Felix Salmon

Listening to Robert Johnson, a Roosevelt Institute fellow, talk at his institute’s conference this morning helped drive home to me exactly why it doesn’t make sense to house a Consumer Financial Protection Agency inside the Fed, or other bank regulators. And the reason is that those regulators are consumer financial protection agencies already: the banks are the customers of the Fed and of the other regulators, and it’s the regulators’ job to protect the finances of their customers the banks.

Elizabeth Warren was at the conference too, and did a great job of explaining what she called “the bank industry’s complexity machine”. Regulators and regulation always evolve in the direction of complexity and away from the simplicity that real consumers — individuals with mortgages and credit cards — need. “The banks want to make reform very complicated, so that only the experts can understand it,” said Warren — and it’s inevitable that a CFPA housed at the Fed or at any existing institution would gravitate towards the kind of regulatory complexity which is a ubiquitous symptom of regulatory capture.

In 1980, noted Warren, Bank of America’s credit card agreement was one page and 700 words long; today it’s 30 pages of dense legalese. Banks will never willingly return to a world of 700-word credit card agreements, not when their profits from consumer finance are almost entirely a function of forcing consumers into paying hidden fees they don’t understand at the outset.

Essentially, the CFPA, by its nature, is going to have to have an adversarial relationship with the banking industry, at least at the outset. The prudential regulators, meanwhile, exist to make those banks healthier: they like anything which generates income and profits, and have historically not cared in the slightest if such products are only profitable because they rip off consumers with moderate financial literacy. If they end up housing the CFPA, the CFPA will never be allowed to force the banks into the world of simplicity and honesty that we financial consumers so desperately need.

Charles Forelle and Stephen Fidler have a really good front-page overview of the eurozone’s fiscal situation in the WSJ today. There’s not a lot of new news here, but as a lucid explanation of how we got to our present sorry state (and possible future even sorrier state), it’s vastly superior to sensationalist conspiracy theories about euro-shorting hedge funds.

So in the wake of the latest announcements from Greece promising fiscal rectitude in present and future — announcements which the market seems to like quite a lot — it’s worth bearing in mind two questions. The first, on which the market is currently fixated, is whether Greece can roll over its maturities in the next three months or so, tapping some combination of public bond markets, state-owned European banks, and EU loan guarantees. On that front, things are indeed looking pretty hopeful, partly thanks, as Sam Jones notes, to those very hedge funds which shorted Greece a few months ago, are making substantial profits by covering those shorts, and are now driving spreads tighter as opposed to wider.

The second question, which is much less tractable, is whether we can have any faith in eurozone government finances more generally, and this is where today’s WSJ article is so helpful, showing clearly that the truth has a tendency to come out very slowly and unpredictably, and that currency swaps through the like of Goldman Sachs are the least of the problem: governments hide much bigger debts by doing things like excluding defense expenditures or reclassifying subsidies as equity investments.

It’s worth remembering the famous convergence trade of the 1990s, whereby the wide spreads on what we now think of as PIGS debt all converged to something near zero as the euro approached: the idea was that simply adopting a single currency would mean an end to idiosyncratic credit risk between countries. In hindsight, that doesn’t make a lot of sense, since it was based on what Willem Buiter calls the “paper tiger” of the Maastricht treaty — the idea that somehow, after signing that piece of paper, sovereign governments would change the habits of decades or even centuries.

Of course it didn’t seem that way at the time. Because the PIGS were funding themselves in domestic currency, their credit risk pre-euro was very low, since they could and did always just print money to repay their debts. The result was high nominal interest rates to make up for high expected future inflation and/or currency depreciation. When those countries moved to the euro, the risks of inflation and currency depreciation were massively and credibly reduced — but no one seemed to worry overmuch about the fact that those risks didn’t simply disappear, they were just being transformed into medium-to-long-term credit risk.

Even at 400bp over German sovereign bonds, Greece’s nominal borrowing costs today are much lower than they were in the era of the drachma: the markets are requiring less compensation for Greek credit risk than they ever did for drachma depreciation risk. Maybe that’s because they have more faith in Greece’s fiscal rectitude today than they did in the early 1990s. And maybe that faith is well placed: the Greeks certainly seem pretty serious, these days, about cutting spending and increasing revenues. More serious than they ever were in the 90s.

