Felix Salmon

The weak-small-bank meme

Felix Salmon
Mar 18, 2010 18:43 UTC

I’m not convinced about a the “too puny to succeed” meme, as evinced today by Binya Appelbaum and David Cho:

The Treasury Department invested in large and small banks during the financial crisis. So far, the big bets are paying off better than the smaller ones…

The missed payments totaled $78.1 million in February and that banks now have missed a total of $205 million in dividend payments to the government.

For one thing, no one is expressing that $205 million as a delinquency rate. Any set of loans will have some kind of delinquency rate; if the rate is lower than the rate of interest on the loans, the lender is in OK shape.

What’s more, these small banks sometimes turn out to be not so small after all:

The list of banks missing payments for the first time included South Financial Group of South Carolina and Citizens Republic of Michigan, both of which rank among the nation’s 100 largest banks, with about $12 billion in assets each.

The fact is that Treasury is going to make a profit on its TARP payments to banks, and that the biggest risks to the TARP fund come not from small banks but from large ones — not only South Financial and Citizens Republic, but also even bigger banks like GMAC.

And the biggest bailout of all was that of mortgage giants Fannie Mae and Freddie Mac; so far there’s no sure indication that they will be able to repay the government’s funds.

I don’t think that “too puny to succeed” is a real phenomenon — there are lots of perfectly successful small banks which make predictable and unspectacular profits year in and year out. If the bank is privately-owned, without shareholder pressure for constant growth, then it can stick to what it knows best and do well. Every so often, it’s true, what these banks do best is real-estate lending, and a big real-estate wipeout like we’ve just seen can fatally damage them. But even when that happens they’re small enough to fail and there’s little if any systemic risk.

With any luck, the Move Your Money campaign will help to keep new business flowing to small banks and credit unions, which don’t get blinded by ambitions of global domination and which don’t bring the entire economy down with them in the event that they do overstretch. There will always be bank failures — that’s a fact of any economy. The trick is to make sure that those failures aren’t contagious. And that’s almost impossible when the failing banks are of Lehman size or larger.


In which country are “predictable and unspectacular profits year in and year out” acceptable? Well, that’s just un-American. The world is flat and we must compete globally. Right?

I’m all for predictable and unspectacular. How do we convince corporate America? We’re all about creative destruction. Predictable and unspectacular are eaten for lunch.

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Financial innovation of the day: smaller fonts

Felix Salmon
Mar 18, 2010 17:27 UTC

Josh Reich explains how overdrafts work, in the real world:

It is pretty easy for a bank to clearly communicate your available current balance. But look at the language that banks use to describe available balance, with additional complexity from pending bills that have yet to be posted, checks that have been authorized but not cleared and temporary holds placed on the account. These are not difficult concepts to understand if you take the time, but banks go out of their way to make it as hard as possible to really understand what is going on with your own money. They have no incentive to help you understand, as a confused customer is a profitable customer. We’ve joked that one of the greatest innovations in banking is ever-decreasing font sizes.

Actually, these are difficult concepts to understand. Maybe not if you’re a geeky college graduate with a solid grasp of mathematics and banking, but many ill-educated Americans have much more important things to do with their time than have to study hard to understand how these things work. As Josh says, “banking should be simple, boring & cheap”, and the onus should not be on the consumer to try and work out how their bank is trying to confuse them.

Right now, banks and consumers are in a lopsided arms race: contracts get ever more complex and fonts get ever smaller, and consumer groups can respond with little more than ineffective — or even downright counterproductive — financial-literacy programs. Here’s Lauren Willis:

The pursuit of financial literacy poses costs that almost certainly swamp any benefits. For some consumers, financial education appears to increase confidence without improving ability, leading to worse decisions. When consumers find themselves in dire financial straits, the regulation through education model blames them for their plight, shaming them and deflecting calls for effective market regulation. Consumers generally do not serve as their own doctors and lawyers and for reasons of efficient division of labor alone, generally should not serve as their own financial experts. The search for effective financial literacy education should be replaced by a search for policies more conducive to good consumer financial outcomes.

