Felix Salmon

Edmund Andrews, freed from the strictures of writing for the NYT, is proving to be a valuable addition to the econoblogosphere: today he not only writes smartly about Chris Dodd’s CFPA compromise, but also posts the actual document. That’s more than the NYT, WSJ, or Bloomberg managed to do. It’s well worth reading, despite — or even because of — the fact that this olive branch has been roundly rejected by both Dick Shelby and Bob Corker, and has therefore not even managed to survive the weekend.

The Bureau of Financial Protection proposed by Dodd was pretty toothless: its rules could be vetoed by the Systemic Risk Council, it would essentially be barred from enforcing its own rules on small institutions, let alone examining those institutions, and it would have to talk to bank regulators before enforcing any rules on bigger banks.

Worst of all, Dodd’s compromise would “adopt the House-based preemption standard”, which is code for saying that individual states would be barred from stepping in to regulate consumer rip-offs if and when the BFP was asleep at the wheel.

And yet even this weak excuse for a CFPA has proved too much for the Republicans. Economics of Contempt makes a seemingly-sensible argument that we shouldn’t let the perfect be the enemy of the good, and that Dodd “should push for whatever he can get in terms of a new division dedicated to consumer protection inside Treasury”. But if even this compromise doesn’t meet that bar, one begins to wonder if anything would be acceptable to Shelby and/or Corker.

At this point, I’m beginning to think that Dodd should accept whatever Corker would find acceptable — probably just a charge for existing regulators that they keep an eye on consumer protection as well. Then Elizabeth Warren should team up with the Center for Responsible Lending to create a Consumer Financial Protection Agency entirely unafilliated with the government, which would give out “consumer friendly” badges for financial institutions which meet its standards, and which would have a high-profile bully pulpit from which to name and shame those institutions which rip off their customers. It might not have any teeth, but in that respect it wouldn’t differ markedly from whatever we’re going to end up with from Dodd and Corker.

Alice Schroeder has two interesting takes on Berkshire Hathaway’s acquisition of Burlington Northern. In her BusinessWeek cover story on Warren Buffett, she explains the hidden upside:

Buffett always likes a sweetener, and Burlington gives him one in the form of information. He learns about wallboard demand from USG and consumer-credit trends from American Express, but Rose has called the railroad a kaleidoscope of the economy. Rail traffic patterns are a window on commodity, wholesale, consumer, and international trade flows. Buffett is adding this kaleidoscope to what his other CEOs tell him about the “reset of the consumer” to a lower level of spending. They feed him data from Berkshire’s portfolio of companies—sales of building materials, jewelry, furniture, real estate, credit, fractional jets, vacuum cleaners, fabricated steel, newspaper ad lineage, and other products and services. He may now command as much information about the state of the U.S. economy as anyone, including the Federal Reserve—and probably gets his faster.

This makes sense — and it might also provide a hint as to whom Buffett will choose to succeed him as chief investment officer. He’ll want a data hound, someone who can leverage the huge amounts of information that the Berkshire conglomerate provides.

On her blog, Schroeder then adds that she’s disappointed in the way that Buffett is going to hide BNSF’s earnings in his annual reports:

Berkshire has been growing less transparent year by year. Now it is going to combine BNI with its utlity segment for financial reporting next year. Buffett made the argument for combining them (regulated, high capex etc.), but the result is less transparency. BNI is in the transportation business. If being a regulated and capital intensive business is what creates an operating segment for financial reporting, the insurance businesses would also be combined with Mid-American.

Schroeder gives good accounting reasons why BNSF should not be lumped in with the utilities, adding, wearing her CPA hat, that “this is not the spirit of the rules” and that “this is pretty annoying”.

Meanwhile, in his annual letter to shareholders, Buffett does a pretty weak job of responding to Jeff Matthews’s criticism of his decision to pay for BNSF in large part using BRK’s own stock. Or, to put it another way, he actually spends a lot of time and space laying out Matthews’s criticism in his trademark ultra-lucid manner. And then he tries to answer his own criticisms thusly:

In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We also like the prospect of investing additional billions over the years at reasonable rates of return. But the final decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made no sense. We would have then been giving up more than we were getting.

This can essentially be boiled down to two words: “trust me”. Which is maybe sensible, given that trusting in Buffett is exactly what he’s been asking his shareholders to do for decades. But the letter does make it seem that it’s a lot easier to argue against the BNSF acquisition than it is to argue for it.

