Opinion

Felix Salmon

The problem with peer-to-peer lending

Felix Salmon
Jan 19, 2010 17:05 UTC

Mark Gimein has an important story today about Prosper, which is required reading for anybody — myself included — who has some hope about peer-to-peer lending helping to disintermediate banks and get credit flowing again to individuals and small businesses.

Prosper was one of the first companies to market in the peer-to-peer space, and in hindsight its arrival at the height of the credit boom was incredibly ill-timed. If you lent money through Prosper back then, when most of its loans were extended, there’s a very high chance that you’ve lost money — in some cases, a lot of money. “Of investors with a portfolio of loans that are an average of at least two years old,” notes Gimein, “folks who have lost money outnumber those who’ve earned 6 percent annual return by more than six to one.”

Prosper was founded in the days before everybody had heard the term “model risk”, back when it made perfect sense that credit risk could be modeled accurately by a computer algorithm using little more than a FICO score.

One of the big problems that Prosper ran into — the massive credit crunch and the ensuing Great Recession — could reasonably be considered to be a one-off event with a low likelihood of happening again. But another is endemic to the model: Prosper borrowers with a given FICO score are inevitably going to be more likely to default on their debts than most other people with the same credit score.

It wasn’t meant to be that way. Peer-to-peer lending was meant to create a personal connection between borrower and lender, and therefore make borrowers more likely to repay their debts than people faced with large obligations to hated, faceless banks. But it seems that adverse selection effects overwhelmed the site’s attempts to be warm and fuzzy. As Gimein explained in an email to me,

I think in this case the adverse selection issues are insurmountable. Folks go to P2P loans almost always because they can’t get money through conventional channels, and often there is a reason. I’ve cut up the Prosper numbers in a bunch of ways, and one thing I’ve noticed is that some of the worst returns come from folks with okay credit who are willing to pay very high interest rates: they’re willing to pay a lot because their finances are in worse shape than they seem.

Also, re: adverse selection, this reminds me of a story I heard years ago from a guy who started a company that marketed credit cards online. What he found was that when you set up a site and have people come to you, you get a really dangerous class of borrowers. This is why credit card companies don’t really make much effort to get people to go to their websites and apply. They would rather *offer* than let people ask. Because ultimately a paradox of lending is that the people who are more likely to repay are those who *don’t need the money*. And Prosper attracts those who do need it.

I’m still hopeful that Lending Club, in particular, can succeed in this space; it certainly doesn’t suffer from the kind of egregiously misleading public communications that Gimein details at Prosper. But insofar as Lending Club can succeed where Prosper seems to have failed, it will have to do so through overcoming the adverse-selection problem with an extremely tough and diligent underwriting program which rejects as much as 90% of the people asking for loans. As such, it’s only likely to make a difference at the margins — and it might find it hard to make a profit itself out of the 1% take it skims off each loan.

Effective underwriting is difficult, labor-intensive, and expensive. And there’s always a worry that at some point any peer-to-peer intermediary will start cutting corners on the underwriting front in an attempt to make more money. Which could be disastrous for lenders.

Update: Gimein points me to the second chart on this page, which shows that Prosper, too, funds less than 10% of the loans that get applied for there. Maybe rejecting lots of loans isn’t, in and of itself, a sign of diligent underwriting.

Update 2: Lending Club CEO Renaud Laplanche emails to explain the difference between his shop and Prosper:

The “10% funding rate” of Prosper and Lending Club are different in nature: Lending Club approves 10% of the loan applications – that’s an underwriting decision. These 10% most creditworthy loans are made available on the platform for investors to invest in, and all loan listings get fully funded. Currently, the platform is “demand constrained”, meaning that we have more investors willing to invest in these loans than loans available. We are increasing our marketing efforts on the borrower side to make sure demand catches up with supply.

Prosper’s 10% is very different in nature: most loan applications received by Prosper get listed on their platform, and only 10% actually get funded, either because of insufficient supply of investors funds, or just because investors don’t want to fund the other 90% of the loans. The question here is whether the 10% that get funded are “the right 10%”? Marketplaces need 2 things to be efficient: sufficient supply and demand, and no information asymmetry between buyers and sellers. I believe Prosper’s marketplace lacks both. So would Lending Club’s by the way, which is why we are making the credit decisions and setting the rates. The consequence is that Lending Club’s 10% are those loans that are the most creditworthy, based on factual information from the credit reports, employment and income verification, anti-fraud measures, etc.

Update 3: Prosper responds to Gimein.

