Felix Salmon


Felix Salmon
Jan 22, 2010 05:57 UTC

Just when you thought you knew just how dysfunctional the SEC was, it turns out to be even worse — WaPo

I think it was Goldilocks, not the bears — Reuters

John Gapper responds to me with a 950-word blog comment. What a mensch! — Reuters

Quote of the Day: CNBC is to Advisors as… — Felder

Venezuelan oil chart of the day — Gregor

In Brooklyn, the MTA turns its new LIRR train station into a tomb with gigantic security sarcophagi — Streetsblog

Some good advice for the NYT, which has already said that homepage visits won’t count towards your metered allocation — Atlantic

Fantastic open letter from OK Go about why record labels won’t allow YouTube videos to go viral — OK Go Forums

Do women have more unreasonable standards for attractiveness than men? — OK Cupid

First look at a Spike Jonze’s experimental, branded short film for Absolut — Fast Company

Many thanks to Richard Perez-Pena for describing me as “a respected writer on media” — NYT

When Gourmet got complaints about change in direction, “Reichl hired staff to handwrite notes in response” — Zocalo

The Faces Of Larry Summers And Paul Volcker Say It All — Clusterstock

Negative-correlation-between-price-and-quality datapoint of the day: the best jeans cost $32 — NYT

The world’s first street art disaster movie — BBC

Go read Paul Smalera on the NYT paywall — True/Slant

Matt Goldstein’s mugshot is being circulated around hedge-fund security guards — Reuters

Dan Roth joining Fortune to run Fortune.com — All Things D


From the OKCupid link:

> One interesting thing seems to be going on here: when the best-looking men write the worst-looking women, their message success rate takes a big hit. The knee-jerk response would be to somehow chalk it up to hunky spammers, but we very carefully control for that in these articles, and in any event why would better-looking girls be drastically more susceptible to it?

I really need to quit going through life with the assumption that everyone knows what “adverse selection” is.

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Reacting to the Obama plan

Felix Salmon
Jan 21, 2010 22:02 UTC

The reactions to the Volcker-Obama bank plan seem to be veering off to extremes. On one side, the Financial Services Forum is talking about how it’s a bad idea to “preemptively break up large, well-managed, and well-capitalized banking companies”, which is wrong on two levels: no it’s not, but in any case no one’s proposing any break-ups at all. It’s also making the point that prop trading didn’t cause the financial crisis, which is true, but beside the point: the idea here isn’t to prevent a play-by-play rerun of the last crisis, but rather to reduce systemic risk more generally. And prop traders at too-big-to-fail institutions undoubtedly increasing the systemic risk in those institutions. To a large degree, that’s their job.

At the same time, the Clusterstock guys I think are altogether too sanguine about the effects of this proposal, should it get enacted. Henry Blodget seems to think it will apply only to banks and not to any other systemically-important financial institutions: we’ve made that mistake once, I’m pretty sure we won’t make it again. And John Carney thinks that simply opening up in-house hedge funds to outside clients will suffice to have those funds classified as serving customers in some way; I very much doubt that it’ll be remotely that easy. In general, it’s pretty hard to find loopholes in rules which don’t yet exist, and I’m sure that insofar as Paul Volcker is the driving force behind these rules, he’ll do his best to keep any loopholes as small as he can.

If you believe in efficient markets, the upshot is this:


That’s the stock prices of investment banks, in yellow, and regional banks, in white, over the past two days. And it’s exactly what you’d want to see if you want to see the center of gravity of the US financial system moving away from the too-big-to-fail bunch and becoming more spread out among smaller institutions.

Update: Gillian Tett makes a good point when she says that “the lack of global co-ordination potentially opens up the prospect of widespread future regulatory arbitrage” — it’s going to be hard for the US to enforce this policy on Deutsche Bank, for instance, or other foreign deposit-taking institutions with investment-banking arms. So there’s definitely a risk of much more in the way of international joint ventures and the like, which will end up being regulated by no one in particular.


There will be no regulatory arbitrage. What markets around the world can hold the same volume as ours? None and the European countries are much harder on their banks anyway. Let’s call the big banks and their supporters in the blogosphere’s bluff on this nonsense. We have to be the leaders on this issue.

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The devil in the NYT meter’s details

Felix Salmon
Jan 21, 2010 20:52 UTC

One issue which I’m sure has yet to be settled inside NYT headquarters is the status of blogs vis-a-vis the nytimes.com paywall. On the one hand, blogs are a central part of the website’s value proposition — exactly the sort of extra digital content that they want people to pay for. On the other hand, blogs simply don’t lend themselves to paywalls in general, or to metering in particular. While newspaper articles are self-contained entities — visit once, get the information, you’re done — blogs are conversations. As a result, participating in any one conversation — reading any one blog — will in and of itself use up whatever pageview quota the NYT might be willing to give you.