For me, however, the weirdest part of the letter is where he talks about Clayton Homes, the manufacturer of modular and mobile homes which famously was giving away a free can of pork and beans with every house bought. Clayton doesn’t live in the category of “Manufacturing, Service and Retailing Operations”, where you might suspect it would be found; instead, it’s part of “Finance and Financial Products”, since the real business here isn’t selling homes so much as it’s selling the financing to buy them.

As Buffett explains:

Currently buyers of conventional site-built homes who qualify for these guarantees can obtain a 30-year loan at about 5 1⁄4%. In addition, these are mortgages that have recently been purchased in massive amounts by the Federal Reserve, an action that also helped to keep rates at bargain-basement levels.

In contrast, very few factory-built homes qualify for agency-insured mortgages. Therefore, a meritorious buyer of a factory-built home must pay about 9% on his loan.

Wow, sounds like a great business! Rather than see its financing profits competed away in a commoditized mortgage market, Clayton essentially has a monopoly on providing financing on its homes, and can lend out money at rates much higher than prevailing mortgage rates.

But weirdly, Buffett seems to be unhappy about this:

Berkshire can’t borrow at a rate approaching that available to government agencies. This handicap will limit sales, hurting both Clayton and a multitude of worthy families who long for a low-cost home.

Really, Warren? I’d like to see some numbers on this, because I always thought that the great thing about being Berkshire Hathaway, even without a triple-A credit rating, was that you could borrow at a rate approaching that available to government agencies. What’s the spread on Berkshire debt over agency debt? When Berkshire recently borrowed $8 billion, it paid between 2bp and 43bp over Libor on the floating-rate bonds, and between 63bp and 93bp over Treasuries on the fixed-rate bonds. In comparison, agency debt recently narrowed all the way to 66bp over Treasuries, albeit at longer maturities.

In any case, I’d say that the funding advantage that agencies have over Berkshire will be no more than about 50bp, while the financing rates that Clayton’s buyers are paying to Berkshire are, by Buffett’s estimation, about 375bp more than those offered by Frannie. And remember here that Buffett is adamant that Clayton’s buyers are good credit risks, and that “Clayton’s delinquencies and defaults remain reasonable and will not cause us significant problems”.

If you take his words at face value, then, Buffett is saying that Clayton’s buyers are no less creditworthy than buyers of site-built homes. So something over 300bp of the spread that Clayton is charging over other mortgage providers should be pure gravy for Clayton and Berkshire. I’m sure that Buffett would love Clayton to be able to sell more homes than it’s doing right now, but if you remember that Clayton is basically in the business of finance more than it is in the business of manufacturing, I can’t quite see what Buffett is complaining about. Sure, he could sell more mobile homes if you could get conventional mortgages on them. But then he’d lose all of his financing profits, and I’m sure he wouldn’t want that.

Well done to Riesling nuts Pacific Rim on their latest gong — Businesswire

Astonishing, on many levels — Mail

Kafka on Twitter’s ad-sales model — AllthingsD

No typing in the press pen at Apple shareholders meeting — Reuters

On how mass transit is American (and not socialist) — Yglesias

Konczal finds a good financial innovation, called TRACE — Rortybomb

“I’ve never fooled myself into believing I could discern the quality of a wine with my taste buds” — Psychology Today

15 free passes to the Milken conference for the newly-unemployed — Milken Institute

Why You Can’t Work at Work — Big Think

Interesting choice of name.: Madoff kin changing name to “Morgan” — NYP

The unlikely life and sudden death of The Exile, Russia’s angriest newspaper — VF

One consequence of going on staff at Reuters last April is that I got a W2 this year for the first time in a decade, and I’m pretty impressed at how much money I managed to pay the government, without even trying, in 2009. I know that if I was paying the same kind of money in big quarterly checks, as I used to when I was freelancing, it would have hurt much more.

Eric Felten explains what’s going on here:

Policymakers have long understood that the less visible—or “salient,” to use the economist’s term of art—a tax is, the easier it is to raise. Which is why Milton Friedman, looking for ways the federal government could collect more money during World War II, recommended the creation of income tax withholding (an innovation he was not proud of).

I agree with Felten on the mechanism at play here, but I disagree that it’s a bad or invidious thing. In a world where people want to maximize their own happiness and minimize their own pain, it makes sense to automate and otherwise anesthetize as much as possible things like tax collection. If I’m happier paying more taxes less visibly, then isn’t that Pareto-optimal for all concerned?

