Felix Salmon

Kate Kelly and Dennis Berman to CNBC? — Mediabistro

The RSS debate, cont: Jack Shafer piles on — Slate

The full Lehman report — Jenner

The Breslin’s forkage fee — NYT

Was the runaway Prius a fake? — Jalopnik

NYU Law Professor Charged With Criminal Libel in France for Refusing to Take Down Critical Book Review — CIT Media Law

All 119 words banned by Tribune’s CEO, in one sentence — NPR

Kevin Drum has a couple of good questions about credit default swaps, and the final link in his post literally made me laugh out loud, so I’ll do my best to answer him.

If the bond issuer does default, and there are a hundred speculators who own CDS protection on one of its bond, you’ve gone from, say, a $10 million event to a $1 billion event. Basically, when things go bad — and eventually they always do — widespread CDS protection can cause things to spiral far more out of control than they would otherwise.

And what’s the upside of allowing this? The argument I hear most often is that broad market trading of CDS provides an efficient price discovery mechanism for the underlying securities. Moody’s may rate that bond AA, but the CDS market will tell you what traders really think.

I guess I have two questions about that. First, does it really work? Are CDS marks really reliable indicators of creditworthiness? That’s debatable. Second, even if they are, is this a big enough benefit to make the instability risk worth it?

The first thing to do here is to dispute the premise. Yes, things will always go bad. But when things go bad, is it true that “widespread CDS protection can cause things to spiral far more out of control than they would otherwise”? Kevin is honest enough to note that when things went bad in 2008, that didn’t happen. And conceptually, it’s not the existence of credit protection which is a problem. People who have bought protection make money, they’re happy. The problem is the people on the other side of the trade — the people who wrote the CDS, not the people who bought them.

Indeed, that’s exactly what we saw in 2008: the people who bought lots of credit protection made lots of money, while the big losers were triple-A-rated companies like AIG and MBIA which had written the protection and which, by dint of being triple-A, didn’t have to put up collateral against the CDS which they sold.

Today, there isn’t a company in the world — not even Berkshire Hathaway — which can write CDS protection without having to put up collateral. And even if credit default swaps aren’t moved to an exchange, they will likely move towards a much more centralized clearing mechanism, which will institutionalize collateral and margin calls and make sudden bankruptcies even less likely than they are now.

But the most important thing to note is that the true villain here is not CDS so much as it is leverage. If I buy a bond and it goes to zero, I lose money, but there are few systemic consequences. If I’m a leveraged institution, however, and I bought that bond with borrowed money, then the consequences can be dire. Writing CDS protection is essentially the same as buying a bond, and writing CDS protection while putting no money down — as AIG did — is just as dangerous as buying a bond on zero margin.

So now ask yourself exactly what’s going on in Kevin’s hypothetical, where there are a hundred speculators who own CDS protection on a single credit. As we’ve seen, the speculators who bought protection don’t pose a systemic risk, although they might alter the likelihood of a bankruptcy filing. The real risk comes from the people who are net sellers of protection on that credit. And who might those be?

Think about what’s going on here, for a second: we have a lot of speculators making a negative-carry trade, where they pay regular coupon-like insurance premiums and get paid a lump sum in the event of default. Negative-carry trades are almost exclusively the province of hedge funds: long-only investors almost never make them. Indeed, it’s the long-only investors who are on the other side of the trade — institutional investors who wrote CDS rather than buying bonds, because the yield was higher or because they simply couldn’t locate bonds to buy, or just because CDS are more liquid. For those investors, CDS are bond substitutes, and they’ll buy a CDS for the full cash value of the amount being protected, just as they would a bond. They’re not leveraged.

The middlemen in the picture, the broker-dealers, are leveraged, but they are nearly always pretty flat when it comes to their net CDS positions. Insofar as there’s a big net position in the market, with one group of people net buyers of protection and another net sellers, the net sellers of protection — the ones posing the systemic risk — are unlikely to be leveraged, and if they’re not leveraged, nothing spirals out of control.

Sensible CDS regulation can and should, then, put tight limits on how much leverage a net seller of credit protection can be allowed to have. And by all means, if you want to keep things symmetrical, apply the same limits on how much leverage a bond investor can be allowed to have. But the CDS market is more dangerous, just because it’s so much bigger.

