Felix Salmon


Felix Salmon
Mar 9, 2010 04:21 UTC

Whole Foods shareholders fight back — Reuters

A spectacular fisking of Morgenson, by Bond Girl — Self-evident

Carlo McCormick on Alexandre Arrechea’s wrecking ball in Times Square — Artnet

“Online advertising’s…main purpose is to take the reader away from the content page.” — Monday Note

“Aggregate 2009 fiscal stimulus in the US, adjusted for declining fiscal expenditure in the states, was close to zero” — MR


YOur Monday Note is actually connecting to an article about the future of visual media and superzooming, Felix.

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Bloggers @ Treasury

Felix Salmon
Mar 8, 2010 23:13 UTC

Treasury had its second big blogger meeting today, where Tim Geithner and other Senior Administration Officials (sorry, ground rules) fielded questions from a group of bloggers* which tilted heavily towards the newsier end of the spectrum. The Center for American Progress was there in force, as were the Atlantic and the Huffington Post; the less corporate bloggers from last time round (David Merkel, Tyler Cowen, Yves Smith, Steve Waldman, John Jansen, Michael Panzer, Kid Dynamite) were absent this time.**

I can’t quote what anybody said, even anonymously, but I can tell you that the message from Treasury was that financial reform is not dead in the Senate, and that in fact on some matters, including derivatives reform, there’s real hope that the Senate can put something together that’s even stronger than what the House passed. I’ll believe it when I see it, but the general idea seems to be that so long as something gets out of committee, the final bill might actually have some teeth.

Have we reached the point at which we’ve wasted our crisis? The official Treasury talking point is that we haven’t, and that there’s a window of time through the end of this year in which there’s still some political urgency left; after that, passing something strong will get harder. Again, I think they’re just trying to make the best of a bad situation — that we’re still months away, in a best-case scenario, from a bill actually reaching the president’s desk, and that by then (fingers crossed) the crisis will be more of a distant memory than ever.

I did ask about credit default swaps, in the light of the latest moves by European governments to place blame derivatives and speculators for their debt woes, and got a pretty encouraging answer: it’s pretty clear that Treasury reckons debt woes should be addressed with fiscal measures, and doesn’t think much of banning naked CDS or anything like that.

HuffPo’s Shahien Nasiripour was on great form, and seemed to be much more on top of the Treasury brief than most of the officials we were talking to. He asked a great question about people walking away from their mortgages, and was told that no one in Treasury would ever officially countenance such behavior — but I did get the impression that the actual human beings there, in their personal capacity, might not necessarily agree with the official view. The answer was more “we’d never say that people should walk away” than “we don’t believe that people should ever walk away”.

There was also a little bit of talk about the higher capital requirements for bigger banks. That’s not part of the financial regulatory reform bill, because Treasury already has the authority to implement it unilaterally. The idea is that the exact requirements will be decided upon by the end of this year, in consultation with the G7, and that they will then be phased in over 2011 and 2012, coming into full force in 2013. There’s no real indication of where they’re going to be set, just that they’ll be more stringent than the requirements currently in place.

More generally, I came away with the impression that life at Treasury is not much fun, on a day-to-day basis, and that the stresses of trying to set economic policy in the face of strong opposition from both the banking lobby and the Republican party are wearing on the officials there. And I also came away with a photocopy of John Cassidy’s piece on Geithner in this week’s New Yorker: each of us got given it as some kind of Treasury party favor.

Josh Green has a big Geithner profile too, and now Treasury was inviting us bloggers in, and then there was that Vogue piece — there does seem to be some kind of PR offensive going on. But I’m not nearly enough of a Washington insider to hazard a guess as to who’s responsible, or why they might be doing it. But I’m sure it’s going to be a topic of conversation at the post-meeting dinner.

*Daniel Indiviglio, Megan McArdle, Matthew Yglesias, Patrick Garofalo, Amanda Terkel, John Aravosis, Faiz Shakir, John Amato, James Kwak, Duncan Black, Sam Stein, Shahien Nasiripour, Ryan Grim, David Kurtz, Tim Fernholz, and me.

