Felix Salmon


Felix Salmon
Mar 22, 2010 07:45 UTC

The SEC: Still toothless — Bond Girl

You want to move your money. But where to? USAA Bank would be a good choice — BankSimple

Is CLP a prime example of a company which does NOT prepare for fat-tail events? — Alice Schroeder

Every time you make a powerpoint, Edward Tufte kills a kitten — Goetz

Another GS board member steps down: this time it’s The Management Consultant, Rajat Gupta — Marketwatch

(Quick note: blogging’s going to be light Monday, since I’ll be spending most of the day in a UCLA conference room judging magazine articles.)


felix, your Alice Schroder link doesn’t seem to be working.


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Gorton’s triple-A error

Felix Salmon
Mar 22, 2010 07:41 UTC

Beware of academics wielding exclamation marks!! Gary Gorton is a very highly respected professor in the fields of finance and economics, but that doesn’t stop him throwing double-shrieks into his official paper for the US Financial Crisis Inquiry Commission. Here they are, in situ:


The problem here is that while double-A-rated corporate bonds did indeed trade through triple-A-rate corporate bonds at the end of 2008 and beginning of 2009, Gorton’s explanation — even with two exclamation marks attached — is entirely wrong.

Finance Guy gives the long version of the takedown, and it’s well worth reading. But the short version is simple. Gorton thinks that triple-A-rated corporates gapped out because they were being sold off in “fire sales”. But in fact, triple-A-rated corporates in general didn’t gap out at all. General Electric gapped out, for very good reason: as David Merkel recalls, “GE Capital nearly bought the farm in early 2009″ due to the fact that it had a major maturity mismatch and was having difficulty rolling over the short-term liabilities with which it was funding its long-term assets.

In March 2009, GE’s CDS were trading at a spread of more than 1,000bp – and GE’s bonds made up the majority of the index of triple-A commercial bonds. (There are precious few triple-A commercial credits these days, and most of them issue very little in the way of bonds.) So it’s hardly surprising that the triple-A commercial-bond index gapped out — and the reason for it has nothing to do with forced selling, or even with selling at all. Indeed, my guess is that almost no GE bonds were sold during those periods.

If Gorton wants to provide evidence of forced sales of high-rated corporate debt at certain periods of time, he’s going to have to provide some volume figures, rather than trying to extrapolate volumes from price charts. Because the chart he provides simply doesn’t show what he says it shows.

(Incidentally, this is yet another example of the blogosphere being extremely good at fact-checking claims by experts. When done well, everybody wins: see for instance my friend Stefan Geens’s refutation of an article by the economist Craig J. Richardson entitled Visual Evidence of the Cost of Destroying Property Rights which was then picked up by Alex Tabarrok of Marginal Revolution. Once Alex saw Stefan’s post, he prominently updated his post to reflect the newly-revealed facts of the matter. I wonder whether Gorton will do anything similar.)


Eh? I never said there were no trades. I just pointed out that to the first commenter there are ways to obtain spreads even if there are no trades – although obviously they aren’t as good indicators of “true” value as real trades. For that matter, even in the absence of dealer quotes, you could have indicative bid/offer levels.

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The connection between airport security and credit cards

Felix Salmon
Mar 21, 2010 16:59 UTC

While I was waiting in an interminable security line at America’s friendliest airport today, a woman’s voice came over the intercom and scolded us that it was basically our fault that the screening was taking so long, and proceeded in a mildly unintelligible voice (the intercom’s fault, not her own) to go into great detail about exactly what had to be done with both small and large containers of liquids, gels, aerosols, and whatnot. People who didn’t fully understand the liquids-and-gels policy, she said, were causing unnecessary delays for everybody else.

It’s worth remembering, here, that the TSA’s security policies “are designed to be unpredictable” and to change from week to week and from airport to airport. Frequent fliers might eventually learn to navigate this kind of security theater with Zen-like grace, but for most travelers it will always be a confusing and exasperating hassle. If the TSA feels the need to implement confusing policies, then it’s a bit much for its officials to then turn around and blame the public for getting confused.

All of which reminded me of nothing so much as the acres of agate type which accompany checking accounts, credit cards, and pretty much all other consumer products. We consumers never read the small print, but we end up being blamed when we’re dinged by billions of dollars in unexpected fees every month. “It’s not the banks’ fault,” say their apologists: “it’s the consumers’ fault for not keeping a solid grip on their personal finances”.