Felten says that he would rather scrounge for change at a parking meter and at tollbooths, rather than pay painlessly with a cellphone or EZ-Pass, precisely because he wants to feel frustration and annoyance at paying those fees: “those are just the emotions I want to cultivate toward the entire enterprise,” he writes. Which, I suppose, is his right. But most of us — those of us who tend towards the sensible — are much more likely to want to minimize the frustration and annoyance in our lives.

This is one reason the Netflix business model is so elegant. I’m sure I pay Netflix much more money on an annual basis than I ever used to pay in DVD rental and late fees. But the frustration and annoyance involved in returning DVDs and paying late fees was enormous, and now all of that has gone away, and I’m happier.

And this is also a reason to love systems like the Oyster card, in London, where you merrily tap your way in and out of the subways and buses without spending much if any time worrying about how much it’s costing you. It’s a much more pleasurable way of getting around than the old system of buying tickets — and it also makes it easier for Transport For London to raise prices, if and when that becomes necessary. In general, the less visible any price rise is, the less pain it causes, and the happier everybody is.

There are limits, of course, to my happiness with such solutions. Sleazy companies like Vertrue, Ben Stein’s employer, who trick you into paying monthly fees on your credit card, are pretty evil — but mainly because you’re doing so unwillingly, and wouldn’t pay those fees at all if given a choice. Similarly for overdraft fees, monthly checking-account fees, and all the other ways that banks have of extracting money unwillingly from their depositors.

But when it’s a matter of degree rather than kind — when you’re willing to pay something, but would just rather not think about it when you do — then these kind of automated payments are a godsend, especially if you’re disciplined enough to manage your monthly cashflow and notice when it’s getting out of control. (Hint: look to see if the balance on your credit card is going up rather than down.) So let’s welcome easy ways of paying for parking, along with easy ways of paying taxes. They’re a lot less unpleasant than the alternatives.

Paul Smalera asks what’s going to happen to mortgage rates after March 31, when the Fed has said that it will stop buying mortgage-backed securities. The answer, predictably, is that they’re going up:

Lawrence Yun, chief economist for the National Association of Realtors (NAR), says 30-year fixed rates are “rock bottom” and simply cannot stay at 5 percent. That much, economists, analysts, and the Fed all agree on. But just how high they’ll get is another question.

Fed Vice Chairman Donald Kohn told a conference last month that any increase in rates is likely to be “modest” but added “that judgment is subject to considerable uncertainty.” Yun believes 30-year fixed rates will probably end up jumping to about 5.7 percent by year’s end. Freddie Mac, which issues many of the MBS being bought by the Fed, said in late December that rates would hit 6 percent by the end of 2010, sending a shock through the market… Bill Gross, head of Pimco, one of the largest and earliest private investors in mortgage-backed securities, believes that due to a rising interest rate environment in general, mortgage rates could settle anywhere between 6 to 6.5 percent, but admits at this point he’s simply making an educated guess.

What does this mean for house prices? Let’s say I have an $80,000 income and a $20,000 downpayment. According to this calculator, at 5% mortgage rates I can afford $279,075 of house. At 6%, that figure drops to $257,780 — a 7.6% fall. And at 6.5%, it’s $248,034 — a drop of more than 11%. And that’s assuming that I have no car or credit-card payments to make.

The government and the Federal Reserve can’t artificially prop up house prices indefinitely, of course. But it’s a fair guess, especially in light of this morning’s gruesome home-sales data, that a combination of falling demand and rising interest rates is going to translate into lower prices and even more negative equity than we have at the moment.

Throwing money at the problem will alter the amount of time it takes to finally arrive at a market-clearing, private-sector-generated level of house prices. But there’s little doubt that such a level is well below where we are right now. Which is yet another reason not to buy, at least for the time being.

Matthew Yglesias proposes a divide-and-conquer strategy when it comes to pushing through financial reform legislation: get the systemic stuff done with the help of Bob Corker, and then draft a second bill, with the help of some other Republican, creating a Consumer Financial Protection Agency.

My problem with this idea is that it’s tantamount to an admission that a CFPA is not a necessary and intrinsic part of the comprehensive regulatory reform this country needs. If put into a bill on its own, it would be easy not only for Republicans but also Democrats to start waxing fiscally responsible about expansion of government and increased bureaucracy.

Yglesias says that “a CFPA isn’t going to regulate systemic risk”, which is true, narrowly speaking — but which is also false, broadly speaking, since a CFPA would actually have been more likely to notice and crack down on the kind of lending which was most systemically damaging than a systemic-risk regulator might have been.