**Update: It turns out that this was a deliberate policy: no one who came to the last meeting was invited to this one. James Kwak, Megan McArdle, and I all for various reasons couldn’t make the last one, so were invited to this one. But Treasury has a somewhat weird policy of “maximizing touch” and therefore not repeating any blogger.


“But Treasury has a somewhat weird policy of “maximizing touch” and therefore not repeating any blogger.”

Ah, good. So when they get to holding the 92nd such meeting, which cookies should I snarf quickly?

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Job creation datapoints of the day

Felix Salmon
Mar 8, 2010 15:38 UTC

Lending to small businesses is often a spectacularly good way of creating jobs — and almost always creates more jobs per dollar spent than any kind of infrastructure investment. One can argue at length about just how many dollars it costs to create one job in the infrastructure field, but whatever numbers you come up with, they’re going to be much higher than, say, the numbers that Linda Levy, the CEO of Lower East Side People’s Federal Credit Union, gave me for our small-business lending. (I’m on the board there.)

We’ve made 25 small-business loans of late, averaging $17,000 apiece. Linda reckons that on average each loan means the retention of one job, since someone with a job would lose it were it not for the loan. But put that to one side; she also says that the 25 loans, between them, have resulted in 10 brand-new full-time jobs as well. That’s $42,500 per job created, which is a pretty good number.

The insight here is that small businesses don’t tend to hire people who don’t pay for themselves: the small-business loan just gives the necessary push to make that job possible in the first place. And small businesses tend to be more labor-intensive than capital-intensive, so new loans are likely to be transformed into new employment.

Of course, if you look at poorer countries, the dollars-per-job-created figures are more impressive still. Here’s the latest press release from the Sustainable Preservation Initiative, about a new project it’s funding in Peru. With a single grant of $48,000, the SPI is helping to turn an important archeological site into a source of tourism-related cash for a poor local community, thereby creating an enormous incentive to protect that site rather than looting it or building on it. And, of course, creating jobs, too:

Together, the workshop, store and tourism activities are expected to create more than twenty additional jobs during the construction period and ten or more new permanent jobs thereafter.

That’s less than $5,000 per permanent job created — plus 20 construction jobs thrown in, as it were, for free.

In general, if you want to create the maximum number of jobs for the smallest amount of money, the best way of doing so is to provide catalytic capital which helps to give a small business the step-up it needs to sustain new jobs on a permanent basis. The problem is that finding such businesses, and underwriting loans to them if you’re giving out loans rather than grants, is expensive and time-consuming, and it’s hard to scale on a national basis. But when it works, it can work spectacularly well.


I work for a small business finance company. The majority of our clients, use the money for expansion, to manage cashflow, invest in inventory etc… Sometimes the business owner owes back wages or can’t make payroll, so we end up saving job’s, but it is less common that the capital ends up creating jobs.

That being said, we have a comparatively lax approval process, and getting funding from us is generally more expensive than getting a loan from a credit union. It’s possible that business owner’s are more likely to spend credit union loans on hiring additional employees.

I agree with ameyer. In general the availability of capital helps small business grow. Thriving small business, means more jobs in the long run and a more robust economy. Ultimately jobs are created by demand. Well used capital creates demand not jobs.


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Why it’s silly to blame CDS for Greece’s woes

Felix Salmon
Mar 8, 2010 14:40 UTC

Rajiv Sethi has a good blog entry taking issue with my view on credit default swaps, which The Money Demand does an equally good job of answering. But Rajiv then asks this question in the comments:

A firm can live with a fall in stock price that is driven by purchases of naked puts as long as it’s cost of borrowing is not much affected. If there were some objective probability of Greek default, independent of its cost of borrowing, then CDS spreads would be nothing more than lead indicators of this probability. But I’m concerned about multiple equilibria here: the possibility that there may be more than one default probability that, if believed and acted upon, would be self-fulfilling. I wish Salmon would at least consider this possibility.