Even if the blogs stay outside the paywall, the NYT might find it hard to communicate that effectively — and in any case, as Ezra Klein says, non-NYT blogs are sure to be the big winners from this move. Many of the NYT’s star blog properties, including Paul Krugman and Freakonomics, are likely to leave nytimes.com — or at the very least mirror their NYT postings elsewhere — if they wake up one morning to find themselves within a firewall.

This is just one of the many bits of fine-tuning which are going to use up an enormous amount of developers’ and managers’ time. Will the NYT still break up long stories into multiple pages? If so, how will it ensure that it’s counting stories read rather than pages visited? And how will it communicate that to its readers? Will they be able to see their own personal meter as it ticks up towards the paywall level? What about slideshows — how many meter-points will they rack up? And what about things like the Times Skimmer, which is one page with hundreds of different articles on it?

In general, many of the most innovative and interesting things which the NYT has done in the multimedia/website space have been experiments which break the old-fashioned equation of one newspaper article = one web page = one pageview. But the meter system seems designed to keep that hoary old convention clattering on into the indefinite future. It’s a problem the NYT is bringing on itself, for precious little upside. It’s going to be a serious distraction, and that’s something no one in the NYT needs right now.

Update: The NYT says 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”. That’s good news for bloggers linking to nytimes.com — but I suspect it’s going to be non-trivial to implement.


Technically FT’s paywall, and indeed the NYT’s current “registration-wall”, are very easy to circumvent: simply delete the site cookie, and your view accounting is reset.

But as kevinacohn says, tracking where the viewers come from is not technically difficult – just check the Referer: header (misspelling is in the spec) in the HTTP request, which is something the browser sends automatically. But on the other hand, it would be quite easy for someone to write e.g. a browser plugin which fills in a bogus Referer entry whenever browsing the NYT site, such that every intra-NYT link appears to be an incoming link from the outside world when the browser requests hit the NYT server.

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Make that two cheers for Obama

Felix Salmon
Jan 21, 2010 19:32 UTC

In public, Barack Obama was stern and tough:

Never again will the American taxpayer be held hostage by a bank that is too big to fail…

The American people will not be served by a financial system that comprises just a few massive firms. That’s not good for consumers, it’s not good for the economy. And through this policy, that is an outcome we will avoid…

if these folks want a fight, it’s a fight I’m ready to have.

In private, however, according to Simon Johnson, a very different message is being sent about how much smaller the Obama administration wants America’s biggest banks to be. The answer: no smaller than they are now — even after the wave of panic-induced M&A at the height of the financial crisis.

The biggest banks in the US — JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley — are not only too big to fail, they’re also, as a group, significantly larger than they’ve ever been in the past. The systemic risk they pose by sheer dint of their size has therefore never been greater. They all of us, right now, are holding us hostage by being too big to fail: no matter how much they borrow and gamble, they know the US taxpayer will be there, in extremis, to bail them out.

Now the proposed Volcker rule will try to cut back on some of that borrowing and gambling, but it probably wouldn’t have had any effect on their idiotic actions in mortgage-backed securities and collateralized debt obligations. Banks will always find a way to lose money: not all banks fail, but there are always bank failures. The important thing is that when banks fail, there aren’t massively destabilizing systemic consequences. And the only way to ensure that is to make the biggest banks smaller. It’s sad that the Obama administration seems to have flubbed this final chance to get that done.


As with his decaf healthcare “reform” having maimed the concept of single payer, Obama totally blew it with this latest resoundingly hollow promise of banking reform. Bring on the Massachussets, he’s got no credit left now.

To top things off, Goldman probably shorted themselves throughout the brief down-blip all this flash and no bang was sure to produce. If you listen closely you can hear them laughing oba-ha-ha-ma all the way to the bank.

Zero cheers.

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Quote of the day, Goldman edition

Felix Salmon
Jan 21, 2010 18:47 UTC

Quote of the day comes from Goldman Sachs CFO David Viniar, responding to confusion over whether the squid’s 36% compensation ratio for 2009 is here to stay:

“I take this year’s revenue ratio not necessarily as a onetime thing and not necessarily not as a onetime thing,” Mr. Viniar said on the conference call. “We will know more as the quarter and the year unfolds.”

Glad that’s cleared up, then.

