Felix Salmon


Felix Salmon
Jan 23, 2010 08:52 UTC

Does Mexico make more from illegal drugs than it does from oil? I’d love to see where these numbers are coming from — Reuters

Barney Frank: Let’s abolish Fannie and Freddie — Globe

Wyclef Jean Demanded a $100,000 Fee to Appear at a Fundraiser for His Own Hometown — Gawker

On the difficulty of trying to define prop trading — Kid Dynamite

Dave Winer’s email requesting he be removed from Twitter’s suggested user list — Scripting (Background here)

The Chinese population ages 20-24 will fall from 125 million in 2010 to just 68 million in 2020 — Caing

Dominoes Keep Falling After Scott Brown’s Win. Is Bernanke next? — Atlantic Wire

Nicholas Carr uses Hal Varian to explain why paywalls can work in theory. But in practice, for the NYT? Jury out — Rough Type

Did Vladimir Putin meet Ronald Reagan? — Hot Air

Where we went wrong in housing

Felix Salmon
Jan 23, 2010 08:31 UTC

Go read this interview with Steve Waldman, one of the econoblogosphere’s most thoughtful and intelligent writers. Here he is on the morals of walking away from your mortgage:

The financial industry has changed the economic and legal landscape surrounding consumer lending so that it simply bears no resemblance at all to interpersonal loans among people of good will in continuing relationships. But those are the norms they ask borrowers to adopt with respect to repayment. That act, demanding others act in accordance with standards from which one exempts oneself, is morally offensive. In a society which, despite economic difference, accepts no social class, ones moral obligation is to behave towards others as others must behave towards you. It is clear that, in general, banks and the special purpose entities that increasingly replace them treat their transactions with borrowers as hard-nosed business arrangements which they are willing to pursue on adversarial terms when doing so is in their interest. Borrowers should do the same. To do otherwise is to reward the cynical immorality of others, which serves no social good.

And here he is on the fetish of homeownership:

I think the government has chronically oversubsidized mortgage lending and homeownership. We cannot know what would have been, but I think we’d have a different and better housing market if we didn’t tilt the scales of the buy/rent decision towards BUY BUY BUY. The business of shelter provision for middle class families is horribly inefficient, literally a cottage industry. Absent all the subsidies, middle-class housing might have become professionalized by now, which could lead to enormous savings in money and aggravation for people who now waste time fighting with plumbers and roofers on an ad hoc basis. It’s remarkable that homeownership rates have kept rising even as people’s tenure in jobs has fallen and mobility has grown more valuable. We’ve made homeownership a totem of middle class prosperity. In doing so, we may have, um, foreclosed consideration of a variety of superior arrangements.

I love the idea of “professionalizing” housing: call it the German model. I’d note that an interesting hybrid exists in Manhattan: the co-op apartment building, where you pay a substantial monthly fee to a landlord-like figure who deals with most of the headaches of ownership, and where the board insists on high minimum-net-worth requirements before anybody can buy into the building, to help avoid the risk of foreclosure. It doesn’t really scale, though, and it doesn’t solve the mobility problem.


Dsucher, you have a telephone call from the limits of arbitrage on line 3. Do pick up this time. And if you’d like the non-snark response, how can you possibly compare single-family housing, which is deeply subsidized via (deep breath) mortgage interest deduction, conforming loan provision, property tax deduction, FICO score, etc ad nauseam, with completely unsubsidized, high-unit-count, multimillion-dollar multifamily housing like ‘[c]ondominiums, co-ops and various HOAs?’ Which is to say, you have another call from the Apartment REIT subindustry on line 4.


The capital-account deficit argument has some data on its side, it is true. Still, if you take away the hundreds of billions in annual government subsidies for homeownership, maybe prices are closer to a sustainable level when the bubble pops.

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Moral hazard datapoint of the day

Felix Salmon
Jan 23, 2010 08:09 UTC

In order to believe that there was a connection between moral hazard and the financial crisis, says Jim Surowiecki,

you also have to believe that the banks knew that what they were doing was reckless, and that there was a meaningful chance that it would wreck their companies, but decided that it was still worth doing because if everything went south, the government would step in. And that, even before Dimon’s comment yesterday, always seemed improbable.

But look what has happened in Sweden, when the government imposed a too-big-to-fail fee on its biggest banks, to help make up for the fact that it would have to bail them out in the event of a crisis.

According to Swedish officials, the stability fee has been welcomed by the banks that dominate the financial system. Smaller credit and financing companies complained bitterly, though, arguing that they would never be helped by the government in the event of a failure.

Maybe this is just the difference between Swedes and Americans — but I do think that there is a very real benefit to banks of having a government backstop. And they know it.