But the fact is that the changes in nominal PIGS funding costs are not perfectly correlated with the fundamental faith that markets have in those countries’ fiscal sustainability, especially now that they’ve spent the past decade with no real control over monetary policy. So while the ouzo crisis might be waning, I’m sure that we’ll see more, similar, crises in future. Because southern Europeans can’t become Germans just by signing a treaty in Holland.

My sister’s tsunami tale. You’ll want to be sitting down for this one — Smiling Footprints

OK Go do a shorter, poppier version of Fischli & Weiss’s The Way Things Go — YouTube

Me, on All Things Considered, talking locavorism — WNYC

Sam Jones returns to the blogosphere with a great rant on Greek CDS — Alphaville

Manhattan’s 34th Street will be transformed into a crosstown transit-way in Sadik-Khan’s biggest move yet — Streetsblog

Mickey Kaus for California Senate. Doomed — Slate

Greece in No Rush to Sell Bonds, Debt Chief Says — BW

Bloomberg columnist Reilly returns to WSJ “Heard on the Street” team — Talking Biz News

Greg Palast is back bashing vulture funds again: his Newsnight piece (web story here) is airing tonight, in slightly different form, on BBC World News America. The last time he mined this particular vein, I responded with a 5,500-word blog entry in defense of vulture funds, and I’m determined not to disappear down that particular rabbit hole this time, especially since all concerned — including Palast — seem to be much more constructive this time around.

So instead, let’s look at the anti-vulture bill which recently got passed by the UK parliament in second reading and which is supported by the UK government — but which still has various hurdles to pass before it becomes law. Time is short, before the UK general election, and the Conservatives, if they win (which they might not) don’t seem to consider this bill a priority; indeed, they’re forcing it to go through “full committee”, which takes me well past my level of understanding when it comes to UK parliamentary procedure.

There’s lots of detail on the bill in this House of Commons research paper, which, I’m flattered to note, quotes not only my 2007 blog entry but also a couple of follow-ups I made here in August and October.

But the interesting most thing about the bill, which will almost certainly pass if there’s another Labour government and which might well pass even if there isn’t, isn’t in the research paper at all. It’s that, surprisingly, the emerging-market debt community — which will normally scream and shout at any provocation — doesn’t seem particularly upset by it. Sure, they argued vehemently against it when given the opportunity. But in its present form, the bill is so narrow in scope that many market participants (by which I mean vulture funds) don’t see much of an immediate threat.

For one thing, the bill covers only the past debts of HIPC countries, and then only debts where the private sector has already agreed to a restructuring plan. Distressed debt investors like Hans Humes, who was happy to give an interview to Palast, are now mainstream enough that they’re key participants in London Club negotiations — which means that they actually like being able to bail in would-be holdouts once a deal emerges. For instance, Palast concentrates on the recent Liberia deal, which Humes helped to negotiate. He’s accepting 3 cents on the dollar from Liberia, a HIPC country, and as a result he’s unhappy if any other funds try to derail the process at the last minute through aggressive litigation.

If you look at Palast’s report, he clearly sides with Humes against Eric Hermann and Michael Straus: Palast characterizes the deal Humes helped to strike as being a legitimate part of “the international debt relief process for Liberia”. This is a pretty helpful stance, especially since Humes counts as a vulture investor himself, by most definitions; I’m pretty sure he’s making some kind of profit on the Liberia deal, even at 3 cents on the dollar. As for Humes, he tells me that the UK bill “is not nearly as bad as it could have been”. The two sides are hardly on exactly the same page, but it seems to me that they’re not as far away as they were, thanks largely to the fact that the UK Treasury was reasonably sensible in the way it drafted the bill.

There are worries, of course. The biggest is that if this bill passes, it will open the way for more aggressive bills being passed into law further down the road, not only in the UK but also in the US.

And this bill definitely has weaknesses: it allows HIPC governments, for instance, to be sued not only by domestic vulture funds but also by companies which provided “goods or services” — which, in the case of countries like Congo and Liberia, is likely to mean arms. If you’re going to attack vultures, it’s a bit weird that you insist on carving out an exception for arms dealers at the same time.