Well, some people don’t keep a solid grip on their personal finances. That’s simply a fact of life. And if you happen to fall into that particular subset of the US population, there’s no reason that you deserve to pay enormous amounts of money to your bank. It might be the reason that you get dinged so much, but it doesn’t really make it your fault – especially in a world where banks deliberately profit from creating as much complexity and confusion as they possibly can. Why else would they be so opposed to offering plain-vanilla products?


I think a lot of bank fees are the legacy of checking accounts, where passing a bad check was a form of fraud. The current fee structure should be reformed.

Simply trying to take out money when there is none there should be charged, but it should be on the scale of the failed transaction, since there is no one else to pay that fee.

Regulation that forces banks to make their terms clear is vastly preferable to setting dollar limits. Then good banks can compete on fees.

A simple chart explaining what happens when your account is overdrawn is key to making that market work.

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Did Charlie Gasparino get Teri Buhl fired?

Felix Salmon
Mar 20, 2010 17:54 UTC

It’s well known that Charlie Gasparino likes getting into mini-feuds with reporters who write about him, myself included. It’s part of what makes him Charlie, and he’s welcome to call me a twerpy nutjob as much as he likes. But he and former Trader Monthly publisher Randall Lane now seem to have gone far beyond name-calling on blogs: it looks as though they have gone so far as to get a full-time reporter fired from her job, in retaliation for her writing about them.

What’s worse, the reporter in question, Teri Buhl, hasn’t just been fired from her job at Greenwich Time, a Hearst newspaper in Connecticut; her entire archive of blog entries there has disappeared, leaving only a message saying “This blog has been archived or suspended”. It’s as though Hearst wanted not only to fire her, but to make it seem as though they’d never hired her — although there is still an archive of stories she wrote for the newspaper itself.

What caused this vindictive and aggressive behavior towards a reporter who is, after all, now going to be looking for freelance work based on the quality of her clips? To erase all of those clips is harsh punishment indeed, which would only be conceivably justifiable if there were very serious questions indeed over the accuracy of lots of her work.

But in fact, according to Buhl, when she was fired on Thursday by David McCumber, the editor in chief, the reasons he gave for firing her were mainly about the rough quality of her writing, and the fact that it needed a lot of editing. (He also, she says, told her that he didn’t know what was going to happen to her blog archive, or why it was taken down.)

The complaint about writing quality, says Buhl, was very odd indeed, since neither her editor nor McCumber had ever complained to her about such things in the past, let alone indicated that they might be a fireable offense.

I talked briefly today to Buhl’s editor, Jim Zebora, and to McCumber; both of them politely declined to comment, so the only source I have to go on here is Buhl herself. But I’ve been following her stuff for some time, and I consider her to be a very good, very dogged financial reporter, with an intuitive understanding of the blog medium. Nothing I’ve ever seen from her would seem to merit this kind of punishment.

So what happened here? Buhl wrote about Gasparino a couple of times on the blog she was hired to write at the beginning of this year — the blog entries are now down, of course, but for the time being the Google cache can be seen here and here. They weren’t particularly nice about Charlie, and they called him “Gas-bag”, a common nickname which he doesn’t like. Angered, Charlie called up Zebora, Teri’s editor, and accused her of “stalking” him; Zebora, like any good editor, had her back.

But it didn’t end there: Charlie then called Zebora’s boss, McCumber, and made the same complaint. Once again, he didn’t get very far. And then Charlie went further still, calling Steven Swartz, the president of Hearst newspapers, again with the same complaint. (Again, I only know about these calls because their substance was conveyed to Teri, who told me about them, but I do believe her when she says they happened.)

Meanwhile, another media bigwig was getting annoyed by Buhl. Buhl had written a story about Randall Lane for Dealbreaker in July 2009, saying that he would find it difficult to sell the assets of his bankrupt company, Doubledown Media, and that he’d given his cousin access to Doubledown’s subscriber list after promising his subscribers that he would never do such a thing.

Teri wrote about Lane on her Greenwich Time blog in February (Google cache here), and immediately Lane, too, started calling her superiors, complaining that she was “stalking” him.

It’s worth noting here that Buhl used to fact-check Gasparino’s column at Trader Monthly, which Gasparino wrote for Lane: all these people know each other. And if Gasparino was complaining about Buhl being a stalker to various Hearst executives, it’s easy to imagine him telling Lane the whole story after Buhl’s story on Lane came out.