As to Kevin’s two questions, the first asks what the upside of the CDS market is, and the answer is simply liquidity — which is much more than just price discovery. The CDS market worked, during the crisis, even as the market in corporate bonds failed: bonds weren’t pricing, and CDS were. Selling bonds is hard and opaque — that’s why bond traders make so much money. Buying protection on bonds you own is cheaper and easier and much more transparent. And don’t even get me started on loans. People will invest in bonds if they believe they can exit their positions when they want. And the existence of CDS makes exiting a bond position much easier than it ever used to be — which in turn makes the bond market much more efficient. If you banned CDS, the price of credit would surely rise.

And Kevin’s second question is whether this benefit outweighs what he calls “the instability risk”. I think it does, just because the instability risk is hard to quantify and easy to regulate. The bellyaching of the Greeks notwithstanding, there’s no real evidence that the existence of the CDS market makes credit markets more volatile. Indeed, I believe that it can keep primary credit markets open when otherwise they would be closed. So let’s consider the upside of the CDS market before banning it for no good reason.

Update: Kevin, clever chap that he is, sees a flaw in this argument:

To a large extent, the superior liquidity and price discovery of the CDS market is attributable to its greater size, which in turn is attributable to leverage. If you tightly limit leverage, don’t you also constrain the size of the CDS market? And if you do that, will it still provide any noticeable liquidity benefits compared to the market in the underlying securities themselves?

I have to admit I was wondering this myself, as I left the office this evening. And really, there’s only one way to find out. But I suspect that CDS will always be significantly more liquid than the bond market, just because most bonds are buy-and-hold investments which are very difficult to find or sell on the open market. You will always be able to find a broker-dealer willing to quote you a price on a credit default swap, because they can simply conjure one out of thin air by writing a contract with you. If you want to find a specific corporate bond, however, that can be all but impossible most of the time, and in any case it might well be trading well above par, or have some other attribute which makes it much less attractive than a CDS of the same duration. People who are used to the stock market are always shocked at the illiquidity and opacity of the bond market: insofar as credit default swaps are a positive financial innovation, it’s because they managed to bring equity-like liquidity and transparency to a market in desperate need of them.

Many thanks to Tim Fernholz, of The American Prospect, and Taylor Griffin, of Hamilton Place Strategies, for helping me out via IM this afternoon to explain to me what on earth is going on with Chris Dodd and the financial regulatory reform bill. The Reuters headline says that talks have failed, and that Dodd is going solo, but in fact it’s not quite as bleak as that.

The important context to bear in mind here is that Dodd, in Griffin’s words, “is staring down the barrel of a April recess and knows he needs to get something moving”. Or, as Simon Johnson puts it, “a week or two lost now can derail completely opportunity for reform along any dimension”. It’s all well and good for Dodd to negotiate with Corker in good faith, but if the talks are dragging out far too long, it makes sense for Dodd to put some deadlines on negotiations with the Republicans. And the way that he’s doing that is by taking a bill to the full committee, and allowing just one week for it to sit there in markup.

“I think the most important thing about the story is that putting a deadline on these talks could sharpen everyone involved’s focus on getting a workable bill,” says Fernholz, “because there are plenty of Democrats who fear that Republicans are just trying to drag out negotiations”.

The worst-case scenario at that point is that not a single Republican votes for the bill in committee, the Dodd bill passes the committee on a party-line majority vote, and then Dodd hopes that someone, somewhere (Olympia Snowe? Susan Collins? Scott Brown? George Voinovich?) will break ranks with the Republicans and provide the 60th vote necessary to get the bill through the full Senate.

But that’s a long shot: Griffin says that the Republicans will stay unified on this, especially now that they’re angry at the Democrats over the reconciliation of the healthcare bill. “I don’t see it passing with one Republican,” he says: either it has some important measure of Republican support, or it fails.

Fernholz points out that Democrats, too, want decent Republican support, saying that “moderate Democrats on the committee are leery of portions of the bill and would prefer to have Republican cover”: his datapoint here is that of the 13 Democrats on the committee, only 7 have gone on the record saying they’d support an independent CFPA.