But it does seem to me that we’re moving towards a much more constructive debate here than I’ve seen until now: instead of having the two sides talking uncomprehendingly past each other, this bill has carved out a middle ground which neither side particularly likes but which neither side particularly loathes, either. So long as we stay at or near this middle ground, there’s hope that the harm to markets from this legislation might be relatively limited.

So maybe there’s some kind of move to the middle afoot — Palast and Humes are two examples, and Lee Buchheit is another. They’re never going to meet in exactly the same place, of course — I’m not talking about a consensus here — but even Maxine Waters seems to be moderating her position a little, and it’s pretty obvious that the arguments are taking place over ever-decreasing sums of money. If I were to look on the bright side here, I’d say that there was some hope that the vulture-fund debate is slowly fading into irrelevance and anachronism, with a couple of narrowly-written laws mopping up what’s left of it. Let’s hope so.

A picture tells, in this case, 2,833 words:

The meat of the story, though, from Keith Epstein of the Huffington Post Investigative Fund, is well worth reading: it shows an astonishingly effective lobbying organization which has persuaded lawmakers around the country that payday lenders are both popular in their local communities and not particularly profitable.

One of the biggest payday-lender lobbyists calls itself the Community Financial Services Association; it increased its spending by 74 percent over the past year, to $2.56 million. That helps pay for people like Steven Schlein, who goes around saying things like “Who’s going to make that kind of credit available to working people besides us?”. (Answer: banks, community development credit unions, non-profit lenders, etc. And if “that kind of credit” is being extended at 650% APRs, then maybe it shouldn’t be made available at all.)

The efforts are if anything even more intense at the state level:

In Wisconsin alone, efforts to establish an interest rate ceiling of 36 percent mobilized at least 27 registered lobbyists against it.

But right now, with consumer financial protection front and center in Washington, all attention is on federal regulations. And it seems that the payday lobbyists are doing a spectacularly good job:

Rep. Luis Gutierrez (D-Ill.), chairman of the subcommittee with authority over consumer credit issues, had once advocated extending to all Americans an effective ban on payday lending for military personnel that Congress passed in 2006. By last year he had scaled back, urging an amendment that would have limited to six the number of loans a borrower could receive in a year.

Gutierrez’ less-restrictive amendment died when Democrats including Rep. Alcee Hastings (D-Fla.), threatened to vote against the entire consumer protection act if the payday provision was included. It also faced opposition from Rep. Joe Baca (D-Calif.), who countered Gutierrez with an amendment the industry regarded as favorable because it had the potential to open payday lending to new markets. Baca said in a statement last year that while “fly by night lenders” should be banned, he wanted to “ensure that students, blue collar workers, teachers, police officers and others have access to legitimate payday advance loans if needed.”

The fact is that teachers and police officers with steady and reliable paychecks should never need access to payday loans: there are always sensible credit products available which can provide them more money at a lower cost. But the payday lenders are much better than most financial institutions at providing convenience: they’re open late, they don’t go through arduous know-your-customer routines, and they’re not intimidating in the way that many banks and credit unions can be. If sensible lawmakers curtail the predatory excesses of the payday lending industry, that will help improve the financial health of millions of Americans. But it’s looking increasingly like that’s not going to happen.

Free Exchange reprints this fantastic chart from the Economist:

The really fascinating charts, for me, are the second two. The one in the middle shows how consumption grew a little bit faster than income through the 70s, 80s, and 90s — but then the gap between the two completely spiralled out of control in the 2000s. There’s your credit boom and inevitable crunch right there.

And I can’t help but look at the payrolls chart in the light of the anti-immigration sentiments of Lou Dobbs and the like. It’s a lot easier to welcome foreigners to your shores when your payrolls are growing by 20% a decade than when they’re shrinking.

Incidentally, I think there’s a misprint in the graphic: the third chart shouldn’t have that asterisk, since the growth rate in that one is per decade, not per year. It seems silly to do it that way, I would have made all the growth rates annual, and maybe added a population-growth or bar to the final chart.

Maybe the reason that politicians spout such nonsense on credit default swaps (CDS) and the like is that they read newspapers, and believe what they read. Two different high-profile newspaper columnists confused Greek credit swaps in 2010 with Greek currency swaps in 2001, for instance, on Sunday alone, and I’m not sure which was worse, although I’ll give the prize this time to the FT.

