreciation is a very real expense. But on top of that, they’ve got a billion-three they’re going to spend of various rearrangements of Cadbury. They’ve got $390 million of deal expenses. They are using their own stock, 260 million shares or something like that, that their own directors say is significantly undervalued. And when they calculate that 13, they’re calculating Kraft at market price, not at what their own directors think the stock is worth. So, the actual multiple, if you look at the value of the Kraft stock, is more like 16 or 17 and they sold earnings at nine times. So, it’s hard to get rich doing that.

There’s a lot of very smart analysis packed into this extemporizing (Buffett was talking on TV). Kraft is selling a business for $2.5 billion, after taxes, which throws off $280 million a year. Yet it’s buying Cadbury at a much higher multiple than that, and it’s paying in undervalued stock.

In general, you see many more stock-based acquisitions when companies are overvalued than when they’re undervalued. (Think of AOL buying Time Warner, or for that matter just about any acquisition by WorldCom.) It’s even possible to use stock-based acquisitions as an indication that a company thinks its shares are trading at too high a level. But sometimes, as Buffett notes, companies will use their stock even when it’s undervalued. And that can be very bad for existing shareholders.

All of which raises the question: what are we to make of the fact that Bufffett himself is using Berkshire Hathaway stock to buy Burlington Northern? Does it mean he thinks that his stock is overvalued? Or, if he thinks BRK is undervalued, does that mean he’s making a similar mistake to that which he deplores at Kraft? Either way, there seems to be an implicit “sell” signal here. Or is there something I’m missing?

One of the more annoying aspects of the Davos echo-chamber is the way in which people are constantly asking each other what “the mood” is this year; the result is an inchoate consensus that since the crisis is over, markets are up, and countries are growing again, there must be grounds for optimism and the kind of yes-we-can thinking in which the World Economic Form has always specialized.

I’m moving the other way, however, siding with the pessimists like Nouriel Roubini and Martin Wolf. They’re both convinced that the problems of southern Europe are both grave and intractable, although they differ in their prediction of what the consequences will be: Nouriel sees a good chance of the eurozone breaking up, while Martin sees the PIGS (Portugal, Italy, Greece, Spain) staying in the euro and ending up stuck in a long-term slump, able to neither cut interest rates nor devalue their currencies in an attempt to regain competitiveness. The only other option is an across-the-board cut in nominal wages, on the order of 30% or so. That’s something which is pretty much inconceivable, although Ireland seems to be trying to move in that direction.

Of course the one entity which will benefit from this is the Squid: Goldman Sachs seems to be taking the lead in trying to orchestrate a desperate and expensive sale of Greek debt to China. Expect more such desperate moves as the southern European macroeconomy continues to deteriorate; anybody who watched the world’s investment bankers swarming all over Domingo Cavallo in the final weeks of Argentina’s currency board will remember just how vulturish they can be in such situations.

My feeling is that the US poses at least as much of a risk to the global economy as southern Europe does. There’s a good chance that 2010 could be the year of walking away from underwater mortgages; there’s no sign of the private sector releveraging; and the government has clearly reached its limit in terms of the degree it can step in and borrow on behalf of the rest of us. If the attempt to prop up the still-overvalued housing market fails and there’s another downwards lurch, there will be a whole new wave of bank insolvencies and much less fiscal space to bail them out than there was pre-crisis. And the fact that most delegates here at Davos seem blissfully unconcerned about the possibility of a second nasty lurch downwards doesn’t reassure me in the slightest.

Howard Davies has taken an early lead in the Great Davos Narcissism Stakes, with this classic parenthetical:

As you climb the mountain to Davos (the train via Landquart is my demotic route of choice – eschewing the expensive corporate Audis) you tend to think you know what the Forum’s financial talking points will be.

This ranks up there with the Hollywood stars who congratulate themselves on helping to save the planet by flying commercial: taking the efficient and comfortable Swiss railway to Davos is not much of a hardship. What’s more, if you think that Davies is going to admit that he was thinking wrong about what the Forum’s financial talking points would be, think again.