COMMENT

Its been over 3 years since this article was written. Since then, peer to peer lending has grown larger as have traditional payday lenders and installment loan lenders. The only problem with peer to peer lending is the time it takes in order to process your loan. Hopefully that changes soon.

By the way here’s a good database of peer to peer lenders, direct payday lenders and direct installment lenders:

http://www.direct-payday.com

Posted by timdavis1981 | Report as abusive

Too-big-to-fail is here to stay

Felix Salmon
Jan 19, 2010 14:51 UTC

Andrew Ross Sorkin has a slightly odd column today, asking whether it’s OK to have too-big-to-fail banks, and concluding — well, not really coming to any conclusion at all, actually.

The oddest part of Sorkin’s column is that it has all the ingredients necessary to come to the sensible conclusion: that, as he quotes Alan Greenspan as saying, “if they’re too big to fail, they’re too big”.

But Sorkin follows up with this:

It was a surprising statement from Mr. Greenspan, given his free-market comment in 2005 that “private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.”

There are two problems here. Firstly, Greenspan has since recanted that belief. And secondly, the problem with having too-big-to-fail banks is not that small-enough-to-fail banks are less likely to have excessive risk-taking. As Sorkin quotes Jamie Dimon as saying, banks of any size can run into problems. But the point is that if a small-enough-to-fail bank takes too many risks and fails, the systemic consequences are manageable. If a TBTF bank takes too many risks and fails, it can drag down the entire economy.

So why allow banks to get that big? Sorkin tries, valiantly, to come up with a remotely compelling answer to the question:

Shrinking the size of these companies may create other problems for the economy, particularly in this age of huge corporations.

If Pfizer, for example, needs to raise $20 billion for a takeover bid, or Verizon needs to raise billions to lay fiber optic cable for its FiOS service, they cannot efficiently go to 20 different community banks looking for the money.

And if corporations can’t readily obtain financing in the United States, they may simply seek out huge overseas lenders like HSBC and Deutsche Bank.

The fact is that if Pfizer or Verizon need to raise billions of dollars, there are broadly three ways they can do so. They can ask an investment bank to help them raise the money in the stock market; they can ask an investment bank to help them raise the money in the bond market; or they can ask a large commercial bank to help them raise the money in the syndicated loan market.

Pfizer and Verizon are well known in the bond markets, where thousands of institutional investors trade those credits every day. And when banks enter the syndicated loan business, they rarely make significant profits from the loans themselves. Instead, the lead managers get fees for putting the deal together, and selling off most of the loan to banks which have excess liquidity and/or want to develop their relationship with the company in question.

Ultimately, however, the economy would be better off if big companies raised more equity and less debt; and borrowed what they needed to borrow in the bond market rather than the loan market, leaving the banks to do what the bond market can’t, which is lend to individuals and small businesses.

And even if that doesn’t happen, I don’t think that giving HSBC and Deutsche Bank a little bit of a boost in the international syndicated-loan league tables is a particularly high price to pay for massively reducing the systemic risk inherent in the US financial system.

Sorkin then continues:

Think of the biggest dominoes: Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley. They weren’t financial supermarkets.

Mr. Dimon was trying to make this point: Companies should be allowed to be as big as they want, so long as there is an orderly way to wind them down.

Actually, Bear, Lehman, Merrill, and Morgan Stanley were all too big to fail: you don’t need to be a financial supermarket to pose a systemic risk, although it helps. And as we saw over the course of the crisis, there is no orderly way to wind down a TBTF financial institution, short of bailing it out, like we did with Fannie Mae and Freddie Mac and AIG, with billions of dollars of public funds. The likes of Jamie Dimon love to talk about “resolution authority” not because it’s a good idea or even practicable, but just because they believe (with good reason) that if they continue to talk about this chimera as though it were real, regulators might refrain from cutting them down to a manageable size.

We’ve learned the hard way that financial institutions can’t continue to operate as a going concern when the markets don’t have confidence in them any more. A confidence crisis is a liquidity crisis, and resolution authority doesn’t address liquidity concerns. If a bank is forced to default on its unsecured debt, it will fail, and it’s simply not realistic to believe otherwise. Resolution authority might protect the taxpayer from having to step up with enormous bailouts, but it doesn’t reduce systemic risk.

If you want to truly address the problem of TBTF banks, there’s only one way to do so: make them smaller. But the fact is that Jamie Dimon et al don’t need to worry about that happening any time soon. None of the financial regulations currently being debated would force them to shrink noticeably. Which means that they will continue to pose a massive risk to the global economic system for the foreseeable future.