First, though, the New York Times (NYT), where Gretchen Morgenson devoted an entire column to the evils of CDS, but threw in this confusing paragraph near the top of the piece:

First, Greece employed swaps to mask its true debt picture, with the help of Wall Street bankers, of course. And now it appears that some traders are using swaps to bet that Greece won’t be able to meet its debt payments and will face a possible default.

This is, I think, deliberately misleading to the point of being downright mendacious — especially since she spent the previous paragraph talking about CDS as “such swaps” and “these swaps”. There is simply no way that the average reader of the NYT can be expected to understand that the swaps of Morgenson’s first sentence, above, are entirely different animals to the swaps of her second sentence, and in fact aren’t CDS at all.

And Morgenson doesn’t stop there. She mangles OCC numbers to make CDS revenues seem higher than they are, and follows that up by describing Martin Mayer as “prescient” for writing this:

“In the presence of moral hazard — the likelihood that sloughing the bad loans into a swap will be profitable — the growth of a market for default risks could lead to bank insolvencies.”

Somehow Morgenson manages to declare that this is a “prediction” which has “come true”. But go back to Mayer’s actual article (which Morgenson, of course, neglects to link to), two things are clear. Firstly, he wasn’t predicting bank insolvencies. And secondly, insofar as he was saying that CDS might cause bank insolvencies, he had a very clear transmission mechanism in mind: banks would attempt to diversify their credit portfolios by using CDS to take credit risk from other banks. And as they started selling more and more of their own loans to other banks looking to diversify, they would do less underwriting, and nobody would have the “credit watch”. Eventually, loans could sour en masse, and that could lead to bank insolvencies if the banks had CDS exposure which they thought was diversified but in fact was just badly-underwritten.

Was that “prescient”? Not really: banks simply didn’t use the CDS market to buy loan exposure from each other (there’s a perfectly good interbank loan market for that kind of thing), and they didn’t seek to diversify their credit portfolios by writing credit protection on other banks’ borrowers. Yes, banks did bundle up CDS into supposedly-diversified instruments — synthetic collateralised debt obligations (CDOs) — which they then sold to investors who blew up, but those investors weren’t other banks: very few synthetic CDOs found their way onto banks’ balance sheets. It was the unfunded portion of those CDOs — the risks that banks kept on their own books, and didn’t sell to anybody else — which ultimately proved so incredibly toxic.

And yet we almost expect this kind of thing from Morgenson, which is why I think the worse column, this weekend, was the one in the FT by Wolfgang Münchau, headlined “Time to outlaw naked credit default swaps”:

Naked CDSs are the instrument of choice for those who take large bets against European governments, most recently in Greece. Ben Bernanke, the chairman of the Federal Reserve, said last week that the Fed was investigating “a number of questions relating to Goldman Sachs and other companies in their derivatives arrangements with Greece”. Using CDSs to destabilise a government was “counter-productive”, he said. Unfortunately, it is legal.

Firstly, Münchau has done exactly the same thing as Morgenson, eliding 2001′s currency swaps with 2010′s CDS. Goldman Sachs, in its derivatives arrangements with Greece, wrote currency swaps, not CDS. And when Bernanke answered a question about CDS on sovereigns, he was not talking about his investigation into Goldman Sachs. Not that you’d guess it from reading Münchau.

But more to the point, Münchau simply asserts at the top of his column that the eurozone is “currently subject to a series of speculative attacks”, without adducing any evidence, and then concludes that the CDS market should essentially be banned. Oh, and he gets CDS very, very wrong:

A typical bundle would be €10m worth of Greek government bonds. To insure against default, the buyer of a CDS pays the seller a premium, whose value is denoted in basis points. Last Thursday, a CDS contract on five-year Greek bonds was quoted at 394 basis points. This means that it costs the buyer €394,000 per year, for five years, to insure against default. If Greece defaults, the buyer gets €10m, or some equivalent. What constitutes default is subject to a complicated legal definition.