Rajiv is absolutely right, in principle, that there can be multiple equilibria when it comes to credit spreads: a company or country can find it easy to repay debt when spreads are low, thereby justifying the low spreads, while finding it hard to repay debt when spreads are high, justifying the high spreads. So the question arises: is there any reason to believe that the existence of a CDS market makes it more likely for credit spreads to jump from low to high? And is that what just happened with Greece?

I think the answer to the first question is no, but I’ll admit that’s a gut feeling: I haven’t seen any empirical research on the matter either way. But even if it has happened sometimes in the world of corporate CDS, I very much doubt that it has happened in the world of sovereign CDS. The reason is that, to a first approximation, corporate defaults are a function of ability to pay, while sovereign defaults are much more a function of willingness to pay.

Exhibit A, here, is Brazil, circa 2002, when the markets were terrified about Lula’s upcoming election, and refused to believe that he would follow market-friendly policies. They drove Brazil’s debt spreads up to 2,000bp over Treasuries — five times the worst levels that we’ve seen in Greece — and refused to lend Brazil any new money at any interest rate at all, at least not in dollars. Brazil was therefore facing a liquidity crisis much worse than anything the Greeks are going through right now: it had essentially no ability to roll over its debts as they came due. A default seemed inevitable, and was certainly more than priced in to the bond markets; while sovereign CDS on Brazil did exist at the time, the market was small and was never blamed for Brazil’s bond spreads.

Eventually, Brazil pushed through, never defaulted, and provided spectacular returns for fund managers who had bought near the lows. If spreads of 2,000bp over Treasuries didn’t turn into a self-fulfilling prophecy in Brazil, I don’t think that spreads of 400bp over Bunds are going to make default any more likely in Greece.

Countries have essentially no limit on how much they can tax or cut spending in order to make their debt repayments: just look at Latvia right now. I’m not saying they should always raise taxes and cut spending rather than default, of course — I’m just saying they can. Companies are in a very different boat, and if they can’t find the money to make a payment then they default: it’s as simple as that.

All of which is to say that if you’re looking for a poster-child of a credit forced into a default by speculative shorting in the CDS market, Greece is pretty much the last place you’d look. For one thing, it hasn’t defaulted, and its spreads are low enough that default is not priced in to its bonds. Indeed, it still has healthy access to the primary market. This is a classic case where Occam’s Razor is entirely appropriate: after Greece revealed that its public finances were much worse than anybody had dared fear, its credit spreads widened, and the CDS spreads naturally widened along with the bond spreads. That’s how debt markets work. There’s no need to posit evil speculators to explain what happened.

(Via Thoma)


Made a lot of money back in 2002 on the Lula scare, buying the bonds of non-Brazilian companies that had Brazilian operations, that would not fail even if the Brazilian ops were expropriated. FleetBoston/Santander gapped out, we bought as much as we could, and spreads crashed in quickly after the election.

Would we have made more buying the Brazil government bonds? Yes, much, much more. But the downside of a default was too much to consider — we preferred a safer strategy where we would win with much higher probability.

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Organic wine datapoint of the day

Felix Salmon
Mar 8, 2010 01:39 UTC

Meg Sullivan has a good write-up of a paper by Magali Delmas and Laura Grant, which asks a simple question:

Why would wineries seek costly eco- certification without informing their customers about it?

The answer turns out to be surprisingly simple.

Our results show that eco-labeling has a negative impact on prices in the wine industry, while there is a price premium associated with eco-certification. Overall, certifying wine increases the price by 13%, yet including an eco-label reduces the price by 20%, confirming the negative connotation consumers apply to “green wine.” The premium puzzle for this luxury good is driven by certification rather than its label, a confounding result not previously documented.

This is a huge result: non-labeled organic wines cost 13% more than non-organic wines. But labeled organic wines cost 20% less than non-organic wines. Which implies that if you take the “organic” label off your Californian wine, you can raise its price by more than 40%.

As Sullivan says, this presents an easy and obvious arbitrage for consumers: buy wines which are labeled organic, and you save lots of money.