COMMENT

Phantus: Canada is different from the US in enough ways that it probably isn’t intellectually sound to say that their less disastrous banking system over the last few years indicates that their banking model is correct and would work in the US.

Most importantly, there aren’t that many people there and the population is more homogenous and stable than the diverse/dynamic US population. Secondly, they have a huge amount of natural resources relative to their population (oil, NG, timber, gold, etc.). Thirdly, they have single-payer healthcare, while medical costs are a huge cause of bankruptcy in the US (look at Elizabeth Warren’s research on this). Finally, most parts of Canada simply aren’t very attractive places to live (cold, undeveloped, far away from everything), so you don’t get the same speculation on sunny vacation homes that fueled bubbles in FL, CA, NV, AZ, etc.

If you compare the Canadian banking system to the banking systems of Minnesota and Vermont, I think you’d see fewer differences. Being up in the north in less densely-populated areas they simply had fewer opportunities to speculate on disastrous condo developments, subprime mortgages to speculators, and huge CDO deals (although they did manage to get in a little bit of activity before the crash – if you look back at filings the major Canadian banks weren’t totally free of subprime and structured finance problems).

To sum up, I don’t think Canadian banks are that much smarter than BAC or C – I think they were just lucky not to be in the same proximity to the most awful bubbles. Given the opportunity to make huge money speculating in (for instance) California real estate, most people (especially bankers) take it.

Felix: Retrospectively, the way we should have managed large institutions like Bear, Merrill, etc. was to offer them a choice: either hold more capital or accept and acknowledge that if you misprice risk you will fail and your stockholders, debtholders, and counterparties will all suffer.

If those banks had publicly made the choice to risk up and markets had a clear sense that government would not bail them out, there is no way that they could have borrowed enough money or done enough unsecured transactions to get as big as they did or pose the problems they did.

On the other hand, if large banks chose to hold more capital and to proactively remedy capital problems when trouble materialized (everyone dragged their feet even after problems became obvious in 2007), again they couldn’t get as big because equity investors would be less interested in the lower rates of return possible while holding higher capital.

If everyone is holding high enough capital, when one institution really blows it and runs into trouble, better-capitalized institutions supply capital on punitive terms and profit from their prudence. This is how markets work and it’s a great thing. If management prefers to hold out for a bailout or irrationally cheap funding, let them blow up the company – it won’t take too many iterations of this mistake before most reasonable people learn the lesson. You can’t regulate all unreasonable people out of existence and it’s foolish to try. Their failures are great lessons for the marginally reasonable.

The only regulation you need is fraud prevention/response, minimization of information asymmetries between banks and investors through disclosure rules and education, a plan for resolution of failed banks, and a requirement to hold enough capital that speculators can’t do too much damage with other people’s money. This is quite a bit of regulation and it’s hard enough – we don’t need federal regulators who couldn’t even manage these tasks to take on a bunch of new ill-defined missions involving figuring out the right credit card terms and the magical size of the ideal bank.

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Counterparties

Felix Salmon
Jan 19, 2010 06:59 UTC

Oxford University bans students from Spotify — Telegraph

Why we shouldn’t expect investment bankers to be great thinkers — TED

Neenah Enterprises had $15m in stockholders’ equity at year-end 2008. One year later, it’s -$162m. Oops — EDGAR

The State Department has been denying seriously injured Haitians visas to be transferred to Miami for surgery and treatment — NYT

Is Teddy Kennedy posthumously losing Massachussets? — NYMag

The famous Richard Ankrom LA highway sign comes down, replaced by a real version. The original is now crushed metal — Good

Big Banks Still Don’t Get It, Part 771 — NYT

Wyclef Jean admits Yele has made “mistakes” — Gawker

Pat Robertson voodoo doll, all proceeds to the Red Cross — eBay

“Mark my words,” said Dubai’s Sheik Hamdan. “We will still put a man on the artificial moon we’re building by 2025.” — The Onion

Jonathan Ford back at Financial Times as chief leader writer — Guardian

My book salon with Andrew Ross Sorkin — FDL

Gretchen makes a good point: Will the new credit card rules actually be enforced? Without CFPA, they might not be — NYT

“The willingness to look this disaster square on reflects the problematic, even embarrassing status of Haiti” — AP

An elegant solution to the congestion problem: pave the East River! — Gothamist

COMMENT

Wow, that “goodwill impairment charge” came at Neenah like a bolt out of the blue.

