Felix Salmon

Now that the New York Times has decided to move to a metered paywall system, a lot of attention at the PaidContent conference — at the TimesCenter, no less — is being directed towards Rob Grimshaw. He’s the managing director of FT.com, which has been a pioneer in the meter-model space.

Grimshaw has been in the news of late, announcing that he’ll close the Google loophole just a tiny bit, by stopping people from accessing more than five articles per day by taking advantage of Google’s first click free program. The new, more limited, program isn’t in place yet — Rob waved vaguely in the direction of the second quarter in terms of when it might happen — but in any case I don’t think it’s going to make much difference, since the five-articles-per-day limit is so much higher than the 10-articles-per-month level at which you’re asked to pay to continue to read the FT.

So why is he even bothering? He told me that the Google loophole was causing a bit of a “headache” within the FT, but I couldn’t work out where it was: I couldn’t imagine that subscribers or advertisers or the print side or anybody else was particularly unhappy about it. But it turns out that there was at least one major financial company which was pushing all of its employees to use the Google loophole, rather than pay for a subscriptions. And when the FT asked them what they thought they were doing, the company just said well, you left the back door open, so we decided to use it. (Better that than to risk a lawsuit by sharing passwords.)

That said, Rob was a big fan of Google in general, and said that he was very pleased indeed with the rate at which visitors from Google converted into being paid subscribers — by implication, that rate is much higher than for other sites driving FT.com traffic.

Grimshaw said that FT.com ad revenues have risen since he put the paywall in place, and he added that if the NYT paywall does indeed turn out to be revenue-neutral, he would consider it a failure. Increasing site revenues, he says, is the whole point. And he has another revenue stream coming up: come May, he says, he’ll start selling day passes to the site. “There’s a large proportion of our readers who are prepared to pay for content, are very happy to pay for content, but for whatever reason aren’t willing to make an annual commitment,” he said, pointing to the fact that on the print side, the FT’s daily circulation of 400,000 is double the size of its print subscriber base.

And although it’s outside his bailiwick, I also asked him about the U.S. print edition of the FT, which seems to be quite thin these days and to suffer from the fact that so many stories were written for a London deadline, five hours before U.S. reporters need to file. Rob said that the U.S. paper was profitable — although I have no idea what exactly that means, when so many of the ads come from global buys — and more to the point, that the FT needs a U.S. circulation in order to be able to sell those global ad campaigns.

As for the numbers, Rob said he was now up to 1.9m registered users of FT.com, and 121,000 paying subscribers, a rise of 21% in past 12 months.

Finally, I asked Rob about Lex, which is the main distinguishing feature of the premium version of FT.com, and which is currently headless as Jo Johnson runs for parliament in Orpington. Rob said that Lex needs to become webbier, which is undoubtedly true: it’s still got a silly allergy to linking, and it’s still very much working around daily deadlines rather than intraday speed. At the same time, however, no one wants to see Lex become just another blog: if there’s any value at all in Lex, it’s because the pieces are deeply reported. So it’s going to be very interesting to see whothe FT hires to replace Jo, and whether they decide to shake up the franchise much.

Wow, Democratic Senator Chris Dodd really doesn’t want the Federal Reserve to be the main systemic-risk regulator — to the degree that his latest proposal gives that job to the Treasury Secretary, of all people. This is not a good idea, as Karen Shaw Petrou says:

“I don’t see how you avoid fundamentally changing the role of the Treasury Department as a member of the executive Cabinet,” said Petrou, managing partner of Federal Financial Analytics, which tracks regulatory issues for industry clients. “One would hope the Treasury would exercise its powers in a virtuous way, but this is not what Treasury is nor what it should be.”

If the Treasury secretary had a formal supervisory role, that official could use the position “to meet the political exigencies of the moment or for an upcoming election,” Petrou added.

On top of that, remember what we saw at the beginning of 2009: Treasury can be a very chaotic place when the White House changes parties. What’s more, substantially all top Treasury officials are political appointees: it simply is not the kind of place that you want to be setting long-term macroprudential principles. Give bank regulation to Treasury, and you’ll end up with a system where regulators care more about banks’ presence in Iran and Cuba than they do about their leverage ratios.