We want to get to a financial world which is safe by dint of being boring, and a CFPA has a key role to play in keeping it boring. Its primary role, yes, it to protect consumers. But the head of the CFPA certainly belongs on any high-level board charged with looking for systemic risks. And might well prove to be a very useful early-warning system.

Jennifer Valentino-DeVries has a good post on l’affair Fabulis, in which a gay entrepreneur named Jason Goldberg was told by Citibank that his website “was not in compliance with Citibank’s standard policies” before receiving a fulsome apology from Bill Brown, the head of branch banking in New York. (Goldberg’s been blogging on this a lot; the best way to see everything is just to go to his blog home page.)

Valentino-DeVries points out that this is not an isolated case: Citi refused to open an account for sillyunderwear.com a couple of weeks ago, on the grounds that “we typically decline accounts associated with content that the general public may potentially find inappropriate or offensive”. Meanwhile, Goldberg is asking for feedback on the question of whether he should move his money.

The answer is that, yes, clearly he should. I spent a fair amount of time on the phone yesterday to various Citi types talking about the Fabulis situation, and it’s clear that once the PR team and the top honchos get dragged in to an issue like this, they’ll do their best to rectify the situation and explain how gay-friendly the company really is. (Although I know two different gay people who left Citigroup because they felt uncomfortable being out in the organization; one was quite senior when he left about 10 years ago.)

The fact is that a company with hundreds of thousands of employees is always going to have difficulty getting all of them onto the same page when it comes to such matters — even in places as gay as Manhattan. And as in most bureaucracies, the initial response of any typical mid-level Citibank manager to complaints about service is to get defensive.

Goldberg has a lot of money in the bank — he just got $625,000 in funding, all of which he deposited at Citi. What he should have with his branch manager is a mutually-beneficial relationship, where the branch knows, understands, and supports his business, and helps him out with financial services as and when he needs them. Instead, he was treated as a computer entry, his account was frozen for reasons which remain murky, and the branch manager, far from knowing him personally and trying to rectify the situation as quickly as possible, instead started accusing him of grave sins against internet decency.

There’s no shortage of gay-friendly managers at banks and credit unions across Manhattan who have both the time and the inclination to help small gay businesses on a personal and institutional level, without having to navigate an enormous bureaucracy to do so. The kind of relationship that Goldberg deserves is one where he can phone up his bank manager directly, say “hi, it’s Jason”, and they can have a constructive conversation immediately. Instead, he seems to have ended up in the kind of relationship where he’s likely to have to give his name and account number before some anonymous functionary looks him up on a computer system and tries to work out what The Rules say about what Citi can and can’t do for him.

Goldberg said yesterday that it was “certain” he was going to take his banking elsewhere. He should stick to his promise: he’ll be glad that he did.

Here’s the front page of today’s Wall Street Journal; I think it says a lot about where owner Rupert Murdoch and managing editor Robert Thomson are taking the paper.

There are three main items on the page. The big headline splashed across the top is “Hedge Funds Pound Euro” — a story which, in its online telling, is weakened significantly to “Hedge Funds Try ‘Career Trade’ Against Euro”, although the headline on the home page remains the same.

The story is accompanied by a chart showing the recent deterioration in the value of the euro, for all the world as though it were caused by the hedge funds in question. There’s even hints of conspiracy: the story begins with the tale of a few fund managers having dinner — together! And talking about the euro!

There’s only the vaguest hint, in the ostensibly-sober WSJ, that it’s ridiculous to think that hedge funds could cause a large medium-term change in the value of the euro against the dollar. They can certainly bet on such a move, and make money if it happens, but you can’t manipulate the largest currency pair in the world, when it’s freely floating and does over a trillion dollars in volume per day.

But that doesn’t stop the WSJ from trying. After talking about nothing but currency trades for the first 11 paragraphs of the story, there’s then a screeching of gears and those demons du jour – credit default swaps (CDS) – are shoehorned into the story, which suddenly starts talking about bets on Greece’s creditworthiness.

While it’s true that worries about Greece can have an adverse effect on the euro, again it’s pushing the limits of credibility to suggest that hedge funds are deliberately trying to manipulate the market in Greek credit so as to make money on their foreign exchange plays.

Especially when, as the article concedes, the only named player in Greek CDS — John Paulson — is now reportedly bullish on the country.