Oh, the banks knew they were being reckless. Unfortunately being reckless was the only way of squeezing out that extra return, and bankers who didn’t do that lost customers to the ones that did. As Citigroup’s Charles Prince said, “As long as the music is playing, you’ve got to get up and dance.”

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More NYT paywall math

Felix Salmon
Jan 23, 2010 07:27 UTC

Gabriel Snyder does his own math, and comes to exactly the same conclusion as both me and Erick Schonfeld: optimistically speaking, the NYT is likely to make no more than about $35 million a year from a nytimes.com paywall — a small fraction of its digital advertising revenues. Has anybody come up with a bigger number than that?

I’m not sure what to make of this, though, from Snyder:

Quantcast’s estimate of NYTimes.com traffic includes a breakdown of how often each of those users are actually visiting the site. Like most sites, the Times has a tiny core, just 1% or 170,000 users, who visit the site more than one time per day or 30 times a month.

Interestingly, in order to get to his $34 million figure, Snyder has to have double that number of people paying $100 a year. But here’s the thing: the NYT has 800,000 paying subscribers already — and the paper has said that they will have free access to the website whatever happens. One big question, then, is the degree of overlap between the most loyal core of nytimes.com readers, on the one hand, and the equally-loyal, and larger, group of NYT print subscribers, on the other. If just 25% of the NYT’s print subscribers visit the website daily, that’s all of the website’s most loyal visitors right there!

So while the maximum upside to implementing a paywall is $35 million or so in annual subscription revenues, the minimum upside is zero. I don’t actually think that the number of daily nytimes.com readers is as low as 170,000, and I do think that the NYT should somehow be able to make at least as much money out of its new paywall as it did from TimesSelect — something on the order of $10 million a year. But given the number of stories that the NYT is going to give away to every reader for free, that’s by no means a foregone conclusion.


While I don’t disagree, I think there’s one clear flaw in our logic: It assumes that the online news industry will look relatively similar in the future. If you expect the industry to see slow gradual change, the NYT’s proposal is dead.

The only way I see this making sense is if there is a fallout in the news industry and publications start either dieing or going behind the paywall en mass. That could, and I emphasize, could, mean that people start paying up for news at at least one site because there’s no other way to get it.

In other words, it’s a cynical play.

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Who values big banks?

Felix Salmon
Jan 23, 2010 07:11 UTC

The Epicurean Dealmaker has some stern words for those — Andrew Ross Sorkin springs to mind — who would say that there are some things only big banks can do:

The assertion that large, multi-line financial conglomerates provide customers with services no smaller institutions can deliver is pure poppycock… Wholesale institutional clients make a point of using more than one investment or commercial bank for virtually all their financial transactions, no matter what they are. In fact, the bigger the deal, the more banks the customer usually uses. This is because banking clients want to 1) spread transaction financing and execution risk across multiple service providers and 2) make sure none of these oligopolist bastards has an exclusive right to grab the client by the short and curlies. Just look at securities underwriting data, for chrissakes: as the number of independent investment banks has shrunk (and their product lines, geographic reach, and balance sheets have swollen) over the past 20 years, the average number of book running underwriters per transaction has risen. This is not the result one should expect if one believes customers prefer to use giant universal banks as one-stop shops.

The next time that you hear a senior investment banker intoning ponderously about the importance of being able to serve clients across multiple geographic regions and asset classes, ask for references. These banks all claim to be so client-focused, but where are the clients’ encomia to the megabank model?

If there was a wave of jubilation in corporate America when JP Morgan bought Bear and BofA bought Merrill, I think I missed it. Is there a single multinational saying “this is great, now we can use just one institution for all our banking needs”? Of course not. And even if there was a bank big enough to keep the entirety of a $20 billion loan to Pfizer on its own balance sheet, there’s no way that Pfizer would accept such a deal.

Being big is great, if you’re a big bank. But for the rest of us, big banks do little but increase systemic risk. There’s certainly no indication of any economies of scale when it comes to things like fees on our checking accounts. So the next time you think that someone else surely values these banks’ size, think again. Yes, they can be extremely profitable. But that doesn’t necessarily mean they’re valuable, on a societal level.


I trade FX for a corporate, and the worst thing that happened to my book was the BOA/Merrill merger. I use several bank counterparties (to ensure better pricing, reduce credit exposure, get better Christmas presents, etc), and the BOA/Merrill merger meant that because BOA had lots of exposure to my firm, and Merrill had lots of exposure to my firm, BOA/Merrill had too much exposure to my firm. The result? A decreased line of credit. So much for one-stop shopping.