Essentially, what’s going on here is pretty simple: winemakers know that organic wines taste better, but consumers think that organic wines taste worse. So winemakers make organic wines without telling consumers, and consumers happily pay up for them so long as they don’t know they’re organic. When consumers do know the wine is organic, however, they won’t pay nearly as much.

There’s a problem here with organic wine (no added sulfites) as opposed to wine made from organic grapes. Organic wine does taste better, but it can age badly, and it tends to turn to vinegar much more quickly after the bottle has been opened. If you know that the wine is organic, that isn’t a problem: you just drink it within a few months of buying it, and you don’t try to save it for the following day. But if you don’t know that the wine is organic, you can end up being disappointed in it when you treat it like any wine made with sulfites.

So let’s hope that consumers wise up about organic wine soon, and for the time being, those of us who know the secret can continue to happily play the arbitrage.

(Via Cowen)


The “surprisingly simple” answer here doesn’t answer the question at all.

Wineries don’t go organic because they think sulfites affect taste (it doesn’t, for one thing); in fact sulfites are naturally occurring compounds that exist in most wines, “organic” or not. To be certified organic, a vintner may not ADD additional sulfite.

But that’s the least of certification. To be certified organic, a winemaker may not use pesticides, herbicides, fungicides, chemical fertilizers, or synthetic chemicals of any kind on the vines or in the soil. In fact, depending on the governing body, a vineyard may lose certification when its neighbor uses any of those.

There are many reasons why a winery might go the expense of going organic. In our experience in the Finger Lakes, the small vintners who get certified (some remain unlabelled as such) do so because they care about the environment. So yes, the answer is surprisingly simple.

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Link-phobic bloggers at the NYT and WSJ

Felix Salmon
Mar 8, 2010 00:08 UTC

Clark Hoyt, the NYT’s public editor, has a good post-mortem on l’affaire Zachary Kouwe, and asks whether “the culture of DealBook, the hyper-competitive news blog on which Kouwe worked” was partly to blame for his plagiarism.

It’s a good question, but also a dangerous one, because I fear it will help to keep blogs marginalized at the NYT and elsewhere: is there something inherent to the culture of blogging which breeds a degree of carelessness ill suited to a venerable newspaper?

The answer, in truth, is not that the NYT has gone too far down the bloggish rabbit hole, but rather that it hasn’t gone far enough. Kouwe was a reporter for the newspaper as well as for Dealbook, and as far as I know he has never had a blog of his own before or since. Big mainstream-media publications, when they hire people to write their blogs, generally hire people with no blogging experience at all — something which is both ill-conceived and dangerous. Some journalists make good bloggers; most don’t. So rather than gamble that you’ve found one of the rare exceptions, why not make prior blogging experience a prerequisite for such positions?

The fundamental problem with Kouwe was that when he saw good stories elsewhere, he felt the need to re-report them himself, rather than simply linking to what he had found, as any real blogger would do as a matter of course.

Kouwe’s interview with John Koblin is a portrait of a journalist utterly failing to grok what a blog can do:

Mr. Kouwe says he has never fabricated a story, nor has he knowingly plagiarized. “Basically, there was a minor news story and I thought we needed to have a presence for it on the blog,” he said, referring to DealBook. “In the essence of speed, I’ll look at various wire services and throw it into our back-end publishing system, which is WordPress, and then I’ll go and report it out and make sure all the facts are correct. It’s not like an investigative piece. It’s usually something that comes off a press release, an earnings report, it’s court documents.”

“I’ll go back and rewrite everything,” he continued. “I was stupid and careless and fucked up and thought it was my own stuff, or it somehow slipped in there. I think that’s what probably happened.”

If there’s a minor news story on a trustworthy wire service, and you think you need it on the blog, then link to it. You add no value by rushing — with “essence of speed”, no less — to get the exact same story yourself. You’re a well-paid full-time journalist at the New York Times; there are surely higher and better uses of your valuable time than going back to rewrite a story which already exists elsewhere.

The sin that resulted in Kouwe’s departure from the NYT was that he rewrote badly, and left large chunks of other people’s work unchanged in his own copy. But the true underlying sin was that he spent so much time rewriting in the first place: the beauty of blogs, which exist to link elsewhere, is that he should never have needed to do that at all.