Basically, the article is long on sensationalism and short on news — much like the big photo on the page, a human-interest picture from Haiti, underneath which we find a crypto-denialist story about climate change carrying the headline “Push to Oversimplify at Climate Panel”.

The story loves that “oversimplify” word, using it in two headlines and twice in the body of the article, but in all cases the shorter and more objective “simplify” would be much better suited.

The story talks about “institutional bias” at the the Intergovernmental Panel on Climate Change (IPCC), but there’s clearly an institutional bias at the WSJ on this issue too, as evinced by things like the paragraph which begins with this:

Even some who agree with the IPCC conclusion that humans are significantly contributing to climate change say the IPCC has morphed from a scientific analyst to a political actor.

That kind of language makes it seem that there’s a pretty symmetrical argument about the existence of anthropogenic climate change, and that even some people on the IPCC side — the side of the believers — are still critical of the U.N body. But of course there isn’t a serious scientific debate over the existence of anthropogenic climate change, not that you’d ever learn that from reading this story.

And just look at the smoking gun that the WSJ presents as evidence of oversimplification in IPCC reports:

This is oversimplification? It’s simplification, yes — it’s taken four different time-series of historical temperature, and averaged them.

But I don’t think it’s oversimplification: they all show pretty much the same thing, that temperatures stayed pretty constant, within a 0.5-degree range, from the year 1000 to the beginning of the industrial revolution.

Since then, temperatures have been rising sharply, and all the different scientific scenarios for the future show them continuing to rise dramatically. The final report shows projections for the future, as well as historical data from the past, making it clear which is which. In that sense, it’s much more useful than the historical data alone for the purposes of policymakers.

In any case, it’s clear from the photograph and the two main stories on the WSJ’s front page that the paper is aggressively becoming both sensationalist and political. That might be a sensible move, from the point of view of selling copies, especially on the newsstand. But it will also inevitably serve to erode the trust that many people, on Wall Street especially, have in the reporting of the WSJ.

Abnormal Returns has a pretty funny takedown of David Weidner and his silly listicle today on the subject of financial blogs. Weidner seems to think that AR is upset at being left out, but in fact this is a cheap and ill-informed article which should mean nothing to those either on it or off it.

In the spirit of Weidner’s article, then, let’s see if we can come up with ten reasons to ignore it:

1. The headline, “Ten Wall Street Blogs You Need To Bookmark Now”, reads like a parody of Blodget link-bait, especially when you realize that they’ve all been around for a while and that there’s really no rush here. Plus, bookmark? Does anybody still do that?
2. Weidner is right that blogs are a serious enterprise, but he’s wrong to point to “the recent acquisition, for an undisclosed sum, of Footnoted.org by Morningstar” as particular evidence of that. It’s great that Michelle Leder is now drawing a regular paycheck and getting health insurance, but that’s hardly a ringing ratification of an entire class of blogs. For that, you should look instead to the amount of money being invested in blogs by both large media outlets and smaller VC-backed startups — sums which dwarf the price of Footnoted.
3. Weidner seems to think that Nouriel Roubini counts as a blogger who has risen to the point of being a must-read on a daily basis. Which is odd, because Nouriel has pretty much stopped blogging these days: in fact, he simply doesn’t write fully-fledged public blog entries any more. He does have something approximating a blog there, but it mostly features round-ups from his staff; Roubini media appearances elsewhere; and excerpts from material available only to his subscribers.
4. Weidner, whose column appears once a week, reckons that “some blogs stink” on the grounds that “they don’t post frequently enough” — which is exactly wrong. Posting more often gets you more pageviews, yes, but many of the best bloggers out there, such as Steve Waldman, post infrequently and are none the worse for it.
5. Weidner scorns blogs which “simply aggregate and rip off”. He doesn’t name names here, so I don’t know who he had in mind, but if he’s talking about the likes of Abnormal Returns, he’s massively off base: AR is a key part of the econoblogosphere, and is much more valuable than most of the blogs on Weidner’s list. Aggregation is a very special skill, and it’s not to be scorned.
6. Weidner is ridiculously credulous when it comes to self-reported stats, talking about Barry Ritholtz’s “more than two million monthly page views”, Business Insider’s “30 million page views a month”, and Naked Capitalism’s “nearly 15.8 million clicks since November 2007″. Whatever those might be. None of those numbers means very much, except to owners of the site in question who try to generate revenue from CPM-based banner ads.
7. Weidner slams Calculated Risk for having boring headlines, especially “Hotel RevPAR off 5.6 Percent”. Well, he might consider that boring; CR’s readers certainly don’t. That blog entry got 232 comments. Weidner’s piece, so far, has got just six.
8. What is GoldmanSachs666 doing on the list? Do we really Need to Bookmark that site Now?
9. “Zero Hedge claims to have four contributors”. Actually, it claims a lot more than that.
10. The whole blog entry is in slideshow format, a particularly annoying way of maximizing traffic figures at the expense of readability and usability. What’s more, the slideshow is embedded in the post, making it impossible to link to any particular blog write-up.