What worries me is that the Consumer Financial Protection Agency is not going to have any control, as far as I can tell, over Josh’s font sizes — he can claim that he’s going to try to be as clear and transparent as possible, and I believe him, but no one’s forcing him to do that. (In fact, if there were someone forcing him to do that, he wouldn’t have a business model, since everybody else would be doing the same thing.)

And BankSimple is going to be web-based; at least in the first instance, it’s going to be disproportionately popular among precisely the geeky college graduates who need it least.

The thing to note here is that perception is often much more important than reality. One of the ways that Wachovia and Washington Mutual managed to grow so quickly for so long was by being the “friendly”, open, transparent bank — by encouraging people to come in for free dog treats, rather than putting signs on the doors saying that anybody entering without a legitimate banking purpose is a trespasser who might be prosecuted. (Really, the new flagship Bank of America branch on 42nd Street has those.) The younger big banks had long, convenient hours, and pushed their “free checking” product very hard indeed — where of course “free” means “we’ll gouge you with fees any chance we get”.

Once again, the onus should not be on the consumer to be able to work out the difference between friendly, approachable BankSimple and friendly, approachable Wachovia and WaMu. All banks will say that their products are free — and the CFPA should stop them from doing so. But it can’t, because it will only have enforcement abilities for the biggest banks. So the war will continue to be one of marketing, rather than reality, and the consumers will continue to be the biggest losers.


Actually, in the US they’re more than half. I’d be willing to cut the 90-100 crowd some slack in the name of getting things to function more smoothly, but the financial affairs of anyone below 90 should be placed in the hands of a guardian.

Regrettably, “race to the bottom” seems more and more to be the guiding principle nowadays.

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Greek bailout chart of the day

Felix Salmon
Mar 18, 2010 15:17 UTC

Do you find the latest news from Greece a mite confusing? After saying that Greece “cannot sustain the deficit reduction that these hard measures aim to achieve” if its borrowing costs remain in the 6.3% range (which doesn’t seem so high to me), Greece’s prime minister went on to say that he had not asked for any money from the IMF or anybody else.

Thankfully, Izabella Kaminska is here to explain exactly what Greece is seeking from the IMF, with this helpful chart:


It seems that Greece is going back to fluttering its eyelashes at the IMF, after playing very hard to get as recently as March 12. Yes, this chart shows how confusing the whole thing has been. But I also think that the ups and downs do make a weird amount of sense, in their own fashion.

At heart what Greece wants is for some kind of bailout (IMF, EMF, EU, whatever) to be clearly available to Greece in the case of emergency, which availability will help to reduce Greek credit spreads, thus obviating the need for any money at all. It’s the Paulson Doctrine gone euro: “If you have a bazooka in your pocket and people know it, you probably won’t have to use it,” he said back in July 2008, and Papaconstantinou is surely thinking along similar lines.

But the fact is that Greece’s debt dynamics are pretty gruesome, just as Fannie and Freddie’s were. And in that kind of situation, the market tends to force you to get out your bazooka sooner or later. My guess is that Kaminska’s chart is going to continue to veer wildly up and down until the bazooka is finally fired.


Felix Salmon
Mar 18, 2010 07:00 UTC

Please scientists: give up your faith in “statistical significance” (which you get wrong) and go back to replication — Science News

Azerbaijan’s president makes $228k/year. His 11-year-old son just spent $44M on Dubai property — WaPo

Don’t prerinse dishes before putting them in the dishwasher — NYT

If you only read one person on Lehman and financial reform, it has to be Konczal — Rortybomb

Ivory Coast refinances its defaulted Brady bonds at 80 cents on the dollar — Reuters

NYC Benefit Performance in support of tsunami disaster relief for the Juan Fernández Islands, Chile — Bechstein America

New York: Center of the World — Thomas Frank

Climate Desk Bleg 2

Felix Salmon
Mar 17, 2010 22:11 UTC

Thanks partly to SXSW and partly to my own atrophied reporting muscles, my climate desk piece is going very slowly. And so I’m going to try another bleg here.

The basic situation is little changed from my last update: most of the companies I’m hearing about are either working on greenhouse gas emissions — which isn’t really the story I’m looking for — or else are just getting started on the work needed to comply with the new SEC reporting requirements. But I have heard, second-hand, of a few stories which are much closer to the mark, and if anybody can help me out in terms of finding me companies or websites which talk about these kind of things, I’d be very grateful.