Viniar also said that, yes, Goldman does have proprietary trading operations, which account for “10ish” percent of its revenues. Does anybody believe that only 10% of Goldman’s revenues come from trading for its own account? I don’t — but as I say, the lines are fuzzy. As far as I know, Goldman already has no dedicated prop desk, and it’s child’s play to simply reclassify any given trade as being in some way client-related. So while I like the idea that the Obama administration is going to try to crack down on prop trading with its new Volcker rule, I’m not at all convinced it’s doable.


are you serious? when you say Goldman already has no dedicated prop desk, do you mean they shut them down in the last 6 months. All of them? In every country? In every asset class?

You ignore the principal investment business which is huge. That is an easy one to regulate.

If they don’t lend, don’t bail them out. That is the key to the rule. Especially since none of the cheap money that the fed has given the banks have wound up in the real economy instead of financial instruments collecting a spread.

Posted by randolfduke | Report as abusive

Bair’s mortgages

Felix Salmon
Jan 21, 2010 18:31 UTC

The Huffington Post Investigative Fund has done a lot of hard journalistic work in nailing down the facts about Sheila Bair’s mortgages, and I’m glad they did. Bair does seem to have received something of a sweetheart mortgage from BofA when she refinanced her Amherst house, and she shouldn’t have been negotiating in her FDIC capacity with BofA at the same time.

One thing which isn’t clear from the article is why Bair refinanced her Amherst house in the first place: is it because under the terms of the original mortgage she couldn’t retain it if she wasn’t living in the house? If so, then she should have asked some questions when BofA offered her a mortgage with what is presumably a more-or-less identical second home rider, saying that she had to keep the house for her “exclusive use and enjoyment” and could not use it as a rental or timeshare. It seems that Bair is violating the spirit of that rider at the very least: she’s making good money from renting out that house.

All that said, however, I don’t think this story is a huge deal. Bair had to move to DC, and she clearly wanted to buy a house there, as is her right. If she was going to buy a DC house, she was surely going to need a mortgage. And the FDIC would almost certainly have some connection with any bank she got a mortgage from. Sure, she could have recused herself from dealing with that bank, but that really wouldn’t have helped: if the bank was going to give Bair special treatment based on her position at the FDIC, it would surely do so whether or not she was recusing herself from discussions with that bank.

In the end, Bair got her jumbo mortgage at 6%, which seems to have been the going rate for such things. Unless we ban FDIC chiefs from taking out mortgages at all, I think that’s an acceptable outcome.

Update: Andrew Gray of the FDIC answers my question:

The Amherst home was refinanced from a 15-year to a 30-year fixed to lower the payment. After attempts to sell the house failed, Chairman Bair’s family found themselves in the position, like tens of thousands of families across the country, of having to carry two mortgages.


Sheila Bair IS George Bush’s FDIC head. She is a certified Republican appointed June 26th, 2006 for a five-year term.

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Three cheers for Obama’s banking reforms

Felix Salmon
Jan 21, 2010 17:09 UTC

Barack Obama is coming out swinging today, and good for him for doing so. Let’s go through the press release line by line:

WASHINGTON, DC- President Obama joined Paul Volcker, former chairman of the Federal Reserve; Bill Donaldson, former chairman of the Securities and Exchange Commission; Congressman Barney Frank, House Financial Services Chairman; Senator Chris Dodd, Chairman of the Banking Committee and the President’s economic team to call for new restrictions on the size and scope of banks and other financial institutions to rein in excessive risk taking and to protect taxpayers.

Note here how Geithner and Summers just become part of “the President’s economic team”, while Volcker gets top billing. This is, as Simon Johnson says, an important change of course — and it’s one which is being supported by both Dodd and Frank, so there’s a good chance it can pass. After all, the Republicans tend to hate Wall Street even more than the Democrats.

The President’s proposal would strengthen the comprehensive financial reform package that is already moving through Congress.

This is also a good sign: in the wake of Dodd making noises about softening existing legislative proposals, Obama has come out and said, quite rightly, that we should push hard in the opposite direction, and tighten them up.

“While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said President Barack Obama. “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.”

OK, so this is populism. But populism in the service of a good cause is no great sin.

The proposal would:

1. Limit the Scope-The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

This is a good idea, but cutting back on prop trading, in particular, is going to be hard. Goldman Sachs has told me repeatedly that they don’t have prop trading: everything they do is ultimately for the benefit of their clients. Absent a corner of the trading floor with a big flashing “prop desk” sign above it, in practice it’s very hard to draw the line between the kind of daily trading that any broker dealer has to do, on the one hand, and proprietary trading for a bank’s own account, on the other. Both of them involve the bank taking risk and making money, after all.

The restriction on sponsoring hedge funds and private-equity shops makes sense: after all, the in-house hedge funds at Bear Stearns played a large role in its demise. The banks will just spin off those holdings to shareholders, I don’t think this is a big deal for them.