So Dodd’s going to design his bill to have the best possible chance of getting Republican support once it comes out of markup, while still being acceptable to the left wing of the Democratic party. It’s a hard line to walk, to be sure. Will the Republicans play along? Griffin says that “some people on the Hill that I’ve talked with think that a bipartisan compromise might have been reached by Monday”; he also thinks that derivatives reform will probably turn out to be a bigger sticking point than the CFPA, where Dodd and Corker were very close.

What this move by Dodd certainly does is move the focus of attention on the Republican side away from Corker and back onto Shelby, who’s being very quiet right now and who holds a lot of cards. If he really wants the bill to die, it will probably die, although Corker could still end up supporting the bill, providing the crucial 60th vote, and bringing a few other Senators along with him.

In any case, financial reform is not dead yet: we’ll have a much better idea at the end of next week what its real chances are.

And while I’m on the subject, one idea: there seems to be a lot of debate about who should be regulated by the CFPA and who shouldn’t; at the moment it seems that payday lenders, auto lenders, and others might well get carved out. But might they not have the ability to voluntarily submit to CFPA oversight? Of course it’s not as good a solution as forcing them into compliance. But some might do it, and an official CFPA-compliant badge might well be a competitive advantage in the market. Anyway, just an idea.

Initial reaction to my Climate Desk bleg has been pretty interesting. I’m looking for companies which are taking a serious strategic look at managing the risks of climate change, and so far I haven’t really found any. The on-topic responses I have received have generally fallen into two categories: “look at the reinsurers”, and “look at us, we’re doing a great job reducing our carbon emissions”.

The carbon-emissions story is basically about positioning a company for present and future emissions regulation, as well as doing one’s part to try to prevent the worst excesses of climate change itself. But it doesn’t really help in terms of positioning a company for whatever effects of climate change do come.

As for the reinsurers, they are certainly looking a lot at climate change, especially insofar as they’re involved in catastrophe reinsurance: hurricanes, in particular, are associated with a rise in sea-surface temperatures. So as the global climate gets warmer, it makes sense for hurricane reinsurance premia to rise. I haven’t yet talked to any reinsurers directly, or even read their reports — if anybody has some useful links for me, I’d be eternally grateful. But outside of hurricanes, it seems that the effects of climate change on reinsurance rates are pretty small in areas like crop or life reinsurance.

More generally, pricing tail risks is what reinsurers do — it’s pretty much the core part of their job. When they look at the possible effects of climate change, they’re not making a strategic decision about the long-term future and structure of their business: they’re just pricing pretty short-term insurance contracts, like they’ve always done, using as much information as they have to guide them.

It’s important to remember, here, that reinsurance contracts are generally only a year or two in length — in that respect, reinsurers don’t really care all that much, when they’re pricing policies today, about what the global climate is going to look like in 30 years’ time. As and when climate change happens, reinsurers can react to it: if there are areas of the UK with lots of flood-insurance policies and sea levels start rising, for instance, there will be more than enough time for reinsurers to react by jacking up flood reinsurance rates or simply refusing to offer that product at all.

One other group of people has a long-term time horizon and is very alert to tail risks, and that’s institutional investors. To that end, a large group of buy-side firms, along with Mercer and the World Bank, has launched a climate change strategic asset allocation study designed “to identify potential new investment opportunities and possible future risks related to climate change”.

That’s a very good and worthy idea. But it does seem to me that risk management, when it comes to climate change, is best done at the corporate level, rather than at the shareholder level. If a big agricultural company risks running out of water, for instance, then it might make sense to be wary of its stock, or to worry about tail risks there. But it would make much more sense for the company itself to put in place a strategy for making sure that it will continue to be able to produce large amounts of food, even in the event that the environment in general, and local water access in particular, starts to deteriorate. That’s the kind of thing I’m really looking for, and that’s the kind of thing that so far I haven’t really found.

I’m a big admirer of David Lazarus, of the LA Times, but I think he was a bit credulous on Monday when he complained about the downside of closing credit cards.

He’s right to slam Citigroup, of course, for slapping a $60 annual fee on a lot of credit cards which had previously been free. But many of those cardholders have the option of transferring their balances somewhere without such a big fee, and closing the newly-expensive Citi card. And that’s exactly what they should do. This part of Lazarus’s article is, I think, misleading:

So close down the account. Easy, right?

