Felix Salmon

I’m a little scared and more excited to kick off a serious and ambitious exercise in collaboration across a spectacular range of websites, including Center for Investigative Reporting, Grist, Mother Jones, Reuters, Slate, The Atlantic, Wired, and WNET. (Update: the Nation Institute is also involved.) It’s called The Climate Desk, and although its website isn’t up and running yet, it does have a mission statement:

The Climate Desk is a journalistic collaboration dedicated to exploring the impact — human, environmental, economic, political — of a changing climate.

My job is to look at the corporate side of things: whether and how big companies are preparing themselves for the downside of climate change. Already the SEC has decreed that companies have to disclose the effect of climate change in four different areas: actual and potential laws and legislation; international accords and treaties; regulatory and business trends, including changes in demand for goods with high or low emissions; and, finally, this:

Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

Of course, disclosing risks is a very different thing to actually doing something about them. So what I want to have a look at is two main questions: how should companies be managing their climate-change risks, and how are they managing their climate-change risks?

Some companies (like property insurers in coastal regions) I suspect are already reasonably sophisticated about these matters. Others, of course, simply aren’t set up to think deeply about long-term strategy regarding risks which will unfold over decades; it would be silly for most small tech start-ups to waste management time on that kind of thing. But I suspect there are some very interesting and surprising stories out there which are worth exploring: when, for instance, does an asset start to look more like a liability?

If the public sector can do this — the Pentagon has, unsurprisingly, already started thinking along these lines — then the private sector should be able to do so as well.

Helping me out in looking at all this will be a group of great bloggers and journalists, including Alexis Madrigal of Wired, David Roberts of Grist, Mark Schapiro of CIR, Kevin Drum and Kate Sheppard of MoJo, and Nicole Allan of The Atlantic. But I want your help too: email me on felix at felixsalmon.com with your ideas, and I’m even welcoming PR pitches on this one.
There are two things I don’t want. I’m not interested in the green-tech story, or in companies which are trying to position themselves to benefit somehow from climate change. I really want to focus on the way that companies are managing downside risks, here, as much as possible.

And I’m absolutely not interested in having a debate about whether climate change is real, or anthropogenic, or overhyped, or anything along those lines. If you think that the downside risks of climate change are zero, then that’s a different story, not this one.

Eventually I’m going to write this all up in a self-contained piece. But right now, I’m starting at zero. Help me out here!

It’s not just the NYT: now the BBC is printing “explanatory” articles about credit default swaps which are simply wrong. Check out the factbox:

Government bonds come with an insurance policy, called a credit default swap (CDS).

Hedge funds have been buying up vast quantities of CDSs linked to Greek bonds in the hope or belief that Greek government will either default on a bond interest payment, or have its credit rating lowered.

This is because in both cases, the seller of the CDSs – typically banks or insurance firms – would have to pay a penalty fee to the buyer of the CDS contract.

Is there anything here which is actually true? No, bonds don’t “come with” a CDS attached. No, there is no evidence of hedge funds (or anybody else) “buying up vast quantities of CDSs linked to Greek bonds”. No, a downgrade of Greece would not result in the seller of the swap having to pay out on it. And no, a swap payout is not “a penalty fee”.

The important thing here is not the inaccurate reporting so much as it’s the way in which heated political rhetoric has been unquestioningly accepted by journalists who simply don’t have a grounding in this stuff. If a lie can get halfway around the world before the truth has got its boots on, this one has circumnavigated the planet twice while the truth is still slumbering in bed. No one wants to be seen as defending banksters, so even those who should know better are happy to stay complicit in the lies.

That said, I was invited to a media lunch hosted by Loomis Sayles today, and I took the opportunity to ask David Rolley, their international fixed-income guru, whether CDS had been or could be used for nefarious purposes. And he unhesitatingly said yes, on both counts, saying that Brazil, for one, has paid as much as $1 billion in extra funding costs thanks to hedge fund types who use CDS to drive up the country’s bond spreads ahead of new issuance.

Of course, the hedge funds in question are likely long Brazilian debt anyway, so a ban on naked CDS wouldn’t prevent that kind of activity. In fact, they’re trying to get even longer Brazilian debt, and trying to manipulate the price at which they’ll be asked buy it on the primary market. So I wouldn’t necessarily say that they’re trying to destroy the country. They’re just trying to get a bit more out of them, in terms of interest payments.

Still, that kind of activity — front-running new issuance in the CDS market — is undoubtedly a little bit distasteful. I just don’t think that it deserves to be talked about people expressing “the hope or belief that the government will default”.

(HT: Coldwell)

Roger Lowenstein has a column up on Bloomberg with the headline “Smart Banks With Dumb Customers Don’t Exist” — which just goes to prove that smart writers with dumb ideas do exist. Ryan Chittum has already done a good job dismantling the piece, but I feel the add to add my own two cents with respect to his characterization of the Consumer Financial Protection Agency:

The new watchdog, wherever it goes, is the linchpin of the emerging financial-reform bill, and its premise is that greedy bankers exploiting dumb consumers essentially caused the credit crisis. Stop bankers from selling toxic mortgages and other harmful loans and we won’t have any more meltdowns.