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A big change at Lending Club

Felix Salmon
Jan 22, 2010 19:14 UTC

Lending Club CEO Renaud Laplanche said something very interesting in his response to my most recent post on peer-to-peer lending. “Currently, the platform is ‘demand constrained”, meaning that we have more investors willing to invest in these loans than loans available,’ he wrote.

That’s a big change from when I met Laplanche in April, so I asked him what has happened since then. He replied:

It is a big change indeed. The platform went from being supply-constrained most of last year to now being demand-constrained. I believe 3 factors contributed to the shift:

1. Our track record continues to get longer, inspiring more confidence to investors, who now invest larger amounts. The average net return after defaults and fees remains over 9%.

2. The dynamics on both sides of the platform are different: investors are repeat customers and the entire base contributes each month, with more than 10,000 investors contributing each an additional $500 to their account each month on average. On the other side, each borrower takes one loan and that’s pretty much it for the next 3 years. We do very little upsell to borrowers, for risk management reasons. So the base getting bigger is not helpful on the borrower side, for now.

3. There are certainly macro-economic factors, with investors’ sentiment evolving. Investors are a lot less risk-averse now than they were a year ago, and those who were only taking FDIC-insured products are looking for yield again.

There’s good news and bad news here. The good news is that the investors keep on coming back with new money: they’re happy with the returns they’re getting and the default rates they’re seeing. But the bad news is that it’s becoming harder to find sufficient borrowers to meet investor demand — and no investor wants to put thousands of dollars into Lending Club, only to see it kept in cash, earning no interest.

The pressure on Lending Club to weaken its underwriting standards, then, is going to be intense — but it’s precisely those underwriting standards which investors are relying on and which set Lending Club apart from the likes of Prosper.

The best-case scenario here, of course, is that Lending Club will become better known among individuals and small businesses wanting to borrow money, and will be able to do much more matching of investors with borrowers. But I also have a concern that Lending Club, and other peer-to-peer lenders, risk becoming the Heloc of the new decade.

Back during the housing boom, people who found themselves over their heads with credit cards could wipe the slate clean(ish) by paying them all off with a home equity line of credit. The problem was that if you’ve gotten yourself over your head with credit cards in the past, you’re likely to do so again in the future — only with that big Heloc to add to the total debt load.

By far the most popular category of loans on Lending Club is debt consolidation. And indeed it makes perfect financial sense for people paying enormous interest rates on their credit cards to refinance it all at Lending Club, tear up their cards, and embark upon a life of newly-discovered frugality. On the other hand, it makes very little sense for those people to refinance everything at Lending Club if the main effect of doing so is simply to reopen those old credit card lines, and find themselves in a situation down the road where they’re paying not only the Lending Club obligations but also a whole pile of new credit-card obligations on top.

For a while there, at the beginning of 2009, I believed that Americans really were rediscovering the wonders of living within their means. But in hindsight they simply didn’t have any money or credit. If the Lending Club spigots continue to open up, we might just be creating a whole new asset class of loans which are weighing down Americans who should never have spent so much in the first place. Personal expenditure, it seems, will always expand to fill the amount of credit available. And that might not bode well for Lending Club investors down the road. Can the company’s underwriting standards stop that from happening? Right now, it’s impossible to tell for sure.


As an investor at lendingclub i for one would not be impressed if underwriting standards were compromised. lendingclub owes much of its success to its current high underwriting standards. The no brainer solution to this more advertising to potential borrowers. The model functions beautifully, but I think the brand overall could use a makeover, because its coming across as very low brow. It doesn’t have any of the web 3.0 feel that it should, starting with the logo, right through to the lack of human feel to the imagery and interfaces. The colors are soemthing out of the 70′s. Its a pretty outdated looking website. Improving the brand’s image along with some television and print advertising directed squarely at BORROWERS, would go a long way to alievating this problem without resorting to a change in underwriting standards.

Perhaps its also time to cap monthly investment, or even just enforce tougher standards to lender profile requirements.

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The US and UK regulators try to play better together

Felix Salmon
Jan 22, 2010 18:01 UTC

There’s a lot of blame to go round for the chaotic implosion of Lehman Brothers in September 2008. But very high up the list is the utter lack of communication and cooperation between authorities in the US and the UK: while panicked all-nighters were being pulled at the New York Fed offices, no one attempted to bring the Brits into the loop until it was too late. And given that the only solution was an acquisition by a British bank — Barclays — the failure to have UK regulators on board proved fatal.