There, that was pretty easy. Now, let’s go back to Abnormal Returns and see if we can find something useful.

Many thanks to the wonderful Stephen Culp for putting this pretty chart together for me. It shows pretty clearly, I think, that the narrative in today’s NYT piece — that CDS spreads gapped out, with a nasty effect on Greek bond spreads — isn’t really borne out by the facts. What this chart says to me is that both CDS and bond spreads increased pretty steadily over a period of two or three months, as perceptions of Greece’s creditworthiness deteriorated. And that Greek CDS spreads were pretty flat on either side of the introduction, in September 2009, of the iTraxx SovX Western Europe index.

More generally, this chart shows that the fixed-income markets are working in exactly the way that they’re meant to work, and that the CDS market is the Greece grease enabling them to do so. In an efficient bond market, the secondary-market yield on any given credit’s bonds is very close to the rate at which that credit can issue in the primary market. It can fluctuate up and down, but that changes the price of credit more than the availability of credit.

That’s exactly what we can see in this chart: Greece was able to issue the whole time, at steadily-higher spreads. And anybody who remembers the credit crunch of 2007-8 knows that that is just about the best possible outcome that can be expected, especially when you’re dealing with a borrower who (a) has €25 billion of financing needs in the next three months; and (b) has been so good at hiding its true debt and deficit figures in the past that they’ve lost the trust of the markets.

In markets which, as we’ve seen, are prone to panic, it’s pretty obvious what one might expect to happen in such a situation: investors would be likely to start selling their Greek bonds en masse, and there’s no way that Greece could borrow another penny on the open market.

In the event, neither of those two things happened — thanks largely to the CDS market. You don’t need to sell your Greek debt if you can hedge it in the CDS market instead, where there’s evidently a pretty deep group of investors willing to accept hefty insurance premiums over the next few years and bet that there won’t be an event of default. It’s a much easier way of making money than buying Greek bonds outright, which requires a lot more cash up front.

In turn, the ease of hedging marginal Greece exposure in the CDS market made helped to ease the fears of investors active in the primary market, and Greece has continued to be able to issue debt without interruption.

So rather than demonize the CDS market and blame it for Greece’s current woes, let’s place the blame firmly where it belongs — with Greece itself, and its profligate ways. And let’s thank the CDS market for adding enough liquidity to the bond market that Greece’s fiscal woes didn’t become a major liquidity crisis.

My CDS Demonization Watch has been on the back burner for a while: I thought that the caravan had moved on. But right now, the most-read story in the NYT business section, getting a lot of attention in the Twittersphere, is this one, headlined “Banks Bet Greece Defaults on Debt They Helped Hide”. It’s gaining a lot of traction: Ben Bernanke said today that he’s looking into the issue of whether the CDS market is enabling some kind of run on the Greek government. I sincerely hope he was just being polite to his Congressional overlords, rather than buying in to this theory.

It’s worth looking at the NYT story in some detail, to see just how little sense it makes.

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

The first thing worth noting here is that Greece is not anywhere near the brink of financial ruin. The CDS market is actually very good at showing when a borrower is near financial ruin: when that happens, spreads gap out past 1,000bp to something closer to 2,000bp or even 3,000bp. Greece’s CDS spreads peaked at about 400bp, which is high for an EU country, but is nowhere near distressed levels. Yes, every time the CDS spread rises it gets closer to distress, but that’s just as true — and just as unhelpful — if it goes from 30bp to 40bp.

The second point to note about these opening two paragraphs is the curious presence of AIG. AIG went bust because it wrote insurance; the NYT story is here implying that there’s some relevance to what’s happening with Greece, a reference credit that people are writing insurance on. AIG had to pay out billions of dollars to make good on CDS contracts; Greece has neither bought nor sold any CDS contracts at all. No sooner are the parallels made than they break down.

