Opinion

Felix Salmon

How JP Morgan treats its clients: scandalously and in bad faith

Felix Salmon
Feb 18, 2010 06:29 UTC

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.

COMMENT

Let me tell you what Morgan Stanley did to me. I put $1,000.00 in a Roth IRA about 10 years ago with them. The market has flexed as everyone is aware, but now MSSB has installed a minimum balance fee, before I noticed it and transferred the account (for which they have a %95.00 closing fee) they had debited the account for all she was worth. I will never EVER use Morgan Stanley Smith Barney for the rest of my days. What they have done is essentially legalized stealing. I wish others with the same issues would come together with me in a class action against them. Robert – Long Beach, MS

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Counterparties

Felix Salmon
Feb 18, 2010 02:56 UTC

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

How the government fudges job statistics

Felix Salmon
Feb 17, 2010 18:45 UTC

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.

COMMENT

@mickeyc,

I appreciate that you’re smart enough to understand the velocity of money, but what you didn’t understand how it is different if the money enters through banks (traditionally how it’s done) vs. entering to a business. I agree that if it enters via a bank, the velocity is pitiful becase they hoard it because of their need to replenish their balance sheets. However, it isn’t the case if you give it to Joe’s Road Construction Company because they’ll disperse it quickly. I’m sorry that you’re not smart enough to figure out the contrast – you’re just a smart ass. How typical for an American.

Ted

Posted by TedS | Report as abusive

High-cost, low-return bank capital

Felix Salmon
Feb 17, 2010 15:15 UTC

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.

COMMENT

As author of this paper I just wanted to make two general responses to the comments.

1. Equity represents the ownership interest in a bank. The purpose of regulatory capital is purely to absorb bank losses. There is no reason they must be the same thing.

2. Some of the comments on pricing and the availability of capital imply a faith in the efficiency/perfection of markets, and the effectiveness of market discipline, that those commenters would probably not defend in other contexts.

At the very least, the fact of the GFC, the need for bank regulation at all, and even the very existence of banks themselves (let alone as such as huge % of GDP), mean there are more than enough inefficiencies and imperfections in the market to justify a view that one form of capital instrument may be more effective than another in meeting a particular set of objectives.

Regards
Will

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Will the NYT paywall be set at $10/month?

Felix Salmon
Feb 17, 2010 14:33 UTC

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.

COMMENT

The source may still be gossip but, if it contains even a grain of truth, this rumour spotlights great divergence at a time when internal conceptual unity is of the essence to the very survival of the newspaper.

Between the print circulation and digital departments at NYT no unified concept, not even a sense of joint purpose appears to exist, other departments meanwhile appearing to have no say in the issue at all.

It’s bad enough that they can’t agree on a pricing model but: how are they supposed to come up with actual benefits to the end-user, without which an NYT customer experience is unlikely to be worth paying – anything – for?

I’m not a big fan of the AT&T model or of anything AT&T does, but NYT could easily co-brand with Apple and build next-generation news cred or, at the very least, outreach to younger readers as Apple’s default news source of record. NYT could function in legacy market penetration in much the same way as Disney does when it distributes on behalf of Apple’s Pixar Studios. The NYT could also do what Google will almost certainly do, and deliver discount coupons as LED barcode to iPad, iPod, iWhatever users for targeted local redemption. There ought to be an immense escalation of values behind an (inevitable?) paywall that so far haven’t been properly singled out, out of apparent lack of self-confidence in the NYT product itself.

Above all, within its own four walls, there are many types of cross-media collaboration between NYT print and digital editions that have yet to be even superficially explored.

The longer NYT clings to its old-economy way of thinking with fragmentation between departments, the greater the risk of failure and rapid extinction. In isolation from a value-added user experience, arguments regarding how much to charge for NYT’s online edition are increasingly moot.

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Counterparties

Felix Salmon
Feb 16, 2010 23:19 UTC

“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

COMMENT

Well, turns out the doctor went to to American Univ. of Caribbean med school. So she couldn’t get into a half-decent medical school in the first place.

Why’s she even in medicine? And do people who go to JHU med school, or any half-decent med school that’s actually in the United States, face he same ridiculous situation? I think not.

Posted by SGKingsley | Report as abusive

The problems with hardship letters

Felix Salmon
Feb 16, 2010 22:44 UTC

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.

COMMENT

IntoTheTardis! could your note be mere fragments of the letter you sent to the Fed and Treasury when you accepted their action in bailing your ass-ets out when the Dow hit 6440?

You are living proof that the tool of capitalism and free markets are not flawed in theory but only when forged and placed in the hands of primates.

Posted by csodak | Report as abusive

Why market reporting should be ignored, part 912

Felix Salmon
Feb 16, 2010 20:17 UTC

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.

COMMENT

The gaming term “flavor text” is useful here. It refers to anything that is included in game materials but doesn’t actually have any bearing on play. For example on the Monopoly card, “You have won second prize in a beauty contest” is the flavor text, which dresses up the actual game action of collecting $10 from the bank.

As stevecrozz says, something in the reporters’ minds makes them want to reduce everything to one or two simple causes. It’s not actually the reporters’ fault, as we all do it. We’d rather think the changes have some simple cause, instead of the real story, so the reporters give us what we want, which is the flavor text chosen from elsewhere in the paper.

And let’s face it, there wouldn’t really be any story otherwise; or rather, it would always amount to the same story, something like “several million people and computer programs made a few billion transactions for their own reasons, the net effect of which was to change the share price of thirty-odd large companies in such a way that one weighted average of those numbers moved down by thirty points.”

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Dead Bankers

Felix Salmon
Feb 16, 2010 17:53 UTC

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.

COMMENT

Rad Dead Bankers last night. Definitively a page turner; I finished reading at 1 am.

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