So it’s good news that regulators in the US and the UK have signed a memorandum of understanding, detailing how they’re going to work much better together in future. Except, the MoU only covers depository institutions, which means, I think, that it wouldn’t have helped with Lehman anyway. And then there’s the issue that the whole thing is, in the words of Paul Murphy, “complete guff“. There’s lots of passive voice (“as the condition of a Firm deteriorates, it is expected that cooperation between the Authorities will intensify”), and even more CYA (“This MOU does not create any legally binding obligations, … or confer upon any Person the right or ability directly or indirectly to obtain… any information”).

What’s more, there’s a risk that this kind of thing has the same deleterious effect that bilateral free trade agreements have on the WTO: if the UK and the US think that they have worked things out, then there will be less urgency to put together something genuinely international and comprehensive. So while Murphy thinks it’s all “a bit academic”, I fear it might even work out to be positively harmful.


It may be putting the dum in memorandum, positively harmful, even, but as the saying goes, “at least something positive will have come of this”.

At least those chaps were off the street for a couple of hours. Stiff upper lip, and all that.

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Is the NYT meter really a navigation fee?

Felix Salmon
Jan 22, 2010 17:08 UTC

Jay Rosen says he’s “uncommitted” in terms of passing judgment on the NYT metering plan, but the broad outlines of his take seem clear: insofar as it’s a metering plan as that term is commonly understood, it’s not a good idea. But it isn’t, and we still don’t really understand what it is, so it’s still too early to judge.

Jay explains most of this in his latest post, where he talks about a pledge from NYT CEO Janet Robinson and digital chief Martin Nisenholtz that “If you are coming to NYTimes.com from another Web site and it brings you to our site to view an article, you will have access to that article and it will not count toward your allotment of free ones.”

Jay is right that insofar as we can take this at face value, it massively changes the whole concept of what a metered paywall is, to the point of inventing a whole new approach. Certainly, if this is true, I’ll happily continue to link to the NYT just as I’m doing right now, since all my readers will be able to follow my link, no matter how many times they’ve accessed nytimes.com that month, and no matter whether or not they’re subscribers. In fact, this is exactly what I said the NYT should do in constructing a metered system.

But will the NYT follow through on this pledge? It seems to me that they’re simply asking everybody to use external aggregators as a replacement for the nytimes.com homepage as the best tool for reading the site. Even people using the NYT’s own RSS feeds to find the stories they want to read might well be able to consume an unlimited amount of online content for free.

Or to put it another way: if this is true, then they’re not actually charging for NYT content; they’re charging for NYT navigation. What you get charged for isn’t reading NYT stories, but rather navigating from one NYT page to another. If you get to that second page any other way — by following a link in your RSS reader or your favorite blog or a news aggregator of some description — then you need no subscription at all.

Now, the navigation at nytimes.com is excellent, and I can see that some people might be willing to pay for it. But it’s a pretty weird thing to charge for.

What’s more, a scheme along these lines ends up hurting the NYT’s blogs most of all. The way that the NYT’s blogs are formatted, to read them you need to navigate separately from post to post — exactly the kind of behavior which will get charged under the new system. Reading a long magazine article costs nothing, if you get there from an external link; reading Paul Krugman’s blog, by contrast, will use up a lot of your monthly allotment, if you want to catch up on his most recent posts.

So while this policy is great for external blogs, like mine, it’s atrocious for internal blogs. Is that really something the NYT wants? I don’t think so — and as a result I suspect we might see some backtracking on this front between now and implementation.

Update: Josh Young makes a good point when he says there’s another way of looking at this paywall: it’s essentially a charge for being ignorant of any doors to NYT content beyond the nytimes.com homepage. Which dovetails with my thesis that the real target here is print subscribers, who tend to be less web-savvy.


I think it’s not an option to deter those determined to steal. It’s an option for those who want to fund good journalism, but don’t want a subscription. Heck even a pseudo tip jar would be nice. I am willing to pay for good stuff.

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A closer look at the Volcker rule

Felix Salmon
Jan 22, 2010 14:55 UTC

There are two big questions overhanging the Volcker/Obama announcement yesterday: will it be enacted, and if it is, will it make any difference.

If you look at Obama’s rhetoric during the announcement (“if these folks want a fight, it’s a fight I’m ready to have”), the enemy is Big Finance — and certainly the Republicans would not look good if they attempted to filibuster a bill like this. The real problem, however, is the Democrats, who are surely more desperate for financial-industry money than ever, given yesterday’s Supreme Court ruling, and who have in recent years raised much more money from Wall Street than Republicans have.