Kouwe once wrote, in an email quoted by Teri Buhl:

Things move so quickly on the Web that citing who had it first is something that is likely going away, especially in the age of blogs.

Anybody who can or would write such a thing has no place working on a blog. If it’s clear who had a story first, then the move into the age of blogs has made it much easier to cite who had it first: blogs and bloggers should be much more generous with their hat-tips and hyperlinks than any print reporter can be.

The problem, here, is that the bloggers at places like the NYT and the WSJ are print reporters, and aren’t really bloggers at heart. I discovered this a couple of weeks ago, after I posted a long and detailed blog entry on the court case between JP Morgan and Mexico’s Cablevisión. The WSJ’s Deal Journal blog didn’t link to it, but a couple of days later, the blog’s lead writer, Michael Corkery, had a piece in the print version of the newspaper which added nothing to the story, quoted the same Cablevisión executive that I had spoken to, and didn’t mention my post at all.

The decision not to cite or link to my blog was made by Dennis Berman, the editor of the WSJ story and a former Deal Journal blogger himself. Corkery and Berman read my piece and spent a couple of days re-reporting it, yet despite the fact that both of them have worked as bloggers, neither felt any need to link to me — or even to link to the court ruling in question. It’s a print-newspaper mindset, and it reveals something important: if even the WSJ’s bloggers eschew obvious links, there’s really no hope that the newspaper will genuinely embrace the power of the web at any point in the foreseeable future.

Both the NYT and the WSJ have built blogs as something of a link ghetto: if you want to find an external hyperlink anywhere on their sites, the only place you’ll have a decent chance of finding one is on the blogs. (There are a few noble and notable exceptions, Frank Rich being one of them: the web version of his column is always full of interesting external links.)

That’s depressing enough — but what’s more depressing still is that even the bloggers at the NYT and WSJ are link-phobic, often preferring to re-report stories found elsewhere, giving no credit to the people who found and reported them first. It’s almost as though they think that linking to a story elsewhere is an admission of defeat, rather than a prime reason why people visit blogs in the first place. It’s a print reporter’s mindset, and it should have no place at Dealbook, Deal Journal, or any other blog.


speaking of bad blog policy, the overzealous folks at ctnews have “archived or suspended” the teri buhl piece you linked to. It’s not cached in google any more either.

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The NYT jumps the CDS shark

Felix Salmon
Mar 7, 2010 01:17 UTC

If Paul Krugman and others want the New York Times to be the paper of record, especially when it comes to matters economic, they’re going to have to do better than this:

Like the credit default swaps that hid Greece’s obligations, the instruments weighing on our municipalities were brought to us by the creative minds of Wall Street.

That’s Gretchen Morgenson, who ought to know better. The derivatives that hid Greece’s obligations were currency swaps, not credit default swaps.

But it gets worse. if you follow Morgenson’s hyperlink, you get to the Times Topics page on credit default swaps: the part of nytimes.com which is trying to compete with Wikipedia in terms of giving a clear overview of topics in the news. Columnists have some leeway to express opinions; the Times Topics pages should be assiduously accurate and impartial. Yet:

These instruments played a pivotal – and controversial – role in the financial crisis in the United States. Now, these swaps are emerging as one of the most powerful and mysterious forces in the crisis shaking Europe.

In essence, a credit default swap is a form of insurance. Its purpose is to make it easier for banks to issue complex debt securities by reducing the risk to purchasers, just like the way the insurance a movie producer takes out on a wayward star makes it easier to raise money for the star’s next picture.

I’m not even going to try to enumerate all the inaccuracies here. Were credit default swaps really pivotal in the U.S. crisis? They certainly brought down AIG, and a couple of smaller monolines. And they made synthetic CDOs possible — without them, the “unfunded super-seniors” which did so much damage to many huge banks could never have existed. But they weren’t pivotal in the sense that absent CDS, the crisis wouldn’t have happened.