But it gets worse:

During negotiations with Dodd this year, Sen. Richard C. Shelby (Ala.), the ranking Republican on the banking committee, suggested having the Treasury secretary lead the council. Shelby viewed that structure as preferable, in part because the Treasury secretary has a higher international profile than most regulators. He also views the Treasury secretary as more accountable to Congress.

I suppose it makes sense that a member of Congress would want to have anybody and everybody maximally accountable to Congress. But that doesn’t make it a good idea. Regulators are like judges: they work best with a minimum of political interference. We saw that with the regulation of Fannie Mae and Freddie Mac: it got hijacked by Congress to the degree that the nominal regulator was to all intents and purposes powerless to do anything but that which Congress demanded. And the consequences were disastrous.

So this is yet another reason — as if one were needed — to be pessimistic about the prospects for financial reform. I’m becoming increasingly convinced that if anything passes the Senate at all, it’s going to be so weak as to be largely pointless. We’ve wasted our crisis.

Paterson is even more useless than I’d thought — NYT

Crap tax law implicated in Austin terror-suicide: it’s not the IRS’s fault, it’s Congress — NYT

Wherein Blodget turns my tweet into a fully-fledged CONTEST — TBI

Valentino vs. September Issue — Black Von

Go read Paul on security theatre. Hilarious — Kedrosky

Must-read piece in the American Conservative on hispanics and crime. Fantastic stuff — AmCon

The top 400 taxpayers all earn at least $138m per year. Their average tax rate? 16.6% — WSJ

The news of the moment is that the Fed has raised the discount rate to 0.75%. So why does the headline announcing the fact read like this?

Federal Reserve approves modifications to the terms of its discount window lending programs

The first two paragraphs of the press release contain precisely zero news; and in fact it’s not until the very end of the release that it actually talks in English about “the increase in the discount rate”. The actual news is announced like this:

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

What purpose is served by this obfuscation? Why can’t central banks in general, and the Federal Reserve in particular, communicate in English? Alan Greenspan famously said in 1988 that “if I turn out to be particularly clear, you’ve probably misunderstood what I said” — but that was then, and I thought we were moving away from that kind of silliness.

Ben Bernanke has shown that clarity is a virtue; his underlings in charge of drafting announcements should have gotten the message by now, instead of reworking it into incomprehensible gobbledygook.

I like Nancy Birdsall’s idea of “Cash on Delivery Aid” a lot. Instead of spending money on building schools or hiring teachers or any other means towards an educational end, just pay for outputs instead:

We propose that donors offer to pay recipient governments a fixed amount for each additional unit of progress toward a commonly agreed goal, e.g. US$200 for each additional child who takes a standardized test at the end of primary school. That is, the donors pay “cash” only upon “delivery” of the agreed outcome. The key features of this proposal are: (1) the donor pays only for outcomes, not for inputs, (2) the recipient has full responsibility for and discretion in using funds, (3) the outcome measure is verified by an independent agent, (4) the contract, outcomes and other information must be disseminated publicly to assure transparency, and (5) this approach is complementary to other aid programs.

If a prize-based approach is a good idea for things like vaccines, why can’t it work with education, and other areas with clearly-definable and measurable outputs?

To spur government action and allow for civil society to participate in bringing about change, each COD Aid contract (as designed) would rely on a single, measurable goal; e.g. children completing primary school or households with access to clean water. Choosing an indicator that is simple, central to people’s lives, and easily auditable, Nancy says, is critical to the success of a COD Aid model.

The problem with this model is I think at the donor end: the government can spend the money on anything it likes, from kickbacks to Kalashnikovs, and people — and even governments — donating money for early-childhood education or clean water don’t like risking their money being spent elsewhere. But Nancy has a 100-page book coming out on the subject; maybe that might help to change some minds.

Last week, weighing in on a miles-travelled tax, I said that “there really is something quite creepily Big Brotherish about trying to track every single vehicle in America”. But then I heard from Bern Grush of Skymeter, and he’s persuaded me that you don’t actually need to make tracking information available in order to tax miles travelled.

Under his system (and of course he has a system capable of implementing this), anybody who’s pre-paid for their miles will simply see those miles essentially erased from their tracking device as they’re driven — along with the money leaving their pre-paid account. If you pay after you drive the miles, at the gas station, for instance, then the tracking data gets erased then and there.