Not exactly…

Linda Sherry, a spokeswoman for the advocacy group Consumer Action, said canceling an older card that reflects long-term creditworthiness can indeed have an impact on your credit score.

“You might see your FICO score go down by as much as 100 points,” she said.

The FICO website is helpful on this front, and does say that closing credit cards might not improve your FICO score, since it’s likely to decrease your total available credit and therefore increase your credit utilization ratio.

But Craig Watts, director of public affairs at FICO, emailed me this statement:

It is extremely unlikely that closing a credit card could reduce anyone’s FICO score by 100 points. Closing a credit card may have no effect at all on a person’s score, or it may cause their score to lose points. Any change in score is caused by other information that is present on the person’s credit report, particularly the level of the person’s balances on other credit cards compared to those accounts’ credit limits.

In other words, if closing one card means that you’re much closer to maxing out your remaining cards, then your score might lose some points — but it’s very unlikely to go down by a quantum as huge as 100 points. Your credit utilization ratio is part of your FICO score, yes, but it’s not that big a part.

Turan Bali, Stephen Brown, and Mustafa Caglayan have a new paper out with an interesting result:

The two most important findings from this study are summarized as follows: (i) hedge funds with higher exposure to default risk premium in the past month generate higher returns in the following month; (ii) hedge funds with lower exposure to inflation in the past month generate higher returns in the following month.

The results are pretty significant. Here, “DEF beta” means exposure to default risk, while “INF beta” means exposure to inflation risk:

On average, between the period 1997 – 2008, hedge funds in the highest DEF beta quintile generate 5.6% more annual raw returns compared to funds in the lowest DEF beta quintile. Similarly, the average annual raw returns of funds in the lowest INF beta quintile are 4.7% higher than the average annual raw returns of funds in the highest INF beta quintile.

These results, interestingly, held both in the run-up to the crisis and during the crisis: they seem to hold in both booms and busts. But the paper doesn’t speculate much on the reasons for these results.

My feeling is that if you did a similar study on mutual funds, you’d get very similar results. Professional investors, in recent decades, have used nominal returns, not real returns, as their benchmark: if you’re comparing returns from year to year, you look at nominal returns, or nominal outperformance, rather than the inflation-adjusted figures. What’s more, hedge-fund and mutual-fund management and success fees are also based on nominal quantities.

What’s more, hedge funds in particular tend to be traders, who make short-term and medium-term bets on the performance of individual securities which rise and fall based on perceived default risk. A successful trader can make good money that way. Both inflation and inflation expectations are much harder to trade, and they act more as a hidden tax on hedge-fund profits than as an opportunity to make money.

All of which raises the question, of course: which funds (both hedge and mutual) have the highest exposure to inflation risk, and the lowest exposure to default risk? Those funds might be good ones to avoid.

Is Twitter becoming less social and more of a news feed, where people just follow celebrities rather than interacting with their friends? Julianne Pepitone of CNN Money would have you think so:

A whopping 73% of Twitter accounts have tweeted fewer than 10 times according to a new report from Barracuda Networks, a Web security company.

It seems that Twitter is becoming more of a news feed than a social network, said Paul Judge, author of the report and chief research officer at Barracuda. And that raises questions about its growth potential, as well as how the Internet phenomenon will make money.

But the indirect quote is telling, here, because my guess is that Judge never said what Pepitone says that he said. I’m pretty sure of this, because if you look at his long blog entry about the report, the trends are clear, and are showing that Twitter is becoming more social over time:

26 percent of users now have at least (≥) 10 followers, showing a 30 percent increase since June when only 20 percent of users had at least (≥) 10 followers.

40 percent of users are following at least (≥) 10 user accounts, showing an 18 percent increase since June.

27 percent of users have tweeted 10 times or more, showing a 29 percent increase since June.

These numbers might be higher or lower than your intuition, but the one thing that’s clear is that they’re rising, and that they’re rising at pretty substantial annual growth rates. Meanwhile, the percentage of users who have not tweeted since they created an account has fallen, to 34% in December from 37% in June. So why the weird negative spin from Pepitone? Is it ‘cos she only has 58 followers herself?