First, there’s the banks. I heard of one Brazilian bank — I’m not sure which one — which was asked for a 20-year loan to fund a major agricultural project in the Amazon, and which responded by asking for an environmental audit. They don’t want to lend money to a coffee project, say, if the land is not going to be arable for coffee in 20 years’ time. Has anybody heard tales of environmental models playing a role in banks’ loan underwriting?

Secondly, there’s the hospitality industry, especially the parts of it which have a lot of assets on islands and beaches and the like. Are any of these companies doing environmental studies on coastal erosion and sea-level rise, and if so, how are they managing those risks? This isn’t a question of insuring against a disastrous event happening in the next year or two — that can be done by writing a check. It’s more a question of positioning the company so that it wouldn’t be devastated by the inability to insure against a disastrous event in the future, if insurers decide the risks are too big.

Finally there’s companies like ADM or Heinz, which are creating new crops designed to cope well with low-water conditions or large swings in temperatures. This is the point at which risk mitigation becomes profitable in and of itself: once you’ve mitigated risks by creating those crops, you can cash in on demand for those crops if and when climate change causes demand for them to rise.

Overall, though, I’m having difficulty finding big companies which are happy to spend a lot of money and effort on mitigating the effects of something as inherently nebulous and unpredictable as climate change. And maybe that’s rational. After all, if you prepare for X and then get blindsided by Y, you might as well have done nothing at all. And no one has any real idea of exactly what things are likely enough to worry about and what things aren’t.


Thought this may provide some data on this topic.

I enjoy your blog. Thanks for the good work.

http://siran.org/projects_s_and_p_report ing_comparison.php

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Repo 105: “Like, whatever”

Felix Salmon
Mar 17, 2010 14:42 UTC

Max Abelson has talked to three former Lehman executives about the Valukas report, and you can see why they requested anonymity. Here are some of the gems from Senior Executive #2:

“It’s just not that big of an event… They just want to be mad and don’t know what they’re talking about and want to be outraged.”

“These firms clearly shop jurisdictions all the time for the most favorable rule set, and there’s nothing wrong with that.”

The only people who would worry about using an old trick to reduce leverage from 13.9 to 12.1, the second executive said, are “yappers who don’t know anything.”

There was lots of talk in the early months of the Obama administration about whether Wall Street bankers really Got It or not — whether they had any comprehension of the amount of justifiable anger in the country and the world that was arrayed against them. Clearly, they don’t. These executives aren’t Erin Callan, retreating to a quiet life in the Hamptons to lick her wounds and ponder her possible criminal prosecution. My guess is that they’re all currently employed, at Barclays or elsewhere, making enormous amounts of money, and persuading themselves that everybody must therefore be rubes, ripe for ridicule. Here’s Senior Executive #3:

The idea, a year and a half after the biggest bankruptcy in American history began, is that criticism of the firm is the domain of unsophisticates. “When I read this, I giggle a little bit. Because $50 billion is a shitload of money, but in the grand scheme of things,” said a third source, a former managing director in England—where the accounting gimmick, named Repo 105, was given a legal endorsement that it couldn’t get here, “$50 billion is a drop in the ocean.”…

The former managing director in London said that Repo 105 was an open secret there, if it was a secret at all. “Yeah, yeah, yeah. In Europe, people just generically talk about it. It’s funny, for nonprofessionals, you can try to make it a smoking gun,” the source said, “I’m like, whatever.”

I’m looking forward to Chris Lehmann’s take on these guys: they deserve all of his opprobrium and more. But it’s important not to lose sight of the fact that what we’re seeing here is a corporate failing to an even greater degree than it is an individual one, and that it infects investment banks generally, not just Lehman Brothers. These shops deliberately go out to hire psychopaths, and then they fire the ones who go soft, while promoting the most aggressive assholes, keeping a few smooth-talking client-relationship types on hand to preserve some semblance of a respectable public face. (Fuld was never particularly good at that part of the job.)