Even though bankers were greedy, and many borrowers were naive, this is a simplistic way of viewing the financial crisis and one that misses its underlying cause. Since mortgage bankers make money from loans, it’s tempting to think of them as parasites that prey on customers. But there is no such thing as a smart bank with a dumb customer; if the loan turns sour, the banker was dumb, too.

Where did Lowenstein get the idea that the premise behind the CFPA was to prevent a systemic meltdown? Has he never heard Elizabeth Warren or anybody in the Obama administration talk about it? I’ve made the case that the CFPA might have beneficial secondary effects, from a systemic perspective, but from day one its primary role and raison d’etre has been to protect financial consumers. As you might guess, from its name.

The CFPA was first proposed in its present form by Elizabeth Warren in the summer 2007 issue of Democracy. Clearly she’d been thinking about it a lot before that article appeared, and equally clearly, if you read the article, preventing meltdowns is simply not there. Partly because the meltdown hadn’t actually happened at that point. So Lowenstein is simply wrong on his “premise” statement.

As a result, when Lowenstein starts attacking the “simplistic way of viewing the financial crisis”, he’s really attacking no one at all. But then he goes on to pooh-pooh the idea that mortgage bankers are “parasites that prey on customers”, using the argument from his headline.

The problem here is that Lowenstein’s argument is based on three very shaky foundations. The first is that if a bank preys on a customer, that makes the customer dumb. But being preyed upon is not a sign of stupidity. This is an important point, because one often hears, when it comes to things like overdraft fees, that they’re all the fault of those dumb customers, and that therefore (and this is a logical step I’ve never really understood) we don’t need to worry about them. What’s undeniable is that calling ripped-off consumers dumb serves to stigmatize them, and make them less sympathetic.

Lowenstein also seems to think that the CFPA cares mostly or entirely about mortgages, when in fact its remit is far broader and more important than that. It will regulate all manner of debt products, from credit cards to payday loans — and it will also regulate non-loan products as well, like checking accounts, pre-paid debit cards, and even (maybe, this is unclear) certain retirement and savings products.

But Lowenstein’s deepest error here is to think that if you do business with a “dumb customer” then the loan will invariably go sour and you’ll end up losing money. This is clearly not true if you’re working within the originate-to-distribute business model, where you can pass the losses on to an end investor after taking your cut up front. But it’s also not true even when you hold on to the loan yourself. The millions of Americans who were eligible for a prime mortgage but ended up being sold a subprime mortgage instead were undeniably ripped off, even when they made all their payments in full. The people who get put in the credit card “sweat box” — something designed to extract the maximum amount of money from them before they inevitably go bust — are highly profitable for lenders. And people who regularly pay multiple $34 overdraft fees on a single day are always going to be a gold mine for bankers.

Lowenstein indeed seems to be opposed to the very purpose of the CFPA:

A sound economy needs healthy financial institutions. Rather than stop lenders from hurting consumers, the first priority should be to keep the banks from harming themselves. In the short run, solvency is often at odds with what consumers want (or with what they think they want).

To which I only say that if you need to gouge consumers in order to remain solvent, you shouldn’t be banking in the first place. And no one will miss you when you go away. Yes, a sound economy means healthy financial institutions. But that never has to mean unhealthy customers.

Gretchen Morgenson, take note: this is how to write a good article about municipalities dabbling in derivatives.

I didn’t write about the main thrust of Morgenson’s article when I attacked her comprehension of credit default swaps, mainly because it was incredibly unclear to me what she was trying to describe. But if you want to see someone do a good job of trying, I’d highly recommend checking out Bond Girl, who has a second installment today attacking the hypocrisy of municipalities who are happy to lock in fixed interest rates through interest-rate swaps, only to complain loudly when rates fall and they realize they would have been better off doing nothing.

But the fact is that municipalities around the world have been ripped off by fast-talking derivatives salesmen for years, and the whole business really is very sleazy. In their excellent FT article, Rachel Sanderson, Guy Dinmore and Gillian Tett show how Italian municipalities are losing money even on fixed-to-floating interest-rate swaps, which you’d think would be pretty hard in today’s low-interest-rate environment. They’re also losing money on sinking funds — pools of money which were meant to shore up municipal finances, but which inevitably attracted an entire aquarium’s worth of vampire squids, sticking their blood funnels into anything they could invest in high-yield instruments.

The FT talks to Antonietta Dominici, the treasurer of a tiny village called Baschi, deep in rural Umbria:

Ms Dominici does not know what assets are in the sinking fund or why the swap is still carrying losses – currently about €90,000 – in a low-interest rate environment. She says attempts to get information from BNL on this have proved unsuccessful. BNL would not comment.