Binya Appelbaum has the latest news on the shape of the consumer financial protection legislation which is likely to come out of the Senate:

Payday lenders, pawnbrokers, car dealers and other companies that make loans but do not hold bank charters would be shielded from the scrutiny of a proposed federal consumer protection regulator under the terms of a tentative compromise between senators who are attempting to craft a bipartisan bill.

Under the proposal, the regulator would hold broad authority to write rules protecting borrowers, but officials would make regular compliance checks only at banks and, for the first time, at mortgage lenders, a step that still would exclude some of the nation’s largest and most controversial lending industries.

The first response to this is, of course, outrage that Corker, who has received substantial campaign donations from payday lenders, could singlehandedly manage to remove them from CFPA oversight.

But on the other hand, it does seem to mean that some kind of CFPA might make it into the Senate and then to reconciliation. And I’m holding out a tiny bit of hope that the CFPA might still be able to write rules governing payday lenders, even if it can’t conduct compliance checks with them or otherwise directly enforce those rules. That would still be an improvement on what we’ve got right now, especially if local state AGs could use those rules to prosecute payday lenders which were in violation.

As for the CFPA being “housed” in the Fed, it’s still far from clear what that means in practice and how much de facto independence it will have.

So overall I’m still in wait-and-see mode: while I’m not happy about the direction these negotiations are headed in, I’ve been of the opinion that the CFPA has been effectively gutted ever since the House removed the mandate that banks offer plain-vanilla products alongside their complicated ones. The Senate is really just chipping away at an institution which was always going to be much weaker than it should be.

Carlos Slim is #1 on the Forbes wealthiest list, with $53.5 billion, up $18.5 billion in 12 months — Forbes

Alex Ross with the definitive take on applause between movements — RPS (Alex and I have been blogging this since at least 2003)

Google Maps Finally Adds Bike Routes — Wired

Fox is pushing back the release of Oliver Stone’s “Wall Street: Money Never Sleeps” from April 23 to Sept. 24 — Variety

Reuters social media guidelines — Reuters

Investors Need Climate Information to Make Decisions — American Progress

Don’t cork up consumer financial protection! — Prospect

Yesterday, Gawker Media truncated its RSS feeds, and former Gawker editorial honcho Lockhart Steele immediately tweeted that “the only thing that excited me about Gawker’s RSS truncation was picturing @felixsalmon’s head explode when he heard the news”. I’m well known as a vocal defender of full RSS feeds, largely because of a 1,500-word blog entry I wrote on the subject back in October 2007. And so I asked Gawker’s owner, Nick Denton, what he was doing.

Nick pointed me to a comment he left at Lifehacker saying that “this was a commercial decision”, and also this one:

Gawker Media is an ad-supported company. RSS ads have never realized their potential. At the same time we sell plenty of ads on our website. So, yes, it is in our interest for people to click through if enticed by an excerpt.

(He also published the address of Gawker’s full VIP feed, which was nice of him, and which put paid to any theories that the truncation was due to worries about people stealing his content.)

In theory, I understand where Nick is coming from here. If people click through from RSS to the website, that generates more revenue for the company, especially since no one ever got rich selling ads in RSS feeds. But in practice, there’s no evidence at all that truncating your RSS feeds results in higher traffic, and indeed there’s quite a strong case to be made that it works the other way around, and that switching from truncated feeds to full feeds is the thing which results in higher traffic.

Not all the arguments I made back in 2007 are quite as strong today: back then, RSS was used largely by people who had their own sites and could drive traffic, while now, in the age of Google Reader, it’s moved a tiny bit downmarket, even as the key people you want linking to you use RSS less and Twitter more.

But the fact is that pretty much the only time I read Gawker blog entries is when they turn up in a search of my RSS feeds, and they’re much more likely to do that if the full blog entry is there than if there’s only an excerpt.

At heart, my argument for full RSS feeds is similar to my argument against a NYT paywall, and neither argument has anything to do with a sense of entitlement on my part. Instead, both are simply bad business decisions. If you truncate your RSS feeds, you’ll get less traffic than you had with full feeds, and you’ll alienate an important minority of your audience. And if you implement a paywall, the increase in subscription revenues will fail to offset the decrease in ad revenues, even as you’ll alienate lots of your audience. So neither makes commercial sense.