This is something that regulatory reform can’t even come close to addressing, unless it deals head-on with the question of compensation. If you think what street criminals will do for a few thousand or hundred thousand dollars, it becomes less shocking what bankers will do for a few million. Or that they will allow their worldview to be skewed to the point at which they can genuinely say that $50 billion is “a drop in the ocean”. It’s, like, whatever.


I would agree that you need more than a disorganized and underfunded rabble but I would argue that not every wealthy individual in this world supports corporate governance of the private sector.
There is enough innovation in disruptive technologies that have and will make a difference in social order and this technology does not require killing off populations.
While the revolution via Napoleon was not the answer, it did provided opportunity. The universe is full of entropy.

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Advertising on the iPad

Felix Salmon
Mar 17, 2010 04:43 UTC

There was another panel today on the iPad and the future of magazines, this one featuring my friends Rachel Sklar and Jacob Lewis. Jacob was pretty downbeat about the ability of the iPad to rescue the economics of the magazine industry, for two reasons; one, I think, is much better than the other. The good reason is that Apple jealously guards the demographic information of the people who download any given app from the iTunes music store, and publishers are hobbled if they don’t have a lot of detail on the demographics of their readers.

The less good reason is that advertisers are going to want lots of very detailed information on how many people are viewing their ads on the iPad, how long they’re viewing the ads for, and so forth: information which is quite easy to obtain with a digital medium but which is happily impossible to obtain with a paper magazine. At the moment, said Jacob, publishers like Condé Nast hire fast-talking salesmen who essentially pull a fast one on advertisers, who would never pay $50,000 for a full page if they knew how few individuals actually paid any attention to that ad in reality.

But I’m not so sure. Yes, there’s undoubtedly a bit of overstretch going on in terms of what publishers tell advertisers about the quality of the audience they’re delivering. But at the same time, when you’re looking at a company like Condé, the advertisers don’t have a lot of choice but to buy space anyway, even if they know they’re being snowed. Luxury-goods advertisers have a reputation to protect, and brand advertising for luxury goods is a fragile and precious thing: you want lots of control of the immediate context, you want very high production values, and you’re petrified of anything which might serve to cheapen your brand.

Compare that with the kind of brand advertising we’re seeing all over the place at SXSW. Here’s a picture of Rachel and Jacob, on their panel, with a cheap vinyl banner behind them advertising Miller Lite and Chevy. That kind of branding is all well and good for some, but you’re never going to see Bottega Veneta in that kind of context.


On the iPad, by contrast, the advertiser’s control of the content is total — they even know exactly what screen it’s going to be viewed on. It’s the first digital advertising medium which is intimate enough to be held in someone’s hands and admired at close range, and it also has abilities which print advertisers can only dream of: not only animations and movies and music, but also virtually limitless space to allow readers to flick through a whole range of clothes or watches or whatever.

After the panel ended, I got to talking to one attendee about bridal mags, and it struck me that the bridal category could be one of the first to be truly revolutionized by the iPad. After all, bridal mags are quite unashamedly bought for the advertising content, rather than any supposedly independent editorial: the idea is that brides-to-be will flick through them, looking carefully at pretty much every ad, searching for that idea which inspires them to spend thousands of dollars on something for their wedding.

On an iPad, that experience can become much more immersive and interactive: brides could spend days if not weeks flicking through the offerings of all the different advertisers, adding various products and ideas to their virtual scrapbooks, finding local retailers for anything they’re interested in, and firing off carefully-curated scrapbooks, in PDF form, to their wedding planners, parents, bridesmaids — even occasionally the fiancé too. I don’t know how much inclusion in that kind of an app would be worth to an advertiser, especially one who jumped in and created deep wells of content rather than simply repurposing their print ads. But clearly there’s an opportunity here for brands to really connect with readers in a new and very exciting way.

Jacob worries that luxury goods advertisers, once they realize how little time readers spend looking at ads, will be loath to continue to spend huge amounts of money shooting and buying enormous media campaigns. But the fact is that without those enormous media campaigns, those brands are nothing. And I suspect that many people on both the advertising and the editorial sides will be surprised by how much attention ads get in the iPad version of glossy magazines, especially the ones which are very well designed.