It’s also the language which gives Davies away here: not just the use of the second person, but also the word “demotic”, which doesn’t mean what Davies thinks it means. If Davies had tried asking directions to Landquart in schoolboy German, and got an earful of incomprehensible Alpine Schweizerdeutsch in response, that would have been demotic. But I suspect he’s not enough of a man of the people to actually attempt talking to them: being in the same train as them is probably as far as he can bring himself to go.

As the World Economic Forum kicks off in earnest, the only real cause of buzz so far has been the apparent suicide of its long-time security chief, Markus Reinhardt. Reinhardt was an aggressive man: he took the decision to fire water cannons at demonstrators in sub-freezing temperatures in 2001; he was also acquitted of murder in 2002 after ordering the lethal shooting of a man.

For the 2010 meeting, I’m sure that this news will mean that security will be if anything stepped up. But I’m hoping that maybe as of next year calmer minds will start prevailing, and that the multiple layers of security cordons will largely be kept in storage. Part of the attraction of Davos is its small-town feeling, but everybody here has to plan out their day strategically, to minimize the number of times they have to pass through metal detectors to get into the convention center, the media center, or the Belvedere Hotel. The result is a constant and not particular pleasant feeling of being hemmed in whenever you’re taking part in official activities. More generally, the omnipresent and high-profile security does tend to cut against the much-vaunted “spirit of Davos”. It would be wonderful if, next year, the World Economic Forum was the first major international confab to start reducing its security levels.

Lawrence Delevingne has got Davos completely wrong: his list of “The Only 12 Davos Panels Worth Paying Attention To” is in fact a list of the 12 panels which can be safely ignored by just about all the delegates here. Larry Summers is more likely to turn up with only one chin than he is to commit anything approaching news in his Saturday discussion with Charlie Rose. People looking for interesting investment ideas would probably be better served by something like the “What is Life?” panel on Wednesday — and they’ll certainly find it much more interesting.

As Davos has embraced increasing numbers of journalists over the years, the alpine gabfest has developed a public face where CEOs and VIPs give us all the benefit of their best thinking on issues of global importance. But that’s not really what Davos is about. At its best, Davos is a way of learning a great deal about things you didn’t know you had any interest in; of meeting people you’d never otherwise meet or even know existed; and of giving human three-dimensionality to people whom you’d previously thought of just as simplistic caricatures. (At its worst, of course, Davos is a malign enabler of systemically-damaging hubris, but that’s a different story.)

In any case, if you think of Davos as some kind of Sunday-morning talk show where you passively sit back and listen to Important People talk about international capital flows and the global macroeconomic outlook, you’re pretty much missing the point. When Davos works, it does so by bringing interesting people together and sparking conversations. But those conversations usually happen on the sidelines, on couches in the conference center or in hotel bars around town. They rarely happen in the formal sessions, and they never happen in the big formal sessions with heads of state and other marquee names.

The fact is that if you’re not here, Davos is not for you. You can try to watch a few webcast panels, but you’ll probably drift off very quickly. It’s the action off-screen which keeps the plutocrats coming back.

If you order a $2,000 bottle of wine by mistake — or even a $6,000 bottle, for that matter — you have no one to blame but yourself: getting angry at the restaurant is silly, even if it’s psychologically understandable. But I think there’s something missing from the commentary about these cases: part of the reason for the anger is that the drinkers in question didn’t get anything like full value out of the wines.

When people enjoy ordering and drinking expensive wines in restaurants, an enormous part of the the pleasure they get is a simple function of the amount of money that they’re paying. If you know that you’re drinking an expensive wine, you pay it more attention, and you discover and delight in aspects of its structure that you might not otherwise notice or even particularly like. If you served a thousand-dollar wine in a twenty-dollar bottle and charged $20 for it, not a single person, no matter how sophisticated their palate and no matter how deep their pockets, would ever take a sip and declare that they would happily pay $1,000 for it. If they buy it and know what they’re drinking, on the other hand, they’re as likely as not to declare it cheap at the price.

As to the question of what restaurants can do to avoid situations such as these, I think a little bit of pomp and ceremony goes a long way — further than simply just letting your hand drift over in the general vicinity of the price column when confirming the order. If you make a show of polishing new glasses for the wine, and ask if the customer wants it decanted, and generally make it clear that they’ve chosen a very special wine, then no one is likely to be offended, while someone who ordered the wine by mistake might well get the message that they’ve ordered something unusually expensive.