Of course, you have the option to retain and not erase the data, if you want to keep it for your own records. But if you do that, there’s always a risk that someone could subpoena it.

In a Please Rob Me world, then, where Federal authorities are pushing to be able to track your cellphone, the privacy issues associated with a miles-travelled tax are probably the least of our privacy worries — so long as they’re very clearly articulated, and so long as the default settings are for absolute privacy. If you want to worry about people being able to track your movements, either in real time or in retrospect, then you should probably worry much more about your GPS-enabled phone and your FourSquare checkins than about any tracking device in your car.

Judge Jed Rakoff’s January 29 ruling in the case of Empresas Cablevisión vs JP Morgan Chase Bank has barely been reported, which is a shame, because it sheds some much-needed light on how banks like JP Morgan really operate — and, for that matter, on the kinds of methods by which Carlos Slim has made his multi-billion-dollar fortune.

I’ve put a copy of the ruling here — it was faxed to me from Mexico, so apologies that it’s a large, non-machine-readable file. (Update: Reader Guanix has put a clean version here, I’ve also uploaded it here.) But the gist is that JP Morgan took one of its longest-standing clients in Mexico — Grupo Televisa — and tried to hand all of its secrets over to its biggest rival, Carlos Slim. And the way it tried to do that was by selling Slim a loan larded up with covenants which would essentially force Televisa to reveal any and all information to the holder of the debt.

I was faxed the ruling in the case by Alfonso de Angoitia, a director and very senior executive within Grupo Televisa, who told me the story behind the lawsuit. I also called JP Morgan for comment, but they said nothing. And it wasn’t one of those 45-minute off-the-record phone conversations where they ultimately say that they decline to comment on the record: this was more like a 10-second conversation where no sooner did I make it clear which case I was calling about than they said “no comment” and the phone call was over. So for JP Morgan’s side of the story, all I have to go on is their 40-page memorandum of law in the case, which is quite narrowly legalistic, which was roundly rejected by Rakoff, and which obviously can’t respond to Rakoff’s ruling since it was filed before Rakoff made his ruling.

In any case, the facts of the case are pretty clear. The relationship between JP Morgan and Televisa goes back decades, and so JP Morgan was the natural choice for Televisa to turn to when it decided to buy a fiber-optic cable company called Bestel for $325 million, $225 million of which was to come from Televisa subsidiary Cablevisión.

JP Morgan intended to syndicate the loan, but the timing was bad: the deal closed in 2008, when credit markets were all but closed, and as a result JP Morgan ended up owning all of it. After an attempt by Televisa to help JP Morgan syndicate the loan fell through, JP Morgan then turned to Inbursa, Carlos Slim’s bank.

This was not an obvious choice from the point of view of serving one’s client. Slim and Cablevisión compete fiercely in the telecommunications space, where Slim is the dominant monopolist and Cablevisión is selling telephony and internet access in competition with him. And the rivalry is all the tougher due to the history between the two groups: Slim used to be a major shareholder in Televisa, and to this day Inbursa owns a 22% stake in Cablevisión.

Now there were two ways of selling this loan: JP Morgan could either assign it to Inbursa, which would require Cablevisión’s permission, or else it could participate it to Inbursa, which would not. At first, JPM tried to assign the loan, but unsurprisingly Cablevisión refused to grant their permission for that deal to happen. It’s worth quoting Judge Rakoff’s ruling here:

On June 3, [Guadalupe] Phillips [of Televisa] called Carlos Ruiz de Gamboa of JP Morgan to report that Cablevisión would not consent to the proposed assignment. Gamboa allegedly reacted by threatening to give Inbursa the 90% interest in the form of a “participation.” Later that day, Phillips sent JP Morgan an email with an attached letter from counsel formalizing Cablevisión’s decision. That letter expressed Cablevisión’s belief “that it would be inappropriate, and could cause serious harm to our business and our competitive position, if one of our major competitors is allowed to gain access to confidential and competitively sensitive information about us, or to exert any control over our business affairs and hinder the development of our business.” The letter also noted that a “participation” of 90% of the loan to Inbursa would be similarly unacceptable and would violate JP Morgan’s “duty of good faith” under the Credit Agreement. Nonetheless, JP Morgan began negotiations to transfer 90% of the loan to Inbursa in the form of a Participation, and these discussions continued throughout June and July until a formal agreement between Inbursa and JP Morgan was executed on July 15, 2009.