In the wake of writing the story about Lane, Buhl says that she started fielding some very weird accusations from higher ups, saying that she was stalking Lane, or that she had written things in her blog entry which simply weren’t there. Shortly thereafter, she was fired, and although the stalking accusations were brought up, they weren’t cited as the main grounds for dismissal. Needless to say, a single blog entry on a person hardly constitutes stalking, and nobody ever came up with any evidence to support the stalking accusations. And it’s also worth noting that all of Buhl’s blog entries were edited by Zebora before they went up on the site, and that he was happy with everything that was published.

Back in February, the Greenwich Roundup blog published this letter:

Teri Buhl is probably the best thing that has happened in a long time at the Greenwich Time.

Dear Greenwich Roundup,

I hope she doesn’t get fired for stepping on too many toes or copying too much from others!!

Well, she certainly didn’t get fired for copying too much from others — that’s one accusation no one has made. But getting fired for stepping on too many toes? That seems to be exactly what has happened.

Update: I’ve now spoken to another source — someone familiar with the situation who said that Gasparino only complained to Swartz once, when she published a Mapquest link to his house on her blog, which was then taken down. The source says that there were no complaints when Buhl wrote about Gasparino subsequently, and that Gasparino never talked about Buhl to Lane.

Update 2: Buhl has left a pair of comments below, saying that Gasparino made multiple complaints and that my anonymous source is “either unfamilar or not telling the whole truth“. I put the update up just because it moved the story along and made clear that there is a fundamental disagreement here, but I am not saying I believe my anonymous source on this one. Without saying anything about this one in particular, I’m certainly comfortable saying that anonymous sources in general are dangerous and unreliable things, and deserve to be treated with skepticism.

Update 3: Buhl takes to Twitter to add a bit more detail:

I’d like to make a point re publishing Gasbag’s weekend address. My editor had to approve that and it was never mentioned as a reason to fire me. Gasparino had just been bragging about having a second home in Rowyaton, CT at a New Canaan book talk. I actually didn’t think he’d mind. When Gasparino got verbally abusive about the mapquest link to his street-I agreed with my editor it should be taken down. But when he kept calling up the editoral food chain that I was stalking him- I thought that was really odd- besides being untrue. I remember my editor Zebora saying well if Gasparino can get Head of Hearst news ear you will have to be careful what you write about him. Lincoln Millstein, vp of interactive, asked what did you do to Gasparino-what’s between u two-just make sure u dont just write negative abt him. It was just really odd to see how some Hearst ppl were afraid of Gas-Bag. At least both my editors admitted he’s a ‘professional asshole’.


Have you followed lately Teri? Seems she has lost her journalistic acumen in lieu personal fight and malignancy. Too much malice… Follow on her desperate fight against fund managers with her blogs on http://www.teribuhl.com/

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Felix Salmon
Mar 20, 2010 06:07 UTC

Sad I can’t make this — BLDG

A very smart post by Avent: residents of dense neighborhoods fight development just as much as suburbanites — The Bellows

How to pay off your credit card debt: an inspiring true story — Consumerist

Bank Of America Has The Crappiest Credit Card Customers — Consumerist

Steve Ballmer’s head-in-the-sand attitude to Apple — Matthews

Madoff and the Colombo crime family boss — WSJ

Fact: that ink ain’t fake. Warren Buffett really has full sleeves! — NYT

Quite a spat between author and foreword writer — Guardian

Chittum sniffs around Sorkin’s sourcing, doesn’t like what he finds — CJR

The Bar Bouloud “nugget” game for wine geeks — Dr Vino

“Day Trading for Dummies: Yes. Yes, it is.” — Josh.sg

The blameless Spotted Owl

Felix Salmon
Mar 20, 2010 05:25 UTC

There’s a nice empirical post-script to the debate over the economic effects of classifying the Spotted Owl as an endangered species. Freakonomics cites a study putting the effect at $46 billion, but others, including John Berry, who wrote a story on the subject for the Washington Post, think it’s much closer to zero.

And now it seems the Berry side of the argument has some good Freakonomics-style panel OLS regression analysis of the microeconomy of the Pacific Northwest to back up its side of the argument. A new paper by Annabel Kirschner finds that unemployment in the region didn’t go up when the timber industry improved, and it didn’t go down when the timber industry declined — not after you adjust for much more obvious things like the presence of minorities in the area.