“If Greece defaults, the buyer gets €10m, or some equivalent”? Well, yes, but Münchau fails to mention that in order to get that €10 million, you have to give up your bonds. Most CDS are cash-settled, and the amount of money changing hands in the event of default can be a tiny fraction of the face value of the bonds. For instance, when Fannie Mae and Freddie Mac defaulted, the CDS auction ended up at more or less 100 cents on the dollar: people who had bought CDS protection didn’t benefit from it at all.

Münchau doesn’t stop there. Just watch his rhetoric ratchet up:

A naked CDS purchase means that you take out insurance on bonds without actually owning them. It is a purely speculative gamble. There is not one social or economic benefit. Even hardened speculators agree on this point. Especially because naked CDSs constitute a large part of all CDS transactions, the case for banning them is about as a strong as that for banning bank robberies.

I’m going to come out and say that this is simply untrue: I defy Münchau to find me a single “hardened speculator” who thinks that “there is not one social or economic benefit” to a naked CDS purchase. Of course, there are lots of very good fundamental reasons why people might want to buy credit protection on Greece without owning underlying bonds. Maybe you are or will be owed money by an arm of the Greek government. Maybe you have businesses in Greece, and are worried that in the event of a default you won’t be able to repatriate your profits there. Maybe you intend to enter into a contract with a Greek company who you trust and understand, but want to hedge sovereign risk which is out of that company’s control. These are not “purely speculative gambles”, they’re ways of facilitating capital flows into Greece. Yet Münchau dismisses all such arguments without even understanding them:

Another argument I have heard from a lobbyist is that naked CDSs allow investors to hedge more effectively. This is like saying that a bank robbery brings benefits to the robber.

No, Wolfgang, it isn’t like saying that at all. A bank robbery involves theft, and the robber leaves the bank with more money than he started with. When an investor buys credit protection, that’s a negative-carry trade: the investor leaves the trade with less money than he started with, and only makes a profit in the event that the underlying credit blows up, or in the event that he takes off his trade, and thereby loses his credit protection, after CDS spreads widen.

But of course Münchau isn’t trying to put together a solid argument here: he’s just trying to fan the flames of anti-banker sentiment, perhaps in the hope that they will help to obscure the real fiscal problems in the eurozone which are ultimately responsible for Greece’s current situation. He should remember that when a house is on fire, the first thing to do is to put out the flames. There will be lots of time later to start asking questions about who stood to benefit from the blaze.

(HT: Sanghvi)

Inside the Excruciatingly Slow Death of Internet Explorer 6 — PopSci

Morgan Stanley spin-off to wed JP Morgan spin-off: isn’t that a bit like marrying your first cousin? — Reuters

Atlantic Web Site Paradise Restored! — Atlantic

My sister’s story of being caught in the tsunami: the short version. Long version presumably to come later — Smiling Footprints

Michael Lewis: “I have an email address and I’m thinking of shutting that down.” — Atlantic Wire

Thank you — TED

I kinda love that “principal on-air pundit” is a genuine job description. I hope Chrystia has it on her business cards! — PRNewswire

Facebook wins US patent for ‘news feeds’ — Yahoo

Vanity Fair has a long excerpt from Michael Lewis’s excellent new book, The Big Short. The excerpt follows Michael Burry, a hedge-fund investor who was almost too early getting short the subprime housing market, and who managed to annoy his investors mightily despite making them millions of dollars.

The excerpt includes a pretty scandalous tale about how Wall Street banks treated their clients when it came to providing them with reliable marks. But is it true? Here’s what Lewis writes:

In the spring of 2007, something changed—though at first it was hard to see what it was. On June 14, the pair of subprime-mortgage-bond hedge funds effectively owned by Bear Stearns were in freefall. In the ensuing two weeks, the publicly traded index of triple-B-rated subprime-mortgage bonds fell by nearly 20 percent. Just then Goldman Sachs appeared to Burry to be experiencing a nervous breakdown. His biggest positions were with Goldman, and Goldman was newly unable, or unwilling, to determine the value of those positions, and so could not say how much collateral should be shifted back and forth. On Friday, June 15, Burry’s Goldman Sachs saleswoman, Veronica Grinstein, vanished. He called and e-mailed her, but she didn’t respond until late the following Monday—to tell him that she was “out for the day.”

“This is a recurrent theme whenever the market moves our way,” wrote Burry. “People get sick, people are off for unspecified reasons.”