This is all pretty amazing stuff. Televisa is a client in long standing of JP Morgan, and makes its views on JP Morgan selling the loan to its most formidable competitor very clearly known. What’s more, Televisa even offered to buy back the loan from JP Morgan at exactly the same discount as Inbursa was offering, and JP Morgan’s Sjoerd Leenart gave Televisa every indication that the loan would not be participated to Inbursa. Even as JP Morgan was doing exactly that.

For a bank which claims to pride itself first and foremost on its client focus, this is seriously torrid. It’s pretty clear why Inbursa wanted the debt — we’ll come to that in a minute. But why was JP Morgan so desperate to alienate Televisa by selling it to Inbursa? Is Carlos Slim so scary that if he wants 90% of a $225 million loan, JP Morgan will give up an entire client relationship to sell that to him? Why else would JP Morgan go ahead with a course of action which looks for all the world as though it was designed to anger Televisa as much as possible?

It turns out — that is, it was revealed to Televisa after it finally brought suit against JP Morgan — that this was no ordinary participation agreement, either. It had all manner of extra bells and whistles in it, all of which were designed to (a) make it look very much like an assignment rather than a participation; and (b) extract information from Cablevisión and hand it over to Inbursa. As Rakoff says, “the agreement permits Inbursa to request and receive nearly unlimited information from Cablevisión”. And what’s more, if Cablevisión for any reason refuses to hand over such information, Inbursa can declare Cablevisión in default, and automatically convert the participation to a fully-fledged assignment.

Rakoff concludes:

JP Morgan, acting in bad faith, used the guise of a purported “participation” to effectuate what is in substance a forbidden assignment, with unusual provisions demanded by Inbursa that are calculated to give Inbursa exactly what the assignment veto in the Credit Agreement was designed to prevent. JP Morgan thereby violated, at a minimum, the covenant of good faith and fair dealing automatically implied by law in the Credit Agreement…

The Court concludes that plaintiff has shown a likelihood of success on the merits of its claim that JP Morgan breached its implied covenant of good faith and fair dealing under the Credit Agreement. Further the Court finds that Cablevisión has shown a likelihood of irreparable harm if preliminary injunctive relief is not granted…

there is as a factual matter a strong likelihood of irreparable harm arising from Inbursa’s ability to seek and obtain Cablevisión’s confidential business information under the Credit Agreement and then use it to Cablevisión’s detriment.

With that, Rakoff tells JP Morgan that it cannot proceed with the participation, or in any way treat it as valid or enforceable, or in any other way try to give ownership of the loan to Inbursa.

The ball is now in JP Morgan’s court to work out how to comply with Rakoff’s injunction — one way would be to go back to Televisa, say sorry, and offer to sell them the loan instead, at the same price. But they haven’t done that: according to Angoitia, they haven’t been in touch with anybody at Televisa at all. All they’ve visibly done since the ruling came down was go once to the court to ask for a two-week extension, which was granted.

I think at this point that a public apology from JP Morgan to Televisa is the bare minimum that is in order — along with an explanation of what exactly went wrong, and how it was that the bank ended up acting in such spectacularly bad faith. Or maybe they genuinely think that they didn’t do anything wrong. Nobody knows: JPM has gone silent. Which I don’t think is necessarily the best way of redeeming its reputation in this case.

Taibbi’s latest: Wall Street’s Bailout Hustle — Rolling Stone

Do you really want a smartmeter? — Berkeleyside

The Epicurean Dealmaker on Lucas van Praag. Nails it. Skip the NYO piece, go straight to this — TED

On the subject of print media — Why I Hate DC

Early newspaper paywall results suggest that the New York Times plan is doomed — TBI

RenTech Institutional Fund Still Sputtering: now running only $3b of outside money — Finalternatives

JPMorgan holds $3 billion of “model-uncertainty reserves” to cover mishaps caused by quants who have been too clever — Economist

Pretty much everything on TV is filmed in front of a green screen — Kottke

“I can’t understand why someone would invest significant sums in works of art and not want to enjoy seeing them” — Bloomberg

You didn’t think that France would pass up an opportunity to blame Goldman Sachs for the Greece situation — WSJ

Newsweek runs huge ad for $2-bill scam — Consumerist; see also its Ponzi ads

Is it possible to plagiarize a press release? This piece seems to think so — NYO

In the Marketplace letters segment yesterday, Representative Peter DeFazio (D-Oregon) took issue with me saying that infrastructure investment is an extremely expensive way of creating jobs and “costs a good $200,000 per job”. Just as well I didn’t use the $1 million figure here, which I stand by, and which was fact-checked by the Atlantic!