Posted by Mega | Report as abusive

A retirement-fund paradox

Felix Salmon
Jan 19, 2010 05:06 UTC

David Merkel is insightful when it comes to a huge status-quo bias in retirement funds. If we have a lump sum, we’re loathe to convert it to a guaranteed income, even when we value the guaranteed income that we do have extremely highly:

I have long been a fan of immediate annuities, particularly those that are inflation indexed, as retirement products for seniors. Yet, they do not get bought by retirees. Why? Well, insurance products are sold, not bought, typically, and when the agent sells an immediate annuity, that is his last sale on that money. They would rather sell a less suitable product that offers them another sale down the road. And, people like having flexibility with and control over their investments, even if that leads to less money for them in the long run. Annuitizing a portion of one’s lump sum lowers risk, and takes the place of investing in bonds in the asset allocation.

Most people like the reliability of their pensions, and Social Security, should it be paid, but do not seek the same thing when investing their private money.

I suspect that one of the problems here is that it’s almost impossible to tell whether or not you’re getting ripped off when you’re buying an annuity. Unless and until a vibrant and competitive market emerges in such things, you might end up buying a million-dollar lemon with substantially all of your life savings, and no one wants to do that.

I’m not sure how much the issue of having a rainy-day fund for unexpected medical costs comes into play here: at the margin it might actually be better to be on a fixed income than to have a large lump sum which could easily get eaten away by medical bills.

I do think however that people massively overestimate the returns they can get on their money, and they often dream of leaving their heirs more money than they retired with. Such dreams almost never come true, but they also never die. The question is, how much are they worth.

COMMENT

Still TIPS have a defined life (30 years) which may not address those with good genes who are afraid of outliving their money, even given your valid inflation concerns. A properly constructed single premium, immediate annuity from an insurance company that one can have confidence in, with a reasonable premium, would be a valuable product for a whole class of people who are not comfortable managing their own portfolios and want the relative security of a monthly check. There is a reasonably large market here for Berkshire to get into if you’re reading Warren.

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The future of the cable-TV business model

Felix Salmon
Jan 19, 2010 04:26 UTC

For reasons that I don’t fully understand, Jim Surowiecki is not a fan of a-la-carte cable pricing, where you just pay for the channels you want, and not for the channels you don’t want. My views on the matter haven’t changed since 2007, but one big thing has: broadcast TV is now digital, which means that cable companies are extremely constrained as to how much they could charge for network TV in an a-la-carte world. As a result, it seems obvious to me that consumers would likely save a lot of money if they paid only for the channels they watched. (The one possible exception? Sports fans.)

Surowiecki says that consumers wouldn’t benefit much from unbundling cable channels, while cable providers and cable networks would both get hurt. He says that a recent paper “estimated the best-case gain to consumers at thirty-five cents a month”, but if you read the paper in question, it doesn’t model a-la-carte pricing at all, but rather scheme where you get a choice of seven different “themed tiers” of programming on top of a $29-a-month basic bill. What’s more, the “best-case gain to consumers” is calculated not as the amount of money consumers save, but rather “the change in expected bundle utility”, taking into account how much “bundle utility” they lose out on by not watching channels they currently watch but which become too expensive under the new system.

There will surely be a lot of unforeseeable consequences to moving to an a-la-carte system: there’s no particular reason, for instance, that cable providers should receive all of the monthly fees, while cable networks receive substantially all of the advertising revenue. My guess is that in an a-la-carte world, both would be shared much more equally.

But as Surowiecki hints, there’s an extra possible step here. If you move along the spectrum from full bundling, like we have right now, to “themed tiers”, to a-la-carte, and keep on going, you end up at a simple metered system not unlike that which the NYT is mulling. Give everybody every channel, let them watch whatever they want to watch, and then bill them for whatever they consumed. Mass-market channels with mass-market advertisers would be completely free — as will smaller channels seeking to build an audience. High-end HBO dramas and big-time sporting events would be quite expensive.

I think the problem with that kind of system is the same as the problem with any micropayments system: people don’t like the psychic cost of paying even a small amount for anything, and would much rather just make one big payment and have it over and done with. As Surowiecki says, bundling “eliminates the problem of fretting about small expenditures”. TV is something people have on in the background: they don’t want to worry about running up a bill for that kind of activity.

The ideal world, I think, would be one where consumers got to choose. You only want to watch the Daily Show, 30 Rock, and breaking news? Go for metered pricing. You want HGTV, Bravo, HBO, Comedy Central, and ESPN? Go ahead and buy them. You want full access to the whole menu of hundreds of channels you can watch at any time at zero marginal cost, just like you have right now? Fine, you can keep what you’ve got.