From the abstract:

The controversy that ensued with this listing quickly became framed as one of jobs versus the environment, a contention that often characterizes conservation efforts. This contention is closely tied to export-based economic theory which assumes that a rural area’s natural resource commodity base is the most important factor in economic development and community well-being. However, other factors could impact well-being… Industrial restructuring and the presence of minorities are the only significant explanatory variables for poverty. The presence of minorities is the only significant variable for unemployment rates.

That’s industrial restructuring in the timber industry as a whole that we’re talking about here, not the effects of the Spotted Owl decision specifically. Employment in the timber industry in the region generally was in terminal decline whether or not the Spotted Owl was made an endangered species, and the decision to list the owl had zero visible effect either way.

Just don’t expect this particular paper to make it into the next edition of Freakonomics.


There is an obvious need to collect more data in order to find the “real” cost of protecting said owl – which lies somewhere between nothing and billions, this I am certain. But I take some umbrage to the “abstract” statement that “The presence of minorities is the only significant variable for unemployment rates.” (And not simply for it’s racial implications.)

After all, one only need look at the actual cost and very REAL economic losses incurred from protecting the California Delta Smelt last Summer and Fall. There is always at least some economic impact when we legislate to protect our little earthly co-inhabitants.

Perhaps we ought to stop blame shifting – one to another – and recognize that we make choices, those choices have cost – and it’s not always someone else’s fault. Not even the Spotted Owls… well not entirely, perhaps.

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Was BofA pulling Lehman’s balance-sheet tricks?

Felix Salmon
Mar 20, 2010 02:33 UTC

John Hempton is the kind of guy who compares the numbers for quarter-by-quarter average assets in Bank of America’s annual reports with the numbers for total quarter-end assets in its quarterly reports. And guess what — if you look at the year 2006, BofA’s total assets were always substantially lower at the end of the quarter than they were over the course of the quarter as a whole.

Remind you of anyone?

The numbers in question are big: $49 billion in the third quarter of 2006, which is pretty much the same amount of money as Lehman Brothers hid off-balance-sheet at the height of the crisis. And Hempton explicitly says that BofA was using Repo 105 to get these results:

Repo 105 is fraud. Its a lie to investors and rating and regulatory agencies. It was also fraud when BofA did it. But both Lehman and Ken Lewis compartmentalized it as OK. And it was not the fraud that undid them – it was the overweening arrogance that thought this was alright.

Hempton even says he knows where the money went: to Japan, of all places. But I do wonder whether BofA used a foreign subsidiary to perpetrate these deals, as Lehman did, or whether it managed to find a US law firm to certify them kosher. Either way, this is a story which deserves to come out in some detail. Does anybody have Ken Lewis’s phone number?


In banking, as with food, if it looks too good to be kosher, it probably is.

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Greenspan’s error

Felix Salmon
Mar 19, 2010 16:31 UTC

Sam Jones has the clearest, shortest rebuttal of Alan Greenspan’s 66-page Brookings paper that I’ve yet seen. And most impressively, Sam wrote it more than a year ago. While Greenspan is becoming increasingly contrite about his failures of regulatory oversight, he still continues to say that his monetary policy was blameless in the crisis, since during his tenure short-term rates, which the Fed controls, ceased to have much if any effect on mortgage rates, which were the key driver of the global housing bubble.

To which Sam says:

It was, of course, (not solely, but significantly) the Fed’s low interest rates that sparked the conditions necessary for such a disconnect – an event Greenspan waves away with a vague mists of time/”turn of this century” sleight of pen. His conceit is basically that the development of a “well arbitraged global market” was a break with the past that the Fed played no part in.

Therein the problem. Precisely because the Fed should have played a part. It should have recognised the huge macroeconomic changes afoot and it should have sought to navigate them.

Instead of which, the Fed stood passively by, nay, it saw what was happening and it recused itself. Turn Greenspan’s excuse around and it becomes a damning indictment: if the Fed realised in 2004 that it could not use its monetary policy tools to control the rapidly inflating US mortgage market, then why on earth did it do nothing for the next three years?

The problem is that it would have been ideologically very difficult for Greenspan, who always wanted the absolute minimum of government interference in the markets and the world generally, to expand the role of the Fed from that of simply setting short-term interest rates. Even when the Fed’s control of short-term interest rates was clearly inadequate to achieve what it’s the job of a central bank to do.

To make matters worse, the reason that short-term interest rates were increasingly powerless was that Greenspan kept them near zero for so long: he basically created frictionless market conditions in which anything could happen — and anything did. Greenspan’s main problem was that he thought that giving up control was a good thing. And while he’s realized that he was wrong in terms of regulatory policy, he still hasn’t realized how wrong he was in terms of monetary policy as well.