The thing to remember here is that while the editorial content on the iPad will for the foreseeable future just be a repurposed version of the stuff that was written and designed for the print version, the ad content can be completely different and utterly customized. And I wouldn’t be at all surprised to see some of the most innovative and compelling iPad content coming from advertisers with big production budgets, rather than from stretched editorial art departments who have to try to throw an iPad app together in whatever few hours they can grab around doing their print work. Ads have always been a hugely important part of magazines like Vogue, which invariably starts off with dozens of pages of glossy and expensive ad campaigns, while the editorial-side fashion stories always appear at the very back of the magazine. Likewise for the iPad: I suspect that top ads might well get much more attention than any given piece of editorial content.


” … it’s the very persistence of a paper ad that provides the value. An ephemeral web ad just isn’t the same. ”

When I look at excellent note tools like Instapaper and Evernote, I see how we could easy scrapbook bits and pieces of content for further study.

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When mortgage companies give up money

Felix Salmon
Mar 16, 2010 19:46 UTC

The ultimatum game has shown repeatedly that people aren’t profit maximizers if they think that the profit-maximizing outcome is fundamentally unfair. And it turns out that the same is true of mortgage companies. Here’s Dean Jens, telling the story of a short sale of a house with two liens:

The total debt was on the order of $350,000 — I don’t remember the exact figure — and he and the seller had agreed to a price of $253,000. The primary lien-holder had signed off on an agreement allowing the second lien-holder to receive $11,500, while the second lien-holder had agreed to accept 5% of the sale price. 5% of $253,000 is $12,650, so they were a bit stuck.

The climax came when the buyer was in an office with his real-estate agent, on a speaker-phone conference call with lower-level employees of both lenders, neither with the real authority to renegotiate either agreement. In lieu of being able to negotiate, they began yelling at each other for a protracted period of time, over which it occurred to them that there was nothing in the agreements stipulating a minimum dollar value that either bank would accept. Accordingly, they lowered the sale price to $230,000, of which 5% would be $11,500, and the buyer walked away $23,000 richer.

This is a classic zero-sum game. The first option is that the buyer is out $253,000, with $12,650 of that going to the second lien holder, and $240,350 going to the primary mortgage holder. The second option reduces the payment to the second lien holder by $1,150 to $11,500, and reduces the payment to the first lien holder by $21,850 to $218,500. In percentage terms, they’re both out an identical 9.1%, and in both cases the first lien holder gets exactly 19 times the sum going to the second lien holder.

So why would they choose the second option, when the buyer — the only winner in the deal — has no negotiating leverage at all? Just because the first option didn’t seem fair to the primary mortgage holder, for whatever reason. This is a short sale, and the second lien holder by rights should be getting nothing, and the first lien holder simply wasn’t willing to pay them more than $11,500 to go away.

Over the long term, such a tactic might actually make financial sense. If these two companies negotiate with each other a lot, then it’s in the interest of the first lien holder to shoot itself in the wallet occasionally, just to prove the point that when it sets a limit on how much it’s willing to pay the second lien holder, it’s going to stick to that limit, no matter what. But in the short term, it’s certainly nice to be in a position where a pair of squabbling mortgage companies decide on the spur of the moment to just give you $23,000.


Not at all. The reason they chose the second option is because the deal is closed by people who (1) lack authority to renegotiate favorable terms, and (2) have no motivation to try to do that, or to relegate the matter to those who do have that authority, because they have no financial interest in the outcome. This might as well have happened in the Soviet Union.

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The economics of aggregation

Felix Salmon
Mar 16, 2010 18:57 UTC

How geektastic is Mark Thoma’s economics of aggregation post? Here’s the question he asks:

If you run a website that depends upon advertising, what is the optimal number of aggregator sites (sites that run part of your original posts plus a link back to the original)? What is the optimal length of an excerpt?

And here’s his answer to the first part:

RsN[sC(CrN(rNA + rAN))N + sNA] = -RsNsAN

In English, he concludes that aggregators are good for original content providers if they provide a lot of clickthroughs, and that longer excerpts can also be good for original content providers “if increasing the excerpt length has little detrimental effect on the number of clickthroughs”.