Mark Thoma is as pessimistic as I’ve seen him Economics of Contempt is pessimistic when it comes to the chances that the Democrats will line up behind Obama on this one:

I don’t even know why I took the time to write about this, because there’s zero chance the proposals Obama announced today will ever be law. This was a fairly transparent political stunt — the White House needed to do something to take the media’s focus off of health care 24/7, so they flew in Volcker and announced some proposals that sound good to the media. The two Senate staffers I talk to regularly both said their offices were basically ignoring Obama’s proposals, because even if the White House fights for them (which they won’t), Chris Dodd has no intention of inserting them into his committee’s bill.

The question here is how much damage Dodd and Frank and Congressional Democrats in general will suffer if, after lining up next to Volcker and Obama yesterday, they essentially ignore the whole thing. Can failure to insert a Volcker rule into financial-reform legislation harm them politically? It’s not easy to see how it would. So I suspect that all eyes should be on Dodd and Frank for the time being: unless and until they start being as friendly with Volcker as Obama has suddenly become, there’s a good chance that this legislation will never happen. Given Dodd’s attitude to the Consumer Finance Protection Agency, I’m not holding my breath. And if you think that yesterday’s fall in the stock-market is some kind of indication that the legislation will happen, Barry Ritholtz has something to say to you.

Still, let’s say something like this passes. Will it be effective? On this front I’m cautiously optimistic. No, it won’t singlehandedly prevent another financial crisis — but I’m getting a bit tired, at this point, of people criticizing necessary moves on the grounds that they’re not sufficient. It’s true that excessive proprietary risk-taking at banks was not the proximate cause of the crisis, but that doesn’t mean we shouldn’t scale such activity back.

It’s important to appreciate, here, the pecking order within investment banks: traders rule, these days — they make orders of magnitude more money than bankers — and if you’re a trader, the more risk you take, the more money you make.

Traders start off small, filling client orders. As they become more experienced and more successful, they’re allowed to manage increasingly-large positions. You don’t need to be a prop trader to do that. Let’s say you’re trading equities, and you want to make a bet that A will rise while B won’t. Then every time a client sells you a block of A stock, you take your sweet time selling it on into the market, while your bid on B stock is less aggressive, and you will sell it with more alacrity. You’re still a client-focused market-maker, but you’re taking on extra proprietary risk.

Eventually, your risk book and your compensation becomes so big that you move over to the prop desk, where you don’t need to worry about dealing with individual clients any more — you’re just in the market, making short-term directional bets.

If you become very good at that, you’re going to start looking at the amount of money that you’re making for your employer, and thinking that you could capture a much larger chunk of that sum if you were running your own hedge fund. You then either strike out on your own, or else you threaten to strike out on your own, and stay only if your employer upgrades you from prop-desk to fully-fledged internal hedge fund.

For some reason, the vast majority of external and internal hedge funds which are started by former star traders don’t do very well: look at Goldman’s Global Alpha, or UBS’s Dillon Read Capital Management, or even for that matter Old Lane Capital Partners, an external hedge fund founded by Morgan Stanley refugees which then became an internal hedge fund at Citigroup. (Or, for that matter, just look at the internal Bear Stearns hedge funds whose collapse marked the beginning of the financial crisis.) But in any case, there’s no doubt that such funds add to the overall riskiness of their parent bank.

It’s true, then, that if you ban internal prop desks, a lot of those prop trades and traders will simply remain on the trading floor proper, where they’re nominally acting on behalf of clients — much of that risk will remain within the organization. But at the same time, if the Volcker rule passes, traders at investment banks will no longer be able to aspire to a career path where they first become prop traders and then eventually leave to start their own hedge fund, either internally or externally.

What’s more, as John Kemp has pointed out, the very fact that prop trading is banned would force regulators to be much more in market-markers’ faces than they have been until now. Thoma says that we’d be better off just boosting the budget of the regulatory agencies, but the fact is that the Volcker rule would probably have that effect. Here’s Kemp:

Enforcing a separation between proprietary trading and market making will require considerable intrusion from regulators (either in the form of rather blunt prohibitions or very intensive supervisory visits and demands for data).

Until now, supervisors have been reluctant to interfere this much in the internal workings of banks. But beefed up regulation is the inevitable condition for taxpayer support, and Obama’s endorsement will stiffen regulators’ resolve in the United States and elsewhere.

Or, to put it another way, the Volcker rule is a means to the end of increased regulatory oversight of broker-dealers. I sincerely hope it becomes a reality; we’ll see how much pressure is brought to bear on Frank and Dodd to make it so.

Update: Sorry, I thought I was quoting Mark Thoma when in fact I was quoting Economics of Contempt. It’s hard to tell when <ol> lists are blockquoted!


Does the White House think that it can successfully take back the populist label after one press conference, without actually fighting for what it says? It’s going to take a lot more than 30 minutes to fix that image problem.

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