On June 20, Grinstein finally returned to tell him that Goldman Sachs had experienced “systems failure.”

That was funny, Burry replied, because Morgan Stanley had said more or less the same thing. And his salesman at Bank of America claimed they’d had a “power outage.”

“I viewed these ‘systems problems’ as excuses for buying time to sort out a mess behind the scenes,” he said. The Goldman saleswoman made a weak effort to claim that, even as the index of subprime-mortgage bonds collapsed, the market for insuring them hadn’t budged. But she did it from her cell phone, rather than the office line. (Grinstein didn’t respond to e-mail and phone requests for comment.)

The whole point of being a broker-dealer is that you should be willing to make a two-way market and provide vaguely reliable marks in just about anything — rather than fall off the face of the planet for a week just when you’re needed most.

This story makes Goldman Sachs in particular look particularly bad — the bank which prides itself on superior risk management and being a provider of liquidity to the markets is now coming up with ludicrous excuses about “systems failure” and making furtive calls on an unrecorded cellphone trying to spin a highly-improbable tale that it doesn’t need to provide any more collateral because honestly the market isn’t crashing around its ears, the visible implosion of the Bear Stearns hedge funds notwithstanding.

But I’ve spent a chunk of this morning on the phone to Goldman Sachs, and they say the story isn’t true. Goldman’s clients, they say, including Burry, got their valuation reports for Friday June 15 and Monday June 18 on the next business day, as is standard practice: the valuations for June 15 were received on June 18 and the valuations for June 18 were received on June 19. The report on the 19th might have been received a bit later than normal — that might be the “systems failure” that Lewis refers to — but Goldman denies outright any suggestion that it was MIA between June 15 and June 20.

Goldman also denies the suggestion — made explicitly in the book, but not in the magazine excerpt — that conversations on Grinstein’s office phone would have been recorded. No, they say, conversations on that phone were not recorded.

The story of Goldman disappearing for a few days ties into Lewis’s bigger theory of what was going on at the time: that Goldman was net long the subprime market as late as June 2007, and then rushed to get short only when the Bear Stearns funds collapsed. A bit later in the book, Lewis has this footnote:

The timing of Goldman’s departure from the subprime market is interesting. Long after the fact, Goldman would claim it had made that move in December 2006. Traders at big Wall Street firms who dealt with Goldman felt certain that the firm did not reverse itself until the spring and early summer of 2007, after New Century, the nation’s biggest subprime lender, filed for bankruptcy. If this is indeed when Goldman “got short,” it would explain the chaos in both the subprime market and Goldman Sachs, perceived by Mike Burry and others, in late June. Goldman Sachs did not leave the house before it began to burn; it was merely the first to dash through the exit — and then it closed the door behind it.

If this is true, then it’s testament to Goldman’s fleetness of foot that it could turn so abruptly from being long to being short. But of course that kind of move is certain to have large repercussions in the market. And there’s a clear implication here that Goldman was mainly worried about Goldman at the time, and was happy leaving its clients, like Mike Burry, out in the cold while it scrambled to reposition its own book. That would definitely be something to bear in mind when Goldman tells you how client-focused it is, how it always puts clients first, and how it doesn’t really have much in the way of prop trading, it’s mainly just making markets for clients.

So, did Goldman only start cooperating with Burry once it had itself got short and was therefore on the same side of the trade as him?

The official Goldman story is actually not all that far from the one put forwards by Lewis. Goldman says that they started hedging their long mortgage positions at the beginning of 2007, but that they were still net long at that time, and that those hedges grew larger over the course of 2007 in general, and at the end of the second quarter in particular. In other words, the story from the Goldman PR operation is entirely consistent with Goldman becoming net short in June 2007 — which is also when, according to Burry and Lewis, it started becoming much happier to provide aggressively low marks on mortgage bonds, and aggressively high marks on the value of CDS on mortgage bonds. It wasn’t long before it was showing those marks not only to Burry but also to AIG, demanding billions of dollars in collateral against its own CDS position.