I suspect that Nick’s move to truncate his RSS feeds was not in fact “a commercial decision” at all — even if traffic does increase a little, it won’t be by enough to move the needle. Instead, I think it’s connected to his recent reshuffle at the top of the Gawker masthead, when he replaced Gabriel Snyder with Remy Stern. That move was largely an attempt to move Gawker away from being a big blog and towards competing directly with the likes of nytimes.com for serious online traffic. And while it’s pretty standard for blogs of all sizes to have full RSS feeds, it’s also very uncommon for big news sites to have full RSS feeds.

There might be a reason for that fact, although if there is I don’t really understand it. But I do see this move as a signal that Denton is exiting the blogosphere and that he has his sights set on higher ambitions. Expect his next move to be to rejigger the home pages of Gawker and his other blogs so that the big featured stories at the top get bigger, and the amount of real estate devoted to a simple reverse-chronological listing of all blog entries gets ever smaller. The NYT has Times Wire, if you want a reverse-chronological bloggish content stream, but it’s buried within the site and is something of an afterthought. Gawker is likely to be moving in a similar direction: towards an edited home page and away from an automatically-generated blog page. It’s the beginning of the end of an era.

Update: Matt McAlister confirms that after the Guardian moved to full RSS feeds in late 2008, its web traffic grew dramatically, from 25 million to 37 million monthly uniques.

Update 2: Denton tweets that I’m right about the redesign, adding that “there’s no connection in my mind between our broader ambition and the RSS change”.

Total credit-card debt outstanding dropped by $93 billion, or almost 10%, over the course of 2009. Is that cause for celebration, and evidence that U.S. households are finally getting their act together when it comes to deleveraging their personal finances? No. A fascinating spreadsheet from CardHub breaks that number down by looking at two variables: time, on the one hand, and charge-offs, on the other.

It turns out that while total debt outstanding dropped by $93 billion, charge-offs added up to $83 billion — which means that only 10% of the decrease in credit card debt — less than $10 billion — was due to people actually paying down their balances.

What’s more, in the first quarter of 2009 alone, total credit card debt decreased by $64.5 billion, of which only $17.5 billion was charge-offs. If you just look at the period from April through December 2009, the decrease in total credit card debt was a mere $29 billion, while charge-offs added up to $66 billion. Consumers weren’t paying down their credit cards at all: they were racking up billions of dollars in new debt, and defaulting on the old stuff.

But enough numbers, let’s come up with a narrative here. The height of the financial and economic crisis was, in hindsight, the last quarter of 2008 and the first quarter of 2009. There was chaos in the markets, panic in the air, and lots of talk of a “new frugality”: people being embarrassed to be seen shopping even if they had the money. So they spent less, and started paying down their credit cards.

Then two things happened: the panic started wearing off, and unemployment continued to rise. The urgency of paying down debt ebbed, even as spending naturally continued in the face of country-wide layoffs. And as a result, credit card debt continued its natural upward rise.

So what’s necessary to bring U.S. credit card debt down from its current level of almost a trillion dollars? Over much of the past decade, it was naturally kept in check by people converting it into home equity loans — but obviously that’s not happening much any more. (And in general it’s a bad idea to turn a credit card debt into something where you can lose your home if you default.)

One natural prerequisite, I think, is going to be a decline in the unemployment rate — people tend not to pay down their credit card debts when they’re unemployed, and not all of their debts end up getting written off.

But we’re also going to need a change in the national mood, and a rediscovery of the virtues of thrift which seemed resurgent for such a short time. Frankly, that’s not going to happen. And the new credit card rules won’t help: by making it cheaper to have and service credit card debt, they also make it more attractive to do that.

Which leaves one last hope: that America’s biggest banks will unilaterally cut down on their credit card lending, especially now that it’s less profitable for them. That already seems to be happening at big banks like JP Morgan Chase. But it’s far too early to consider it a trend. Partly because the alternative — personal loans — is generally less profitable than even the most legally constrained credit card.