That doesn’t stop the NYT, however, which then proceeds to wheel out the cliché about CDS being “like buying fire insurance on your neighbor’s house”. The problem is that the analogy just doesn’t work in this case. Much later on in the article, after most people have stopped reading it, we’re told the truth of the matter:

European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.

That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure stands at $43.2 billion.

These banks aren’t buying insurance on someone else’s house, they’re buying insurance on their own house. As the old saying goes, if you owe $75,000 to the bank, you’ve got a problem. If you owe $75 billion to the bank, the bank has a problem. And in this case, the banks are doing their best to deal with that problem and manage their risk proactively.

The question here is whether their ability to do so in the CDS market is exacerbating matters for Greece. The mechanism here is complex, if it exists at all:

As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.

At the very least, this does a large disservice to bond investors. They’re not sheep who are happy to lend to any country unless or until its CDS spreads widen — in fact, at the margin, they’re more likely to lend to a country if they know that they’ll always be able to hedge that position in a liquid CDS market. Now, it’s true that as worries over Greece’s creditworthiness get more intense, Greece’s cost of funds goes up. But there’s a strong case to be made that absent the CDS market, Greece simply couldn’t borrow at all: the existence of the CDS market has made it easier (if more expensive) for Greece to borrow money, not harder.

There is a connection between the CDS market and the cash bond market, thanks to the concept of delta hedging — people who sell credit protection on Greece will often end up selling Greek bonds at some point in order to manage their exposure. But that connection is much more tenuous than the alternative, which is that of banks looking to reduce their Greece exposure all dumping their Greek bonds onto the market at the same time. The result of that kind of operation would be spreads much wider than 400bp.

The weirdest bit of all in the NYT article is the way it places the blame not on people trading Greek CDS, but rather on people trading a more general sovereign CDS index:

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.

If you want to gamble on Greece, you can gamble on Greece: gambling on a broader Western Europe index makes little sense. What’s more, insofar as people are trading the iTraxx index, they are very unlikely to delta-hedge in the bond market — they’re just taking positions for a few hours or days, trading in and out. Blaming the iTraxx index for Greece’s problems makes no more sense than blaming the ABX index for the subprime crisis: it’s a symptom, not a cause.

But by far the worst part of the NYT piece is its headline: at no point in the article does it come close to making the case that banks in general, or Goldman Sachs in particular, are betting on a Greek default. At worst, banks are hedging their large exposure to Greece and other PIGS nations using an index they helped to create. But the fact is that Greece’s financing burden — the title of the NYT webpage is “Trades in Greek Debt Add to Country’s Financing Burden” — is entirely its own making. Blaming the banks here makes no sense at all.

Yves Smith, of Naked Capitalism, has sent me a note to tell me how unhappy she is about the kindle pricing of her new book, which has a cover price of $30, an Amazon price of $19.80, and a kindle price of $16.50. Her publisher, Palgrave, is part of Macmillan, which just won a fight to force Amazon to sell e-books at more than $10, but part of the fallout from that fight is that books which cost much more than that on the kindle often get one-star reviews on the basis of their pricing alone.

Writes Yves:

You know my base skews heavily toward the type that buys on Amazon, and to top that off, as you would imagine, my book promotion is going to be more than usually web oriented, so that will maintain that skew.

I don’t know about you, but the vast majority of the time, if I see a book with an Amazon rating of fewer than four stars, I won’t buy it. And it does not take many one stars to drag an average down.

In principle, my sympathies are with Yves and Amazon here. Amazon wants to subsidize her book; she wants Amazon to subsidize her book; but her publisher, worried about kindle sales cannibalizing hardback sales, won’t let that happen, and is willing to risk bad reviews as a consequence.

My feeling here is that none of this matters a great deal. And the main reason is pretty simple: after about a year of kindle ownership, I’ve come to the clear conclusion that it simply isn’t suited for reading the vast majority of non-fiction. You might not even notice it when you’re doing it, but when you read a non-fiction work like this one, you tend to flick backwards and forwards a lot, skim past the bits you already know about, re-read earlier passages in light of later ones, that sort of thing. And that’s prohibitively difficult with the kindle, which is designed primarily for reading narratives where you start at the beginning and make your way steadily to the end. Truly narrative non-fiction a la Krakauer is fine, but “learn about the crisis” nonfiction just doesn’t lend itself to being read on the kindle at any price. If you’re the kind of person who reads footnotes, you will get very annoyed very quickly with the kindle whenever they start appearing.