This is all jolly good fun, if not particularly useful in the real world, but I fear that Mark, here, is missing something very important. The holy grail for content websites is loyal readers — people who come back to your site multiple times per week or even per day. Most visitors to a site, whether they come from Google or from social-media links or from aggregators, will simply read the article they came to read, and then go away. A small proportion of those visitors, however, will stick around for a while, look at the rest of the site, and then, possibly, decide to keep on coming back.

I’m not a great browser of websites, but I certainly do something similar: if I follow a link and find myself on an interesting new blog, I’ll subscribe to that blog, and then might well come across more great content there while looking at the stories in my feedreader. Alternatively, I won’t subscribe to a blog the first time I visit, but once I find myself visiting the same site three or four different times, I’ll get the picture and click on the RSS icon. (Of course, if the RSS feed turns out to be truncated, I’ll probably delete it immediately, but that’s another issue.)

So it seems to me that Mark’s model overemphasizes the importance of what you might call drive-by traffic, while underemphasizing the importance of building a loyal repeat audience. There are millions of potential loyal readers out there, and the most difficult thing to do online is to reach out and touch them, somehow, just so that you get onto their radar screen so there’s a chance they might become actual loyal readers. Aggregators are a wonderful way of doing that: they make it their job to find people posting original content, and to show it to lots of potential loyal readers. I think of them as free marketing.

People like Rupert Murdoch, and his former employee Heidi Moore, think that what the aggregators are doing is stealing content and making money off it. But I like it when people make money from reading my blog! As far as I’m concerned, that’s a good thing. And Murdoch should similarly be very happy that the dynamics of the internet mean that there’s a strong incentive for people to read his websites assiduously, and then link back to hundreds of his stories, driving traffic and helping to build that crucial base of loyal readers. Historically, Murdoch got his readers by spending hundreds of millions of dollars printing physical newspapers and distributing them all over town, this is a much easier and much cheaper way of getting his brands into the consciousness of consumers.

So I don’t worry when people read my stuff on an aggregator and don’t click through to my website — and I wouldn’t worry about that even if I was supported solely by advertising. (Which, incidentally, is actually a very uncommon blog business model: most bloggers, insofar as they monetize, will do so through job offers, book deals, or even blog acquisition deals, rather than ad revenues.) If you make it easy for people to find you and to read your stuff, they will eventually become hugely valuable to you. If you make it hard, they will be worth nothing to you. The choice is easy.

Update: Heidi responds, in the comments, saying that “honest aggregators” are those who provide “only a brief summary”:

It is true that I am a former employee of the Wall Street Journal, which is owned by Rupert Murdoch, but it’s misleading to say I was an employee of Rupert Murdoch, is it not? And I did, after all, decide to leave the Journal. I have nothing against Rupert Murdoch, as he was nothing but polite the only time I met him, but for the sake of accuracy that should be clarified.

Similarly, I’m sad to say my views here have been misquoted. Unlike Rupert Murdoch, I do not see Google as a problem for journalism – I see Google as a boon to driving traffic and opening journalism up to more Web-surfing readers.

I believe, Felix, you are referring to a Twitter discussion we had about plagiarism, which is quite a different topic. In that conversation I said that SOME blogs, in the name of aggregation, had resorted to cutting-and-pasting the content of news sites or other blogs, adding no new analysis or reporting of their own, and distributed the content with a new headline as if it were their own work.

I made the point that this practice, if it were copied in print, would be considered plagiarism – and that it should be defined as plagiarism on the Web because it steals traffic by taking the most important parts of a story and corraling elsewhere the traffic due to the author and original publication.

To be clear, this has nothing to do with linking, or analyzing an article written elsewhere, which is the currency of the Web and its honest marketplace of ideas. My point was purely about the practice of re-headlining the work of others and then copying that work on such a scale that it would divert readers from clicking on the original. This is, I believe, plagiarism that can often be hidden in the name of “aggregation.”

It means nothing for honest aggregators, however, who provide readers with only a brief summary and direct credit and link to the original.


“This is perhaps the single greatest piece of financial journalism ever written”

I keep coming back to this just to crack myself up.

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