2. Limit the Size- The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

I love this. It’s bank liabilities which cause systemic risk: that’s why it’s bank liabilities which are subject to the bank tax. And as too-big-to-fail banks increasingly rely on wholesale liabilities rather than a more stable deposit base, it’s important to place some kind of restrictions on the degree to which they can do so. In his press conference, Obama said that banks should not be allowed to stray too far from their mission of serving depositors: he’s moving, here, towards a vision of narrow (or at least narrower) banking. Good for him.

Banks stocks are down in the wake of the speech, but not dramatically: it’s easy to get overexcited about a 6% fall in JP Morgan’s share price while forgetting that it’s still over $40 a share, compared to less than $15 in March. Indeed, its all-time high, back in 2007, was barely over $50. Let’s get the Republicans on board with this, and push it through. It’s probably our last chance to enact meaningful financial reform this generation.


As an employee of JP Morgan Chase I am concerned about a recent directive from management that they will destroy all e-mails on 5/31/10 that are over 60 days old.

Chase management claims costs of maintaining older e-mails as a contributing factor for this decision. This is an utterly ridiculous reason in light of today’s ultra-cheap storage drives and systems. The cost of maintaining all e-mails on various servers and locations would not amount to more than a few thousand dollars. When compared to the billions and trillions that Chase handles daily this is a minuscule amount.

I believe there is more to this action than Chase management wants us to know about.

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Cutting pay at Goldman

Felix Salmon
Jan 21, 2010 14:31 UTC

Goldman Sachs has always prided itself on leading the investment-banking pack in terms of compensation. Because it’s richer and more successful than anybody else, it can pay more than anybody else can afford, forcing them to spend money that would be better used elsewhere on bonuses. That in turn improves its competitive position. It’s a bit like the US-Russia arms race during the cold war.

But now Goldman has done a stunning U-turn, putting aside exactly $0 for compensation in the fourth quarter, and bringing its compensation ratio for the year down to an all-time low of 36%. By contrast, the same ratio at seemingly-struggling Morgan Stanley is 62%.

This could, conceivably, be a game-changer. Banks have always said that they need to pay top dollar in compensation, lest their most valuable assets walk out the door. But it simply isn’t credible that many if any Goldman Sachs employees will leave voluntarily after getting bonuses this year which were lower than they might have been led to expect. And if Goldman proves that employees will stay when bonuses are cut — well, that could trickle down to the rest of Wall Street, too, which is much more desperate to cut compensation expenses.

The question, of course, is whether this move by Goldman is a one-off publicity stunt, or whether it genuinely thinks that a compensation ratio less than 40% is sustainable in the long term. Given the fact that the government is likely to put a lot of pressure on Goldman to shrink, my feeling is that the bank can keep compensation (relatively) low more or less indefinitely. If bankers leave, fine, we want to get smaller anyway. Whether Goldman will keep compensation low, of course, is another matter entirely: doing so would fly in the face of the Goldman culture in general, and the culture of CEO Lloyd Blankfein in particular. But maybe the Squid feels that it has no choice, given political realities.


UMLaw: We could do that except that CEOs at public companies probably donate more money to their Congressmen than you do. So it’s unlikely.

More substantively, we already do this sort of thing – the tax code is progressive, the amount of cash comp that a corporation can deduct is limited, fringe benefits that discriminate in favor of higher-level employees are more likely to be taxable, etc. We could try to do more of it and see if it start to work, but given the ability and desire of corporate boards to find ways to pay CEOs more regardless of tax and regulation levels, it would probably be fruitless without significant corporate governance changes (see some of Lucien Bebchuk’s writing).

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Felix Salmon
Jan 21, 2010 05:43 UTC

The Brownian-motion-and-greater-fools theory of the old GM’s share price — TED

More than 70% of mortgage modifications result in an increase in the principal amount — HuffPo

Any number of ways to get around a paywall — Slate

Helmet laws save lives — and also reduce the number of cyclists — NBER

Brad Miller points out that the bank tax is basically what we should have been doing to Frannie all along — HuffPo

Roubini warns of “a disorderly rush to the exit” if inflation appears in the US — Project Syndicate

More solid reporting on the iffy finances of Wyclef Jean’s Yele Haiti charity from John Cook — Gawker

We like people who are generous. Buffett likes people who are stingy. That’s why he’s a better judge of character — Bronte Capital

Too much of a good thing? Making the most of your disaster donations — Aid Watchers

It’s behind a paywall, but Euromoney has a long and interesting story on David Proctor, a banker who can’t leave Qatar — Euromoney; (Update: ungated version here.)


You appear to have rather disproven your earlier assertion that bloggers will shop around for free stories rather than link to paywalled ones… :-)

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