That world would be great for consumers, but there would be a lot of adverse selection: people currently paying large sums for TV they barely watch would immediately trade down to a cheaper option, and the cable providers would lose that extra subscription revenue in perpetuity. Which means that unless and until it gets mandated by the FCC, it ain’t gonna happen. I’m not holding my breath.

COMMENT

May 24, 2010Cost-Effective GenosTV Replaces Traditional Cable and Satellite Service
By Calvin Azuri, TMCnet Contributor

Rob Shambro, CEO of GenosTV, recently decided to dissect the “AlternativeTV” market. Genos, reportedly ranked as the world’s first broadband cable TV network, made a decision to dissect the players and their offerings because of many false impressions in this space.

Internet Protocol Television comes in three kinds such as Live TV, time shifted programming and video on demand. IPTV (News – Alert) delivers television programs to the households through a broadband connection by using internet protocols. Most IP media comes under the category of video on demand and content generated via internet. Most of the players are trying to obtain this media in order to use it on the TV.

You can obtain the video from the Internet and play it on the TV in many ways. First method is you can set the computer near the TV and connect both video and audio outputs to that of the TV. Second method is by making use of the extender. You can obtain the extender for Windows Media Center on the Media Center Edition, Vista and Windows 7. Users can connect a computer to a network and an authorized device like the XBOX360, Linksys (News – Alert) DMA, Samsung Media Live and the HP MediaSmart. The end user has to choose at the computer level.

A lot of TV service providers and hardware manufacturers offer the GoogleTV platform. It is available in the form of a separate box or integrated into TVs and other provider boxes. The service offers two things such as indexing your stored media and provides the facility to search the subscribed channels available via cable provider, YouTube (News – Alert) and other web content.

Rob Shambro said, “You buy the Genos box for under $100 after the company’s launch at CES Jan., 2011. You connect the box to your TV and broadband Internet. You sign up. You pick your language. You pick your channels, which run between 2-3 dollars per month. Then you THANK THE BOX”, “Imagine the cost savings!”

The Genos Service is powered with TVME which is the next killer app which permits users to create their own television station at no cost irrespective of where they reside.Genos TV differs from the traditional cable or satellite service, since users need to pay only for the channels they chose.

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Why the Fed should regulate banks

Felix Salmon
Jan 19, 2010 01:05 UTC

George Cooper asks whether or not banks should be regulated by the central bank, noting drily that “America sees salvation in replicating the failed British banking experiment while Britain sees salvation in returning to the equally discredited American model”. He adds:

I am happy to make my small voice heard in support of Mr Volcker. He is right when he says “It simply doesn’t make sense, as then Fed Chairman Mariner Eccles complained during the Great Depression, that the efforts of the Federal Reserve to ease money be to some degree frustrated by overzealous banking regulators determined to restore bank capital and assure strong lending standards.” For this reason it is best to view monetary policy as requiring both interest rate and regulatory policy levers.

That said, it is pointless to give the central bank control of both levers if it is unwilling to use them or chooses to push them in opposite directions.

There’s no doubt that the current US administration in general, and Bernanke’s Federal Reserve in particular, is indeed currently pushing those levers in opposite directions. Monetary policy is very loose, while everybody is agreed on the need to tighten up banking regulations substantially.

Where I part company with Cooper is when he determines that this is necessarily a bad thing. If the Fed’s in control of both regulating banks and setting monetary policy, then it can put together an optimal combined approach, or at the very least take account of one while working on the other. We have to crack down on bank leverage? OK, then we might have to cut rates a bit more.

If by contrast the banks are regulated by some other institution entirely, the Fed has to second-guess what that institution is going to do in the future, and that’s never going to be easy.

During the credit bubble, it’s now clear, one of the Fed’s biggest failings was that it not only kept interest rates too low for too long, but also abrogated all responsibility over what Cooper calls the regulatory policy lever. It could have cracked down much harder on mortgage lending, but didn’t. There is a chance, however, that it can learn from its mistakes — especially if it’s given regulatory authority over non-bank lenders and other actors in the shadow banking system.

Anybody else given broad regulatory authority — and someone needs to have it — would need to work hand-in-glove with the Fed in any event, especially when it comes to questions such as the Fed paying interest on reserves. And there’s no particular architectural reason not to give the Fed those powers — objection to the idea comes overwhelmingly from the fact that this Fed has made so many mistakes that people don’t trust it to do the right thing in future.