The Fed did indeed realize the impending doom facing the economy, as did the American Congress.

That is precisely why after decades of no significant changes in bankruptcy law at the federal level, Congress enacted sweeping changes that benefitted the lender a couple years before the economy collapsed.

Posted by breezinthru | Report as abusive

Is there an alternative to exchange-traded CDS?

Felix Salmon
Mar 19, 2010 15:47 UTC

I just had an interesting conversation with a senior market participant about the optimal way to structure and regulate the CDS market, compared to the proposal which has now been put forward by Chris Dodd. Essentially, there are two options here: you can either consolidate all the different functions (trading, matching, confirmation, clearing, information warehousing) onto a handful of big global exchanges — or you can disaggregate those functions and allow competition in each of them separately.

It’s pretty obvious that the exchanges, especially the big ones like the CME Group, would love to see everything consolidated with them* (Update: The CME says this isn’t true, see below.) And they’re in luck: that’s exactly what we see in the Dodd bill. I’m sure that makes for happy pillow talk in the Dodd household: Dodd’s wife, Jackie Clegg, is a director of the CME, which paid her $153,219 in 2009; she also owns shares in the company worth about $235,000. (The CME makes no mention of her husband on its website or in its SEC filings, despite the fact that he’s surely a big part of the reason why she has the position.)

That said, consolidating on exchanges is a relatively simple and elegant solution. The alternative is to allow a number of different companies to compete at each stage in the process: trading platforms (Tradeweb, MarketAxess, that kind of thing); matching and confirmation services like ICE Link; and clearing and settlement companies like ICE Trust or LCH.Clearnet. Once all that was done, all of the data would be aggregated into a common standard and warehoused at DTCC and possibly somewhere else as well; the systemic risk regulator would keep a close eye on all that data, and everybody else could too, since it would be made public in a form where new analytics could be applied to it very easily.

The risk with the exchange-based solution is that the exchanges will get protective over their data, and while they’ll surely show it to the systemic risk regulator, the risk regulator will be the only one aggregating the data, and it’ll be harder for the public to get access to it. And, of course, there will be a relatively small number of exchanges trading CDS; as such, the winners in that market — most likely including the CME — will probably end up making windfall profits off everybody else, thanks to their greater pricing power.

On the other hand, the risk with breaking up the different functions of the exchanges is that they’ll end up being dispersed around the country and the world, with the effect that many of them are likely to be pretty free of regulatory oversight. I’m not sure how much of a problem that is, if all the data is publicly warehoused, but conceptually it’s certainly easier for the SEC and CFTC to keep a close eye on the CME, and for their European counterparts to oversee Eurex, than it is for a disparate group of international regulators to try to keep up with a rapidly-evolving set of obscure market facilitators.

My feeling is that while I have no particular love for the exchanges, they’re clearly not part of the problem here, and that if they take over large chunks of the CDS market, little if any harm will be done. I would, however, ask them to report all their data to the DTCC for warehousing, and then require the DTCC to make that data available in a publicly-tractable form. It might not be the solution that today’s big CDS players most like — they’re likely to lose profits to the exchanges — but I’m not going to shed any tears for them. In theory, an alternative system might work. But in practice, moving everything to exchanges is much easier to grasp and implement.

Update: CME spokeswoman Anita Liskey tells me that “we don’t offer trading for CDS, only clearing services”, and sends over this statement:

“We do not believe that clearing should be mandated for all over-the-counter products because it exposes a clearinghouse  to undo risk.  In addition, many contracts do not lend themselves to central counter party clearing because of the complexity of their pricing.  We have publicly stated that mandated OTC clearing does not further the stated goals to bring transparency, integrity and stability to OTC derivatives markets.   Clearing should be encouraged through appropriate capital charges and tailored regulation for participating swap dealers.”


You don’t deal with industrial organization issues through infrastructural design. Leave that up to anti-trust, or to taxing systemically important market participants. The alignment of interests between an infrastructure’s owners and their users is actually helpful when things get rough. No one else has the depth of pockets or information to be able to manage these things properly – including most small to mid-size brokers.

There’s also an assumption here that an exchange is a viable solution. Perhaps for the most liquid stuff it could be. But there’s more to liquidity than just squeezing spreads – there’s also the resilience of liquidity. When times get tough participants have less incentives to show their hand through an exchange-traded market, and there’s a real risk of discontinuity and market failure.

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