The host, Kai Ryssdal, had no time to read out the letter in full, but has allowed me to reprint it:

Dear Mr. Ryssdal:

I have always enjoyed your show and have enjoyed past opportunities to discuss issues as your guest. However, I was distressed last Friday to hear a purported expert guest, Reuters blogger Felix Salmon, state with great certainty that infrastructure investment is an inefficient jobs creator because those jobs are so expensive to create. To back up his argument he claimed that it costs $200,000 to create one infrastructure job. However, he provided no source for this claim and you failed to challenge his assertion.

The Council of Economic Advisors has estimated that $92,000 in direct government spending creates one job-year, regardless of the sector of the economy. The U.S. Department of Transportation, arguably the most knowledgeable government agency when it comes to transportation spending and the resulting job creation, states that an investment of $35,941 creates one infrastructure-related job. Those two confirmable estimates are a far cry from the dubious $200,000-per-job claim from Mr. Salmon. Unfortunately Mr. Salmon’s assertion went unchallenged while the other guest, Heidi Moore of The Big Money, seemed to tacitly agree with him.

I am particularly sensitive about this issue since the AP ran an article last month on an “analysis” by AP reporters that used incomplete information to draw inaccurate and misleading conclusions about the success of the transportation infrastructure component of the American Recovery and Reinvestment Act (ARRA). The article claimed that “a surge in spending on roads and bridges has had no effect on local unemployment ” based on the reporters’ finding that “local unemployment rates rose and fell regardless of how much stimulus money Washington poured out for transportation.” However, instead of examining the impact of ARRA’s transportation investment on jobs in the transportation industry – an appropriate comparison – the reporters compared the transportation funding, which comprised only 6 percent of spending in the Recovery Act, to the overall unemployment rate. This led to a specious conclusion and ignores the fact that transportation projects funded by ARRA have created or sustained more than 250,000 direct, on-project jobs, with payroll expenditures of $1.3 billion.

I continue to support infrastructure investment as both a justified investment that future generations will benefit from as well as one of the most efficient creators of jobs, contrary to the beliefs of purported experts like Mr. Salmon and the so-called investigative reporters from the AP. I hope you will set the record straight. If you would like to discuss this further you can contact me directly at [redacted].

Sincerely,

Peter A. DeFazio, M.C.

Chairman, Subcommittee on Highways and Transit

(In case you were wondering, the “M.C.” just means Member of Congress.)

I have no dog in DeFazio’s fight with the AP. But his attacks on me are just plain wrong. Infrastructure investments are simply not “one of the most efficient creators of jobs”, no matter how much DeFazio might want them to be, and the sources he cites to back up that claim don’t support it.

What’s at issue here is a ratio: I’m talking about dollars per job created. To get that number, you take the number of dollars spent, and divide it by the number of jobs created. DeFazio, by contrast, subtly tries to change the denominator when he says that “$92,000 in direct government spending creates one job-year”: he’s taking dollars, dividing by jobs created, and then dividing again by the number of years that each job is expected to last.

In the real world, of course, if you spend $300,000 to create a job which lasts three years, then that’s one job created with your $300,000, not three jobs. Only in DC would people attempt to claim that their $300,000 had created three “job-years”.

What’s more, the $92,000 estimate covers government spending in general, not just infrastructure spending. Infrastructure spending gets you low bang for the buck, in terms of job creation, compared to other kinds of spending — my example on the show was arts subsidies. A lot of government spending goes on creating new federal jobs: you get much more job creation per buck that way than you do building infrastructure.

And if you look at the CEA report, you’ll see that it carefully fudges the difference between jobs created, on the one hand, and jobs saved, on the other; in fact, it seems to used “created” and “created or saved” as synonyms. So if you’ve had a job for years, and you’re still in that job, you can still be counted in these job-creation statistics if the government somehow determines that you might not be in that job had the stimulus bill not passed.