But the fact is that if you try to build a bank regulator from scratch, it will take decades to find its feet and learn from its mistakes. The Fed, with any luck, has reached that point now. Let’s give it regulatory authority, and cross our fingers it uses them wisely.

COMMENT

First let it be know that I am not an English scholar and there will probably be grammatical mistakes in this posting.

The question is do we allow the Federal Reserve to regulate banks? The simple answer is no. There are also simple explanations to this complicated issue, which only can be obtained through common sense.

There has always been housing bubbles and all have burst.
Most, if not all, housing bubbles are created by the government. Not only our government but ever government of the world.

Banks and the bursting housing bubble is not the problem. The problem is Washington politicians buying votes with easy money, borrowed from the Federal Reserve, from both parties.

It is a fact that the Federal Reserve is privately owned. It is a little know fact that the Federal Reserve is the only institution in this country, that cannot be audited by the Federal Government.

So, if bank regulator authority is turned over to the Federal Reserve, the question becomes who regulates them?

If you missed it the first time I will say it again. It is the Federal Government and the Federal Reserve, not the banks that is the problem.

Posted by MSGret1 | Report as abusive

How the NYT should construct its paywall

Felix Salmon
Jan 18, 2010 03:53 UTC

Gabriel Sherman says that the NYT is going to be putting up an FT-style paywall:

After a year of sometimes fraught debate inside the paper, the choice for some time has been between a Wall Street Journal-type pay wall and the metered system adopted by the Financial Times, in which readers can sample a certain number of free articles before being asked to subscribe. The Times seems to have settled on the metered system.

Let’s hope that if and when this happens, the NYT implements a good metered system, rather than the bad system adopted by the FT. The NYT arguably has the best news website in the world right now, and any kind of paywall implementation is going to result in a deterioration of the experience of using it. But if the NYT is smart about this, it can try its hardest to be be as unobtrusive and user-friendly as possible.

The first and most important principle that the NYT must bear in mind is that any smart metering system will work more like a taxicab than like the dreadful FT approach: the key thing is that a meter measures how much of the service you’ve consumed, and then you pay for that much — and no more. At the FT, by contrast, the meter slams down a hard paywall after you’ve reached n pageviews in a given month, and then charges you a very large sum for the n+1th pageview. That’s stupid, because no single pageview is worth that much to a reader.

The NYT system should instead simply measure how much you used the site last month, and then bill you; my guess is that Apple, when it releases its new tablet later this month, will also unveil a system which makes it very easy to link your nytimes.com account to your iTunes account so that your NYT bill will simply get added on to your iTunes bill along with your apps and TV shows and music and ringtones. The NYT itself won’t even need to collect your credit-card information. Once you reach a certain maximum billing level for the year, the NYT and Apple will just stop billing you.

And what of people who can’t or won’t pay? The NYT is an invaluable source of information for many people around the world who don’t have credit cards or iTunes accounts. I think that in the first instance most countries outside the US (and maybe also Canada) should be exempt from having to pay anything. There will always be ways of getting around any paywall, so the NYT shouldn’t worry too much about loopholes; its first priority should be retaining as much of the user experience for as many of its readers as possible, given that it has come to the conclusion that a paywall of some description is necessary.

In fact, I don’t think that the NYT should ever bar content entirely from people who can’t or won’t pay. If you refuse to be billed for usage, then the NYT can maybe massively increase the number of interstitials you get served, or otherwise allow the kind of intrusive advertising that normally it shuns. (Click to make this survey go away!) The Sulzbergers are rightly serious about preserving the NYT as a public trust — and it’s in their self-interest to do so. Nowadays, that public trust is best served through the website, and its accessibility to hundreds of millions of information-hungry people around the world. Cutting them off from the website just for the sake of dealing with a nasty cashflow problem is not smart business. As I said about the FT last year, high-profile newspapers should value long-term brand value, and the ability to stay relevant to future generations of potential readers, at least as much as short-term subscription revenues.

I trust too that NYT digital chief Martin Nisenholtz will do his best to encourage bloggers to keep on linking to nytimes.com, just as he came to an agreement with Dave Winer, before he freed up the NYT’s archives, to create a way of linking to stories whereby the links would continue to work even after the story should have disappeared behind the archive wall. One easy and obvious policy would simply be to say that the first story you see after following a link to nytimes.com from some other site is always free. If purpose-built websites started popping up which existed only to allow people to get around the paywall very easily, the NYT could always exempt those sites from the policy.