What to make of BofA’s decision to abolish overdraft fees on debit-card purchases? Josh Duboff says it’s “kind of undeniably great”, James Kwak says it’s a good thing, and the Center for Responsible Lending says that it’s a GOOD thing. Only Kevin Drum spies a fly in the ointment:

It just doesn’t make sense to eliminate overdraft protection entirely. Other alternatives are simpler, better for consumers, and more profitable for Bank of America. Something just doesn’t smell right here.

Kevin’s hit on something important here: while this is undoubtedly an improvement on the status quo ante, it’s far from optimal.

What I’d love to see, maybe from BankSimple, when it finally launches, is a UK-style overdraft. This has two main features which one almost never sees in the US:

1. It has no fees attached; you just pay interest, per day, on the amount that you’re overdrawn.
2. It’s a negative balance on your checking account, rather than a separate loan facility: as a result, if you’re overdrawn and you deposit more than that amount into your account, the overdraft automatically disappears.

If this works in the UK (which also, incidentally, has much more consumer-friendly ATM fees than the US has), I can’t see why it couldn’t work in the US. But BofA chose a very different route. Why? I suspect because they want to keep the fee income from ATM withdrawals and checks, when insufficient funds are available. If you get rid of overdraft fees on debit card purchases, it’s much easier to keep them on everything else.

Go read CFTC head Gary Gensler’s speech on regulating credit default swaps: it’s by far the best thing written on the subject to date. He’s absolutely right about pretty much everything, and it would be amazing if the Europeans, who seem much keener to start regulating these animals than we are in the US, were to use it as a blueprint for their own CDS reform.

I’m in a little bit of a rush this morning so can’t go through the speech in much detail, but there are a few things worth picking out, starting with this statement:

A comprehensive regulatory framework governing over-the-counter derivatives should apply to all dealers and all derivatives, no matter where traded or marketed. It should include interest rate swaps, currency swaps, foreign exchange swaps, commodity swaps, equity swaps, credit default swaps and any new product that might be developed in the future.

This seems to have been forgotten in a lot of the rhetoric surrounding Greece, but if you crack down on CDS while allowing all manner of other OTC derivatives to remain unregulated, any behavior you don’t like will simply move elsewhere in the OTC market.

Gensler says, rightly, that regulation of derivatives dealers is key to doing this effectively, since you can never wipe out the OTC market entirely, no matter how many derivatives are moved onto exchanges. And standardized OTC derivatives — which is the vast majority of them — should be cleared by clearinghouses. Moving to exchanges and clearinghouses isn’t a panacea, but it is likely to help.

And it makes sense that single-name CDS should be regulated by the SEC, along with corporate stocks and bonds: if investors have long since reached the point at which they write credit protection interchangeably with buying bonds, the SEC should catch up with them. (And for that matter, the SEC should be policing the corporate bond markets much more strongly that it does right now as well.)

Gensler makes a strong case that empty creditors should not be allowed to mess around with bankruptcy proceedings; I suppose the alternative here is to say that writers of credit protection should be given a seat at the table. But Gensler’s solution is more elegant, if arguably harder to implement.

As for bank capital, in the wake of the financial crisis it’s a no-brainer to reduce the degree to which banks can use the CDS market to engage in regulatory arbitrage. If you need capital, you should, as a rule, have capital: you shouldn’t be able to get away with buying CDS protection on some of your assets instead.

The CDS market grew very quickly, without any adult supervision, and it’s inherently a much riskier market than most other derivatives. As Gensler says,

While the value of interest rate or commodity derivatives generally adjusts continuously based on the price of a referenced asset or rate, credit default swaps operate more like binary options. A seller of CDS could one month collect its regular premium with little expectation that the insured company may default and in the next month be on the hook for billions if the insured company goes bankrupt. A credit default swap can quickly turn from a consistent revenue generator into ruinous costs for the seller of protection. This “jump-to-default” payout structure makes it more difficult to manage the risk of credit default swaps.

As a result, CDS do pose systemic risks, and should be carefully regulated. But let’s not unhelpfully oversimplify matters by banning them — or banning “naked” CDS — entirely. For one thing, that won’t ever happen, and it’s a much better idea to try to implement something which can actually work in reality.