What’s more, the phenomenon of angry one-star reviews will I think fade away pretty quickly: they’re a response to the change in prices more than they are a response to the price itself. If the price for a kindle book goes up from $10 to $17 without the product changing at all, that’s annoying. But if it was never $10 to begin with, the annoyance is much lower.

Obviously, the number of kindle versions of Econned sold will be lower at $16.50 than it would be at $9.99 — just as I doubt many people buy kindle versions of books which are more expensive than the ink-on-paper versions. But a substantial proportion of the people who would have bought at $9.99 but won’t buy at $16.50 are people who will now just buy the hardback instead — and I’m pretty sure they’re going to have a better experience that way. And that should make Yves happy, not angry.

Aaargh! The Obama administration is no longer insisting on the creation of a stand-alone consumer protection agency — Wapo

Eric Jackson on how Goldman should beef up its board — The Street

So Long, Hummer! — Awl

The single biggest question hanging over the future of financial reform in the US right now is what exactly is acceptable to Bob Corker in terms of a Consumer Financial Protection Agency. Bloggers on the left are pessimistic: Simon Johnson says that “the consumer protection agency is likely to be gutted as the price of bringing Senator Corker on board”, while Tim Fernholz says that bringing Corker along could “cost the Democrats key provisions in the bill — most notably, an independent Consumer Financial Protection Agency”.

But now Taylor Griffin and Tony Fratto are finally spreading what seems like pretty concrete intelligence on the form that the Dodd-Corker compromise is likely to take, in the wake of a weekend trip that the two of them took to Central America.

The contours of the Dodd/Corker deal look like this: an independent agency with its own source of funding would be established to regulate all federally chartered banks. The agency would have two divisions: one to conduct prudential regulation and one for consumer protection. The agency’s director would decide disputes between the divisions.

We could see this arrangement picking up enough GOP votes to get through the Senate, the big question will be whether this is going to pass muster with an Administration and House Financial Services Committee Chairman who have insisted on a “stand alone” CFPA. This is not completely stand alone, but it’s closer to that description than some of the other compromise proposals.

I’m not entirely clear what this means, but it seems, on its face, to imply that the FDIC, OTS, and OCC will all be combined into one agency, which would then have somewhat conflicting goals, when it comes to the zero-sum tug-of-war between banks and consumers. On the one hand, it would be responsible for ensuring that banks are profitable and well-capitalized; on the other hand, it would be responsible for ensuring that banks don’t gouge consumers in their search for adequate profits.

Most worryingly, the consumer-protection part of the agency would only seem to have control over federally chartered banks. That’s a very bad idea indeed, since it’s precisely the non-bank financial institutions — subprime lenders, payday lenders, non-bank credit card companies, Walmart, etc etc — which need as much if not more regulation, from a consumer protection point of view, as the banks.

And to top it all off, Griffin and Fratto write that even if a Senate compromise passes, it could still be derailed by Barney Frank when it comes to reconciling the House and Senate bills.

So, there’s no good news here, I’m afraid. And I’m inclined to agree with Fernholz that if working with Corker means losing the guts of the CFPA, it’s best to ditch him altogether and just try to push something through the Senate with the support of Democrats alone.

I’ve been following the CoreLogic data on the number of underwater mortgages for over three years now, and it’s undoubtedly the most reliable time series we have on that front. Which is why this is so scary:

First American CoreLogic, the research firm that monitors housing equity, reported Tuesday that 11.3 million homeowners — or 24% of all homes with mortgages — were underwater as of the end of 2009. That’s up from 23% and 10.7 million borrowers three month earlier.

How could the number of underwater homeowners could have risen by 600,000 in just one quarter — especially when the latest Case-Shiller data shows national house prices more or less stable over those three months? I think the answer might lie in the seasonal adjustments: to take a couple of the more extreme examples, Dallas prices fell 0.9% on a non seasonally adjusted basis, while rising 0.1% on a seasonally adjusted basis, while Chicago fell 1.6% in nominal terms but only by 0.6% in seasonally-adjusted terms.

The biggest systemic risk posed by underwater mortgages, of course, is the fact that they’re much more likely to default. But if the decline in the value of your house is a cyclical, seasonal thing, then that’s clearly much better than if it’s likely to persist indefinitely.

On the other hand, we’re clearly in uncharted territory here — at the upper echelons of the credit scale, unsecured credit-card debt now carries a significantly lower default rate than secured mortgage debt. If the number of underwater homeowners is going up at the same time as the societal mores urging full mortgage repayment erode, then the ingredients for another real-estate bust are definitely in place.