So I’ve arrived in snowy Davos, where with typical modesty the miscellaneous moguls will attempt to “Improve the State of the World: Rethink, Redesign, Rebuild”. (Seriously, that’s the official slogan this year.) The official “purpose” page is full of claptrap of the highest order — a “Network of Global Agenda Councils” “driving the rethink” over here; “an unprecedented multistakeholder dialogue ” over there; and on top of it all, naturally, “a collaborative platform that integrates Web 2.0 technology”.

Or, to put it another way, there’s no indication whatsoever that anybody at the World Economic Forum actually Gets It. Davos is great at throwing a couple of archbishops onto a panel with Niall Ferguson entitled “Restoring Faith in Economics” (geddit?) — but what I see none of in the programme is an indication that much if not all of the crisis was caused by the arrogance of Davos Man and by his unshakeable belief that the combined efforts of the world’s richest and most powerful individuals would surely make the world a better, rather than a worse, place. Excitement about the opportunities afforded by the Great Moderation (as the credit bubble was known before it burst), financial innovation, the rise of the bankers — Davos was ahead of the curve on all of them. And as the annual symposium of smug sermonizing became increasingly established, it served as a crucial reinforcement mechanism.

It’s not like CEOs and billionaires (and billionaire CEOs) need any more flattery and ego-stroking than they get on a daily basis, but Davos gives them more than that: it allows them to flatter and ego-stroke each other, in public. They invariably leave even more puffed-up and sure of themselves than when they arrived, when in hindsight what the world really needed was for these men (it’s still very much a boys’ club) to be shaken out of their complacency and to ask themselves some tough questions about whether in fact they were leading us off a precipice.

Now that it’s clear that many of them were leading us off that cliff, there’s still no sign of contrition, although you can be sure that a few fingers will be pointed at various past attendees who aren’t here to defend themselves. Is anybody here seriously examining the idea that Davos was institutionally responsible, at least in part, for the economic and financial catastrophe which befell the world in 2008? I’ll be on the lookout for that over the next few days. But I suspect that the preening potentates will be far too busy giving themselves the job of rebuilding the world to stop and ask where they went wrong in building the last one, and whether they might actually owe the rest of us a large collective apology.

Dan Primack has a bone to pick with PRs: PE Hub

I wonder whether the Times-Picayune will lose money on increasing and reprinting its press run after the Saints win — Nola

John Gruber on why Apple probably won’t include Flash on the Tablet — Daring Fireball

Every day of the NYPD’s terror trial will cause 2,200 additional hours stuck in traffic — Streetsblog

The Economist’s blogs gets initials! “RA | Washington” (Ryan Avent) now distinct from “GI | Washington” (Greg Ip) — Economist

Why is it that the SEC is only diligent on matters where it shouldn’t be, like keeping public information secret? — Reuters

US to lift 21-year ban on haggis — Guardian

Pandit said no when Obama summoned him to DC (he tried to send Parsons in his place), but can make it to Davos — Reuters

Alice Schroeder says it’s “frightening” how an “undignified” Warren Buffett has “behaved vindictively” toward her — AS

I’m with the redheaded girl — Vimeo

Annals of surreal libel cases, crossword edition — Sky

Epic customer service fail by B&N with an early oder for its new Nook — fsck

Not Having A Mortgage Doesn’t Stop Bank Of America From Foreclosing — Consumerist

The 37 most liberal Senators represent 51% of America — The Bellows

That 4,170-word Steve Waldman post you’ve been waiting for, on how inequality impedes growth, has finally arrived — Interfluidity

There’s been a lot of speculation on this blog about the economics of the NYT paywall. So let’s stop speculating and look at what Alan Rusbridger, the editor of the Guardian, has to say on the subject. After all, the Guardian, and its website, are in a very similar situation to that of the NYT: a newspaper which has a huge online audience, but which is still losing a lot of money. What’s more, there’s a good chance that a NYT paywall, if it’s set high enough, will catapult the Guardian into position as the most widely-read newspaper in the English-speaking world.