But we’ll give the NYT the “pivotal role” bit just because it’s simply untrue that credit default swaps “are emerging as one of the most powerful and mysterious forces in the crisis shaking Europe”. (Even assuming there is a crisis shaking Europe.) In what way, exactly, are CDS emerging as particular powerful in the latest Eurocrisis? CDS volumes on Greek debt are a fraction of the total amount of debt outstanding, and certainly no sovereign has written huge amounts of credit protection, thereby racking up enormous contingent liabilities, in the way that AIG did. In fact, European sovereigns aren’t players in the CDS market at all.

In order to believe that CSD are “shaking Europe”, you have to believe that when one market player buys sovereign credit protection off another market player, in a transaction both sides think they’re going to make money on, finance ministries across the continent start to tremble. It’s silly. Sovereign credit spreads have moved up and down in sometimes-dramatic fashion for decades, long before CDS were even invented. And they will continue to do so even if CDS are banned. And there’s no indication whatsoever that volatility in European credit spreads is any higher now than it would have been absent the CDS market. Indeed, there’s a colorable case that the opposite is true, and that the ability to hedge one’s exposure in the CDS market has made the European sovereign bond market less volatile.

As for the NYT’s idea of the “purpose” of a CDS, all I can say is that I have no idea whatsoever where they got that one from. At least on the CDS/Greece connection, you can see how various European politicians love to be able to blame Goldman Sachs rather than themselves for their woes. But this just makes no sense at all. What “complex debt securities”, exactly, can banks issue more easily if CDS reduce the risk to purchasers? Presumably we’re not talking about simple bonds and loans here, since they’re not complex at all. Is the idea that banks somehow help companies issue debt bundled with CDS insurance? I’ve seen a few monoline wraps in my time, but nothing like that.

In any case, by putting all this garbage on its Times Topics pages, the NYT has pretty much given up any hope of having the tiniest bit of credibility in the debate over CDS. The WSJ might be sensationalist, but I haven’t ever seen it go this bad.

(A big hat-tip here to Anal_yst, who writes faster and meaner than I do, and to @taste_arbitrage.)


Yebbut, imagine how much better the NYT will be when they have a paywall…

Then imagine how much better CDS could be without regulation holding back the worst Yep, you’re getting warmer.

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Iceland says no

Felix Salmon
Mar 6, 2010 22:34 UTC

Does any referendum, ever, get a 98% no vote — especially when it’s a referendum on a bill which was passed by a democratically-elected legislature? The first reaction is that the people have obviously spoken with one voice. But then the question arises: What have they said?

It’s worth noting, here, that the bill they were voting on — that Iceland repay its $5.3 billion debt over 15 years, with 5.5% interest — is no longer the deal being offered by the UK and Holland, which have now offered a two-year interest holiday and a lower interest rate. And it’s also worth noting that the “no” vote was certainly split between people saying “no to this deal” and people saying “no to any deal”.

So maybe this is simply a sensible national negotiating tactic, giving Iceland some small amount of leverage in the run-up to a new deal being hammered out in coming weeks.

Or maybe it’s just in the national character to want to stand up to bullies.


Felix, you could report that Iceland is, in fact, keeping its treaty obligations with the EU. This “deal” is nothing more than the UK whining about how they deserve special treatment. Make no mistake about it: The EU proscribes an FDIC-style of protection for individual accounts.. up to a certain value, and over that everything’s gone. The “deal” described in your article is only sent to the Iceland citizenry because the UK is demanding that Iceland guarantee ONE HUNDRED PERCENT of deposits.

The blame lies with the UK’s politicians, not with Iceland. This is definitively not “Iceland’s debt” — they never agreed to anything of the sort.

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Felix Salmon
Mar 6, 2010 06:49 UTC

Vikram, you’re wrong. the drop in Citi stock was your fault. Not the fault of short sellers — Alphaville

Income inequality chart of the day — EPI

Olbermann out-funnies Jon Stewart on ChatRoulette — AllThingsD

My cousin Sebastian’s photo essay on the Iraq elections — Time

Chittum is good on the consequences of, and reaction to, the silly WSJ hedgie-conspiracy story — CJR