Shahien’s en fuego. Here he finds a damning HAMP statistic on page 17 of a boring Treasury PDF — HuffPo

Mark Thoma is five years old — Economist’s View

In which Fox Business decides to fisk the NYT on CDS — Fox Biz

The hypocrisy of Gawker Media’s RSS switch — Lifehacker

The hypocrisy of HuffPo — Gawker

4,000-word profile of Stevie Cohen — Bloomberg

I almost took this “mesofacts” article seriously until I got to the frog-boiling bit — Boston Globe

Great article on Spanish labor markets. Echoes of the US public/private divide — Qorreo

Kevin Drum asks a good question about the background blogger briefing at Treasury:

Having read a few posts from the bloggers in question, what I want to know is: Did they really learn anything? Did Geithner and the anonymous SAOs say anything interesting that they wouldn’t have said on the record? Or was it just a pure spin session?

First it’s worth noting that HuffPo’s Sam Stein made a formal protest at the beginning of the meeting, asking that at least we be allowed to quote “senior administration officials” directly instead of being forced to paraphrase. And I don’t think any of us were particularly happy about the ground rules.

That said, I think there are a few ways in which these briefings can provide something that an on-the-record briefing can’t. The Treasury secretary, in particular, has to be very careful what he says in public; his statements can and do move markets and even cause minor diplomatic incidents. Going offline allows the public official to relax a little and even have something approaching a real conversation, as opposed to simply reciting talking points.

It’s also worth noting that the audience for this briefing was pretty newsy, as bloggers go. There were quite a few people around the table — Stein included — who consider themselves reporters first and foremost. When sessions with Treasury officials are on the record, they (the sessions, I mean, not these individuals) have a tendency to descend into unhelpful dynamic where the journalists try to get the official to say something specific, and the official repeatedly talks around the subject and doesn’t give them what they want. Banning quotes altogether does solve that problem at a stroke.

Geithner in particular has a way of getting a little tongue-tied and angst-ridden (this is new, I think, since he became Treasury secretary, I never saw it before), and no one at Treasury has any interest in that becoming news. He did show some flashes of humanity in this session, cracked a few jokes at his own expense, and was surely less self-conscious than he would have been had the briefing been on the record.

And as Matt Yglesias rightly says, it’s hardly as though on-the-record briefings are spin-free zones.

It’s true that I can’t think of anything which was said by Gene Sperling or Michael Barr or Alan Kruger which couldn’t easily have been put on the record, but it’s also true that the one bit of the meeting which actually was on the record — a briefing by Neal Wolin about internet technology in Iran, Sudan and Cuba — was so far removed from newsworthiness that all of us were quite happy when it was over.

Of course, you can’t put Sperling et al on the record and then have just Geithner being the only “senior administration official” in the room — that kinda gives the game away. So you see how Treasury ends up where it does — just as you can also see how the likes of Drum end up asking if we’re not all being sucked into the age-old Washington game.

The fact is that if I thought it would serve any purpose at all to boycott background briefings, I’d be happy to do that. But it wouldn’t. And in many ways these briefings are the closest that people like Geithner ever come to having a friendly drink with the press, not having to worry about how they might get quoted. Most of us would become very quiet very quickly if every word we said was scrutinized in the way that Geithner’s public statements are. Obviously the ground rules serve him more than they serve us. But insofar as we basically just wanted to talk to the guy, I think we came away reasonably happy.

So while Drum is absolutely right that these meetings “allow government officials a chance to peddle their spin in person without really being held accountable for what they say”, I think that sometimes it’s good to talk to someone without holding them accountable for what they say. I’d say that the walk-forwards-walk-back that we saw on the subject of principal write-downs, for instance, is more revealing than an accountable on-the-record statement would have been. Mixing things up a bit is usually a good idea; I’m generally suspicious of absolutism in these matters. After all, it’s not as though the press corps and Congress never get to ask Geithner lots of questions on the record as well.

And on top of all that, I’m very happy that I got to thank Gene Sperling personally for Treasury’s latest CDFI initiative. (I’m on the board of a credit union which will probably be one of the recipients.) It’s a really good idea and it probably ought to have gotten more play than it did. A lot of really useful lending will come as a result of it.