More generally, the NYT should build the easiest and most user-friendly metering system they can construct, without worrying too much about whether and how their readers are going to be able to game the system. One of the many problems with the FT’s system, in particular, is that it’s overly paranoid, to the point at which it regularly blocks paid subscribers from the site. But the fact is that there will always be people trying to game the system — and they will always be in the minority. If and when that minority becomes very large, the NYT can revisit its paywall design. But in the first instance, it shouldn’t worry too much about them. It’s the same idea as spam filters and comment moderation on blogs: they should be implemented only after comment spam becomes a problem, not before.

For the NYT has bigger things to worry about than readers gaming its paywall. (Remember that it doesn’t worry about people stealing copies of its physical newspaper — and those extra copies cost real money to print and distribute.) Up until now, the NYT has been in a very small group of news sources, along with Reuters, the BBC, and the Guardian, which people know that they can link to, safe in the knowledge that their link is going to work forever: anybody clicking on the link will get the story. A badly-designed paywall will oust the NYT from that select group — which would be great for Reuters, but very very bad indeed for the NYT. Let’s hope that if and when this paywall arrives, it’s designed with all the intelligence and conscientiousness that we currently see informing the paper’s site design.

COMMENT

You suggest some very good models but how about just a flat amount, say $25 a year for people who use the site a lot and free to its paper subscriber? By a lot I mean 30-50 page views every day. Or as a commenter responding to the Jarvis/Buzzmachine diatribe suggested the Pandora model of a nominal sum of 99cents/month supported by ads and a full access @ $35 w/o ads.

I do agree that they should develop a model that is painless for its userbase. I am a big fan but if they start locking content like FT or WSJ and go beyond my dollar threshold I’ll go elsewhere even though there’s very few reliable national news sites in the U.S.

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Counterparties

Felix Salmon
Jan 16, 2010 03:31 UTC

What would Jamie Dimon do if accosted by a midget? — Time

“Back when we would do like, you know, The Hundred Hottest Hotties, no men would watch that.” — Jezebel

Does Larry Summers return Paul Volcker’s calls? — WSJ

Kwak piles on to Gladwell — Baseline Scenario

Smalera delves further into the mystery of AIG stock — Big Money

$11.7 billion of high-yield debt issued this week: that’s an all-time record — Deals Insight (PDF)

Pimco’s assets under management now exceed $1 trillion — Reuters

Annotated photos of the FCIC’s CEO hearing — Cityfile

COMMENT

Little People consider the m-word to be an offensive slur. http://www.denverpost.com/news/ci_127595 19 – Just thought you’d like to know.

Posted by patrickinmaine | Report as abusive

Don’t give money to Haiti

Felix Salmon
Jan 15, 2010 21:30 UTC

Between the Twitter campaigns and the telethons and the corporate donations and the record sums raised through text messages, you can be sure that an enormous amount of cash is going to end up being raised to help Haiti. This is not necessarily a good thing.

For one thing, right now there’s very little that can be done with the money. There are myriad bottlenecks and obstacles involved in getting help to the Haitians who need it, but lack of funds is not one of them. For the next few weeks, help will come largely from governments, who are also spending hundreds of millions of dollars and mobilizing thousands of soldiers to the cause. But with the UN alone seeking to raise $550 million, it’s going to be easy to say that all the money donated to date isn’t remotely enough.

The problem is that Haiti, if it wasn’t a failed state before the earthquake, is almost certainly a failed state now — and one of the lessons we’ve learned from trying to rebuild failed states elsewhere in the world is that throwing money at the issue is very likely to backfire.

What’s more, charities raising money for Haiti right now are going to have to earmark that money to be spent in Haiti and in Haiti only. For a Haiti-specific charity like Yele, that’s not an option. But as The Smoking Gun shows, Yele is not the soundest of charitable institutions: it has managed only one tax filing in its 12-year existence, and it has a suspicious habit of spending hundreds of thousands of dollars on paying either Wyclef Jean personally or paying companies where he’s a controlling shareholder, or paying his recording-studio expenses. If you want to be certain that your donation will be well spent, you might be a bit worried that, for instance, Yele is going to be receiving 20% of the proceeds of the telethon.

Meanwhile, none of the money from the telethon will go to the wholly admirable Medecins Sans Frontieres/Doctors Without Borders, which has already received enough money over the past three days to keep its Haiti mission running for the best part of the next decade. MSF is behaving as ethically as it can, and has determined that the vast majority of the spike in donations that it’s received in the past few days was intended to be spent in Haiti. It will therefore earmark that money for Haiti, and try to spend it there over the coming years, even as other missions, elsewhere in the world, are still in desperate need of resources. Do give money to MSF, then, but if you do, make sure that your donation is unrestricted. The charity will do its very best in Haiti either way, but by allowing your money to be spent anywhere, you will help people in dire need all over the world, not just in Haiti. Here’s the message on MSF’s website:

We are incredibly grateful for the generous support from our donors for the emergency in Haiti.