And they do a great job of explaining how bankers exploited greedy Italian politicians:

In 2006, for example, Baschi was persuaded to undertake a more complicated restructuring of its debt. The swap’s value rose to €2.5m; the maturity extended to 2034; and a sinking fund was established. The bank structured the deal so that the village received an “upfront” payment of €25,000 – in effect an advance on its loan. In return for the upfront, rates would be tougher in the longer term…

It was the upfront that caused many local authorities to get high on derivatives, say experts. In the revolving-door world of Italian local politics, each new administration wanted its own upfront, so asked their bankers to restructure the deal to release more cash in advance. The terms of the swap tended to become more restrictive each time.

Some banks covered the cost of the upfront fee by pricing the interest rate swap more aggressively, so that only in unusual circumstances would the entity receive more each period than it paid out, say people familiar with the deals. In other cases, upper and lower limits on the movement of interest rates ensured the upside for the local authorities was reduced and downside risks were magnified.

I can guarantee you that every time a swap was sold, the person selling it got a nice fat up-front commission, and the unsophisticated small municipality buying it wound up getting a very unattractive deal. And the more complex the swap, and the higher the up-front payment to the town, the more the municipality was likely to be ripped off.

The underlying problem here is that interest-rate swaps tend to be sold rather than bought. If municipal treasurers came up with these plans on their own, and then asked a few banks for bids on the exact swap that they wanted, many of the rip-offs would never have happened. But instead, like subprime borrowers encouraged to monetize their home equity, they got talked into bad deals by sleazy financial professionals working on commission.

I wonder whether the Consumer Financial Protection Agency will have the ability to police swaps sold to municipalities. It should.

Well done to Shahien Nasiripour, who did the best job of anybody, at the Treasury blogger meeting yesterday, at getting Treasury’s officials to commit news. Specifically, he asked about Sheila Bair’s sensible idea that mortgage principal write-downs can help keep homeowners in their homes while also maximizing the value of the mortgage to the issuing bank. And he was told, quite clearly, that Treasury has been talking to Bair about this idea, and that if it makes sense at the bank level, it probably makes sense at the federal level, too, as part of the HAMP program to make mortgages affordable.

Except that once the meeting was over, its main architect, Treasury flack Andrew Williams, emailed Nasiripour to walk that particular idea back, saying that Treasury was NOT (his all caps) going to do anything “major” in terms of principal write-downs, and that any moves in that direction would be no more than “tweaks”.

At the dinner after the meeting, Williams did a good job of looking very interested while saying absolutely nothing as the assembled bloggers talked about the optimal treatment of bank balance sheets during a recession. Do you mark to market, thereby plunging the entire financial sector into insolvency, or do you delay and pray, risking a Japan-style lost decade?

It seems to me that insofar as Treasury has a problem with principal write-downs, that’s clearly a function of the fact that it’s worried about the consequences for banks’ balance sheets. We’re prosecuting a muddle-through strategy right now, where the government artificially props up house prices by providing substantially all of the mortgage finance in the country, in the hope that with economic recovery will come enough of a natural rebound in house prices to let the government slowly remove its support without them falling dramatically again.

A large program of principal write-downs would in effect ratify the view that house prices are not going to recover any time soon — and that’s not a view that anyone in Treasury wants Americans to have. A different senior Treasury official, trying to explain that the economy is doing much better than expected, told us in the meeting that house prices right now are higher than house-price futures were indicating a year ago. It’s a silly argument: house-price futures are highly illiquid, and they don’t give a remotely useful indication of where people expect house prices to be in the future, since insofar as they’re used at all, they’re overwhelmingly used to hedge existing long housing positions. Because there’s no one who naturally would want to take the opposite side of the trade, house-price futures always look very pessimistic.

In any case, it was clear that Treasury is trying to sell a message that the economy is doing much better than anybody had dared to hope this time last year. And since a program of principal write-downs would be incompatible with that message, it’s probably not going to happen.

Well done to Annie Leibovitz, who has managed to extricate herself from her unpleasant embrace with the aggressive and litigious Art Capital Group. Her new sole creditor — and we can only guess at how much the principal amount she owes has risen to at this point — is Colony Capital, the $30 billion private-equity shop which normally has its eye on much bigger deals.

Chances are that Colony is not going to find Leibovitz particularly easy to work with: no one else ever has. But they’re also unlikely to start foreclosing on her assets in the way that Art Capital is prone to do. Technically, this is a debt deal: Colony has bought Art Capital’s loan. But my guess is that Colony is looking at it more like an equity deal: they expect to work with Leibovitz to start generating an income stream for both of them which is going to last more or less indefinitely.

So fingers crossed on this one — but it certainly seems as though Leibovitz had much better advice this time round than she did when she was put into the Art Capital deal initially. Here’s hoping it works out.

Whole Foods shareholders fight back — Reuters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Via Thoma)

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

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

The answer turns out to be surprisingly simple.

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

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

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

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

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

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

(Via Cowen)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Income inequality chart of the day — EPI

Olbermann out-funnies Jon Stewart on ChatRoulette — AllThingsD

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

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