The fact is that if you move away from vague country-level statistics and start drilling down to the actual number of jobs created by actual infrastructure projects, you never get anywhere near $92,000 per job. For instance, have a look at the job-creation statistics on this page.

A 5-mile stretch of highway, costing $50 million, creates a total of 79 jobs. That’s over $600,000 per job. Even if you divide that by two on the grounds that it’s a two-year project, that’s still $300,000 per job-year. In railways, a $15 million investment creates 12 jobs — that’s $1.25 million per job, and it’s a one-year project.

I’ve seen similar numbers surrounding hospitals, and higher numbers surrounding nuclear power stations — basically, infrastructure investment is an incredibly inefficient way of creating jobs.

But what of DeFazio’s $35,941 figure? I finally tracked it down to here — a report which does not say that spending $35,941 “creates one infrastructure-related job”. Again, it’s talking job-years, not jobs, but more importantly, it says this:

The FHWA analysis refers to jobs supported by highway investments, this includes ‘new jobs’ to the extent unemployed labor is hired; ‘better jobs’ as currently employed workers move into jobs with better compensation and/or full time positions; and ‘sustained jobs’ as current employees are retained with the expenditure.

This is an even looser definition than “created or saved” — it also includes substantially everybody who just gets a promotion as well, along with that ill-defined definition of “sustained jobs”, comprising people who just stay in the same job they’ve had all along.

Finally, what is DeFazio talking about when he says that “transportation projects funded by ARRA have created or sustained more than 250,000 direct, on-project jobs, with payroll expenditures of $1.3 billion”? Simple division here would seem to imply that each worker is earning no more than $5,200 a year, which can’t be right. But again, look at the footnotes — specifically in this report, which is the source of DeFazio’s statistic:

Consistent with the U.S. Department of Transportation’s reporting requirements, the number of direct jobs is based on direct, on-project full-time-equivalent (FTE) job months. One person working full time or two people working one-half time for one month represents one FTE job month. FTE job months are calculated by dividing cumulative job hours created or sustained by 173 hours (40 hours per week times 52 weeks divided by 12 months = 173 hours).

Yes, for the purposes of this report, the government has calculated the number of jobs created by taking the number of hours worked and dividing by 173. If you pay a man to wield a shovel for one year, working 40 hours a week, then hey, you’ve created 12 jobs! If you pay him overtime, and he works 60 hours a week, then you’ve created 18 jobs! If he keeps on working at that pace for three years, then you’re up to 54 jobs! All from one man earning one paycheck.

So it’s not just DeFazio, then: everybody in the government seems to be happy fudging job-creation statistics, especially by using job-years or even job-months rather than actual jobs, and also by eliding the distinction between jobs created, on the one hand, and jobs improved or saved, on the other. That’s worth remembering, next time you hear a politician kvelling about how the government is creating millions of new jobs.

William Wild has a great little paper up, disputing the widely-accepted idea that the best form of regulatory capital, for banks, is common equity. It isn’t, he explains: shareholders have a strong incentive to maximize leverage and risk. They don’t make banks safer, they make them riskier.

In its place, Wild proposes a form of regulatory capital which, far from having the large potential upside of shares, has no potential upside at all. Essentially, it’s just cash, invested in risk-free assets, throwing off a very modest income stream for its owner, and which can’t be repaid or redeemed. Yet if the bank gets into trouble, all that cash would go towards absorbing losses before there’s any default.

Such capital would not be attractive to investors. But, says Wild, that’s a feature, not a bug:

Irrespective of form, there is no doubt that the required up­front premium or discount would be substantial. The perpetual instrument would provide, at best, an ongoing risk free rate of return but with clearly material levels of risk. To bemoan this high cost is, however, to miss the point. The highest quality form of regulatory capital will be expensive, given what it is required to do. As has been amply demonstrated, cheaper forms of regulatory capital are simply poorer at performing the function.

Yes, says Wild, the high cost of this capital will end up in higher borrowing costs for the people that banks lend to. But that’s also an increase in transparency: the hardest part of any bank’s loan-pricing operation is trying to come up with a cost of existing equity, while the cost of this new instrument will be much more obvious and easy to calculate.