MSF has been working in Haiti for 19 years, most recently operating three emergency hospitals in Port-au-Prince, and is mobilizing a large emergency response to this disaster. Our immediate response in the first hours following the disaster in Haiti was only possible because of private unrestricted donations from around the world received before the earthquake struck. We are currently reinforcing our teams on the ground in order to respond to the immediate medical needs and to assess the humanitarian needs that MSF will be addressing in the months ahead.

We are now asking our donors to give unrestricted funding, or to our Emergency Relief Fund. These types of funds ensure that our medical teams can react to the Haiti emergency and humanitarian crises all over the world, particularly neglected crises that remain outside the media spotlight.

The last time there was a disaster on this scale was the Asian tsunami, five years ago. And for all its best efforts, the Red Cross has still only spent 83% of its $3.21 billion tsunami budget — which means that it has over half a billion dollars left to spend. Not to put too fine a point on it, but that’s money which could be spent in Haiti, if it weren’t for the fact that it was earmarked.

It’s human nature to want to believe that in the wake of a major disaster, we can all do our bit to help just by giving generously. And if there’s a silver lining to these tragedies at all, it’s that they significantly increase the total amount of money donated to important charities by individuals around the world. But if a charity is worth supporting, then it’s worth supporting with unrestricted funds. Because the last thing anybody wants to see in a couple of years’ time is an unseemly tussle over what happened to today’s Haiti donations, even as other international tragedies receive much less public attention.

Update: Saundra Schimmelpfennig has a great list of what to do and what not to do when you’re making donations in the wake of a disaster; it includes, of course, that donations should be unrestricted. And the Philanthrocapitalists suggest that you “match fund what you have given to Haiti with a gift to someone suffering just as much, but less dramatically, elsewhere in the world”.

Update 2: Sophie Delaunay of MSF USA responds in the comments. And in case this blog entry isn’t clear, let me be explicit: DO give lots and lots of money to MSF’s Emergency Relief Fund. Give now, because the tragedy in Haiti is in the news and because you want to do something to help; MSF is there and is helping and is a great cause. And then continue to give in the future, because there are many other equally tragic situations elsewhere in the world, where MSF is doing just as great a job, but there isn’t the same degree of media coverage and there’s much less money flowing in. Earmarking your funds for Haiti in particular is not helpful. But that’s no reason to give nothing at all.

COMMENT

We want to thank you for acknowledging our efforts at transparency with our donors and the public. We would like to clarify our decision to encourage donors to direct their giving to the Emergency Relief Fund, rather than a donation earmarked explicitly for Haiti.

The extent of immediate needs from the devastation in Haiti is still coming into focus, and the picture is bleak. There is a huge need for essential
surgical care for the quake victims: open fractures, deep wounds, crush injuries, amputations. We have sent more than 400 patients in need of surgery to Choscal Hospital in Cité Soleil district of Port-au-Prince,
where an MSF team has begun working, in addition to the 2,000 cases taken care of over the last 48 hours. MSF and other groups are rushing to scale up capacity to bring as much assistance as needed.

The outpouring of financial and moral support from people throughout the US has been remarkable. Our decision to request that NEW donors direct their
support to our Emergency Relief Fund is not based on the fact that MSF has raised enough “to keep (our) Haiti mission running for the best part of the next decade.” But as you rightly state, it is based on a will to ethically use the funding that the organization receives.

Haiti will undoubtedly face overwhelming medical needs in the days, months, and years to come – in that sense, comparisons to the Tsunami are misplaced because the medical systems affected by that crisis were not decimated and the short and long term emergency surgical needs of the population were much narrower.

As our existing teams on the ground now are overwhelmed with meeting immediate lifesaving efforts needs and will only be able to begin to assess the full scale of needs when additional emergency staff have reached Port-au-Prince, we are not in a position today to assess the full scale of needs and definitively say how we can respond – at the moment, even delivering supplies to Haiti is challenging, and the massive influx of aid organizations might lead us to reconsider our priorities in the coming weeks or months.

Donating funds to the ERF will allow our team to assess and respond to the needs in Haiti as they arise, while also being transparent about the potential limits of what we can or are best suited to do.

Sophie Delaunay
Executive Director
MSF USA

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