My commercial colleagues at the Guardian – the ones who do think about business models – want to grow a large audience for our content and for advertisers, and can’t presently see the benefits of choking off growth in return for the relatively modest sums we think we would get from universal charging for digital content. Last year we earned £25m from digital advertising – not enough to sustain the legacy print business, but not trivial. My commercial colleagues believe we would earn a fraction of that from any known pay wall model.

They’ve done lots of modelling around at least six different pay wall proposals and they are currently unpersuaded. They’re looked at the argument that free digital content cannibalises print – and they look at the ABC charts showing that our market share of paid-for print sales is growing, not shrinking, despite pushing aggressively ahead on digital. They don’t rule anything out. But they don’t think it’s right for us now.

The New York Times, like the Guardian, is currently seeing little if any erosion of its print circulation from the fact that it’s available for free online. That might be counterintuitive, but it does seem to be true, at least for the time being. So if I’m right that the main purpose of the NYT paywall is to shore up the newpaper’s print circulation, this would seem to be a weird time to implement it.

In fact, the reverse is true: with Rupert Murdoch seemingly hell-bent on putting paywalls around all of his newspaper properties (although not, as Rusbridger notes, around SkyNews.com), a lot of Murdoch’s readers are going to look elsewhere for news. And many of them will find their way to the Guardian and the NYT. I’m told that the current plans for the paywall around the Times and the Sunday Times are for what John Gapper calls a “Berliner”: no meter, no free content, just a wall which you have to pay to get past. I’m sure that Rusbridger is licking his lips in anticipation.

Abnormal Returns has gone real-time! The indispensible link-fest will still arrive daily, but now that Tadas Viskantas has sold his site to StockTwits, a second column has appeared on the site, with “links in real time”, mainly from Twitter.

This is great news for the econoblogosphere, on many levels. It helps to ratify the importance of Twitter for driving the conversation; it helps to make AR even more important than it has been until now; and it also demonstrates a new way of monetizing small, one-man blogs: exit via acquisition. Tadas gets a check from StockTwits now, and a regular paycheck from them going forwards: this means, I hope, that we can look forward to him sticking around for a while.

As for me, I’m going to be a bit quiet for the next 24 hours or so, as I wend my way to the top of a Swiss alp for a certain alpine gabfest. Tadas should be able to take care of your econoblogospheric needs until then.

Justin Fox kicks off his new HBR blog with a cracking post on the jurisprudence of treating corporations as persons. If John Roberts really believes that shareholders control corporations, he says, that’s all the more reason not to allow corporations the rights of individuals — and he uses Milton Friedman, of all people, to make his case:

The “one and only social responsibility of business,” economist Milton Friedman wrote back in 1970 in a New York Times Magazine essay that launched a thousand arguments, is “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game …” Friedman contrasted this with the multiple responsibilities that an individual — such as a corporate executive — might have “to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country.” …

The individuals who make up the electorate in the United States are, as Friedman described, beings of many facets — their actions and their views shaped by pecuniary self interest but also by values, beliefs, and loyalties that might conflict with that self interest. The ideal for-profit corporation, on the other hand, is out to do nothing but make as much money as it can “within the rules of the game.” It is supposed to behave in a fashion that for an individual would probably be described as psychopathic. And if corporations are allowed to play a decisive role in shaping the “rules of the game,” we have effectively put the inmates in control of the asylum…

If corporations are persons, they are — if they behave as Milton Friedman wanted them to — persons with mental and emotional impairments so severe that any decent judge would feel entirely justified in declaring them incompetent.

There’s a connection, here, to the increasingly conventional-wisdom argument that walking away from a mortgage is perfectly fine since the banks who lent the money in the first place wouldn’t hesitate to behave in exactly the same way. But if Justin is right, we’d have to be psychopaths to treat corporations as our role models in such matters.

Justin’s timing on this is impeccable, as the world’s plutocrats start firing up their private jets to fly in to Davos and pat each other on the back for their efforts to “improve the state of the world” with their “double bottom-line” or even “triple bottom-line” endeavors. It’ll be interesting to see what Davos Man thinks about the ruling in Citizens United vs FEC: the general default position at the alpine gabfest is that successful corporations, acting in their own self-interest, are perfectly positioned to make the world a better place. Maybe giving them enormous influence in US elections will simply help in terms of steering the country towards more enlightened policies!