Finally, says Wild, this new instrument is much less pro-cyclical than bank equity. When banks get into trouble, they tend to stop lending, rather than increase their capital by issuing dilutive new stock. And since banks generally get into trouble when the economy is doing badly, the decrease in lending only makes macroeconomic matters worse.

By contrast, Wild’s new form of regulatory capital could be issued much more easily, with a much smaller hit to shareholders — doing so might not even require board approval, if the cost of buying new capital could be incorporated into the terms of some new loan to a customer.

In general, I like the idea of a high-cost, low-return form of bank capital. When it comes to macroprudential regulation, you can’t let market rules like the link between risk and return drive everything.

Update: If the SSRN link doesn’t work, the paper can also be found here.

Ryan Tate has an interesting piece of gossip about a turf war at the NYT over iPad pricing:

On one side, a Times source explains, you have print circulation, which thinks it should control the iPad since it’s just another way to distribute the paper. They’d like to charge $20 to $30 per month for the Times’ forthcoming iPad app, basically the product already demonstrated on stage with Steve Jobs, the source said. Why so much? Because they’re said to be afraid people will cancel the print paper if they can get the same thing on their iPad. Nevermind that iPad distribution comes with none of the paper or delivery costs associated with print, or that there’s already a free electronic edition available to subscribers who cancel.

On the other side, you have the Times’ digital operation, which is pushing to charge $10 per month for the iPad edition and is said to be up in arms over print circulation’s pricing. The digital side will provide interactive content for the iPad no matter what happens, but does not want print circulation to have control of pricing, marketing and other facets of the product. It’s something of an uphill battle since print circ has had control of other e-editions, for example for the Kindle, which are also seen on the digital side as overpriced.

The digital side is right, here: if you want to make a splash in a new medium, you can’t start out at a premium price. The NYT could more or less own news content on the iPad if it made its app free, at least to begin with. But the Print Guys don’t care about that — and since they still bring in the lion’s share of revenues, they still have an enormous amount of clout.

I’ve said in the past that the decision to install a paywall on nytimes.com has much less to do with getting new money from digital properties — indeed, the move might well be revenue-neutral on that front — so much as shoring up the print subscriber base and all the ad revenue associated with it. Essentially, if you can make it a bit more expensive and annoying to read the paper in non-print form, then at the margin some people will either move to a print subscription or will fail to cancel their existing subscription. And those people are very important for NYT revenues.

If you charge $20-30 for the iPad app, however, no one will use it. (Except maybe print subscribers if they get it for free with their print subscription, and I don’t think that the NYT and Apple will let that happen.) The iPad is designed to make surfing the NYT website an absolute joy, so really the fee for the app is only for the marginal extra benefit of having a different way to navigate the paper — it’s not for the content at all.

Once the NYT paywall goes up, however, that changes. So at the very least I think it would make sense for the NYT iPad app to be free until the paywall goes up, and then at that point it can be priced at paywall levels. And if I’m thinking along remotely the same lines as the NYT digital team, that would imply that the paywall is likely to be priced at around $10 per month.

“Since 1979, mortgage brokers in California have had a fiduciary duty to the people they’re providing with home loans” — Time

Oh boy. New York Times launching Qatar edition of ‘T’ — Yahoo

Allow Congress to vote from home states — Washington Examiner

This is brilliant. “Get out if you like Basquiat, Haring, Koons or Lady Gaga” — NYT

How “a 50% accuracy rate in an intelligence story is pretty good” — ProPublica

Marine get blown up three times and then shot in the head, but emerges unscathed — Reuters

Marion Maneker thinks Isaacson’s bio of Steve Jobs might get a $20m advance — TBM

Simmons told Goldman “I have absolutely nothing to offer you” when offered a board seat. But still accepted it — Brown Daily Herald

Demark?! — Kedrosky

The $555,000 Student-Loan Burden: only $100 of one $990 monthly payment is principal — WSJ

Tkacik on traders: “detestable children with a throbbing surplus of misappropriated self-esteem” — Daily Finance

If you’re doing a PhD in Applied Statistics, specialising in sampling theory, how many times do they make you write your dissertation? — Dsquared

Computer screens cause eyestrain–it’s basically B.S. — NYT

“It’s like we finish each other’s legislation” — YouTube

Planet Money got a letter from a correspondent worried about the hardship letter which is required as part of the loan-mod process:

I am now racked with doubt about what I should put into this letter. Should I make it all Oliver Twist-ish and beg for financial scraps from my lender’s table? Should I make it more utilitarian in scope and just lay out the facts? No one told me that there was going to be a talent portion of this pageant of homeowners walking across the stage of shame and I am honestly perplexed by the judges who will look at my essay and judge whether I made a good enough case to defend my life. I am imagining Simon Cowell, Kara DioGuardi, Randy Jackson and Ellen DeGeneres sitting around a desk with my essay and picking it apart while making snide quips about my writing style, how unflattering of a narrative I chose or how I didn’t take economic hardship and make it my own.

I’m honestly scared about losing my house to an essay of all things, I can’t imagine what it’s like for a lot of Americans who can’t use the English language in a meaningful way to have to fill one of these out, but I am frightened by the notion that I now have to apologize and make a case why I should stay in my home, to beg on paper why I should be spared.

I suspect that a large majority of the people who are asked for a hardship letter do not understand what they’re being asked for, and will end up writing something which at best won’t help and at worst will be positively counterproductive. All requests for a hardship letter should explain exactly what they’re looking for, ideally with examples. And anybody who wants to write one should read two classic posts by the late, great Tanta, explaining exactly what you should and shouldn’t do.

In a nutshell, the hardship letter should explain, in English, what you can afford, what you can’t afford, and why. It should not spend much if any time detailing the circumstances by which you ended up in this situation, or look for sympathy, or really talk much about the circumstances of your hardship at all.

The problem is that outside geeky finance blogs, this is not explained well: even some financial advisors don’t really understand it. And as a result, the hardship letter is yet another means by which lenders find a way to avoid helping distressed homeowners. If it’s really necessary, let’s at least give the borrowers the tools they need to write a good one.

If you search the NYT for the phrase “Wall Street Follows European Markets Higher”, you’ll find this morning’s stock report at the top of the results list. Follow the link, and you’ll find the latest version of the report; the headline has changed to “Shares Rise as Worries Over Greece Ease”. But go back to that search-results page, and see how the story is described there:

Traders reacted to strong earnings from Barclays but remained wary about the Greek debt crisis and the response from the European Union.

This morning, then, US stocks were higher because of strong earnings from Barclays, but despite worries about the Greek debt crisis. A couple of hours later, they were higher — or so says the headline — because worries over Greece are easing.

Did US markets go from being worried about Greece to seeing their worries ease about Greece, all in the space of a couple of hours, and all without moving very far? I suppose it’s possible, but there’s no reason to believe in such things. Instead, pace Occam, the easiest and most obvious answer is normally the correct one. Market reports are meaningless; they can and should be ignored.

Are markets worried about Greece? Are they rallying as their worries about Greece ease? The answer is that anthropomorphizing markets in this way is supremely unhelpful. It’s just not often as obviously unhelpful as it was today.

I was off the grid for most of the long weekend, which allowed me to curl up with a pulpy thriller for the first time in many, many years. I’m by no means an expert on the genre, but if you’re a reader of this blog and you like such things then there’s a good chance that Dead Bankers, a novel by Philip Delves Broughton, might be exactly for you; there’s a paperback version here if you don’t have a Kindle.

The thing that makes this book so great to read right now is not the fact that it’s full of the usual thriller ingredients — glamorous protagonists, jet-set lifestyles, money and sex and death and all that. Rather, it’s the thrill of seeing the whole financial crisis fictionalized, with thinly-veiled real-world figures (Hank Paulson, Steve Schwarzman, Nat Rothschild, Chris Hohn, Henry Kravis, Roman Abramovich) being caught up in intrigue and murder and blackmail for stakes in the billions of dollars. I don’t want to give too much away, but suffice to say that no matter how bad your view of these figures is right now, the chances are that Broughton’s is much, much worse. And that the walk-on role given Schwarzman’s crab claws is particularly delicious.

If anything, the problem with this book is that it’s almost got too much real-world material in it: it’s harder to forgive a couple of the more extreme financial contrivances when you know that the author went to Harvard Business School and knows his material so well. But there’s no doubt that the book is fun to read and extremely timely. If you’ve ever fantasized about what would happen if the people who helped create the global financial crisis started getting serially murdered, you should give this book a go.