So where do I stand on the question of how Goldman in particular, and Wall Street in general, treated its clients at key points in the history of the subprime meltdown? I think that Wall Street was slow to mark CDS realistically, and I believe the story earlier in the book about how Bear Stearns would send out official marks on subprime CDS which were nowhere near the levels at which it would ever actually write new business. I think there was a spectrum in terms of how responsive and accurate the Wall Street banks were, and that the banks which were most short the subprime market — Deutsche and Goldman — were also the most responsive and accurate.

In other words, your experience as a client of a Wall Street bank was going to be much more pleasant if the bank was positioned on your side of the trade than it would be if the bank was positioned against you. Obscure instruments like credit default swaps on the senior tranches of synthetic subprime collateralized debt obligations are never going to be traded transparently on screens, and all traders have a tendency to give out marks in such a manner as to make their own books look good — especially at or near the end of the month. That might not be as true of Goldman as it was of Bear Stearns, but it will still always be a little bit true, at the margin.

I do believe that Burry was having difficulty getting through to Grinstein between June 15 and June 20 of 2007, even if the bank did manage to send him client valuation reports in that period. When any bank is going through turmoil in a highly volatile environment, it will always have a tendency to try save its own bacon before worrying about giving great service to relatively small clients. As I’ve said many times before, if you do a derivatives trade with Goldman, then Goldman is — at least in the first instance — taking an equal-and-opposite bet to yours. So don’t expect a lot of sweetness and light out of them if and when things start moving in your direction.

Can someone explain to me why and how politicians seem to be particularly susceptible to getting the issue with Greek credit default swaps completely backwards? And why reporters simply parrot their nonsense, rather than calling them on it?

Exhibit A is Carolyn Maloney — my very own representative in Congress, whose district covers all of the big Wall Street firms in Midtown — as reported in the FT:

Ms Maloney compared the use of credit default swaps in the Greek situation to the “activities that brought down American International Group”, referring to the US insurer that collapsed and was bailed out in September 2008.

Er, no, Carolyn. The activity which brought down AIG was the fact that AIG sold a lot of credit default swaps on subprime mortgage bonds — essentially insuring those bonds against default. When they defaulted, AIG became insolvent. Greece, by contrast, has never written any credit default swaps on anybody. If there’s any issue with CDS in Greece at all, then it’s with people buying CDS on Greece — insuring themselves against the risk that Greece defaults. There’s no “shocking echo”, to use Maloney’s words, of AIG in Greece at all, except if you don’t understand the first thing about how credit default swaps work.

Exhibit B is German financial watchdog BaFin, as reported by Reuters:

Germany has taken steps to identify speculators in Greek debt to try to prevent them from profiting unduly from any bailout of the ailing euro zone economy, a source with direct knowledge of the matter told Reuters…

“It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators,” the source told Reuters.

“The result of the ‘Greek tragedy’ is that the political environment has become such that the Credit Default Swap (debt insurance) problem has come to the fore.”

Again, this makes no sense, since if there’s a problem here it’s with people using the CDS market to bet against Greece. If and when Greece gets bailed out by Germany, the bailout will enable Greece to pay its debts, and anybody who’s short Greece will lose money. What’s more, the CDS market is a derivatives market, which references Greek debt but which sees none of the cashflows from it. Any money flowing from Germany to Greece will end up in the pockets of Greece’s bondholders, where it belongs — there’s really no mechanism at all whereby it can end up in the CDS market.

So how could these evil speculators profit “unduly” from a German bailout of Greece? That key question is never asked, or answered. Yes, it’s possible that somehow they’re betting on volatility in Greek debt, rather than making big directional bets, and that activity in the CDS market has increased that volatility. But even then a German bailout would almost certainly reduce volatility, and therefore the profits on their trade.

But of course it doesn’t matter that these political actors are making no sense: it’s all a big Kabuki, wherein anybody bashing banks in general, and Goldman Sachs in particular, gets automatic political brownie points. And there are no points at all, it seems, for basic financial literacy.

The WSJ today gives a surprisingly favorable review to Spark, by Frank Koller, a book extolling the virtues of Cleveland manufacturer Lincoln Electric and its no-layoffs policy:

Mr. Koller contends that layoffs deprive companies of profit-generating talent and leave the remaining employees distrustful of management—and often eager to find jobs elsewhere ahead of the next layoff round. He cites research showing that, on average, for every employee laid off from a company, five additional ones leave voluntarily within a year. He concludes that the cost of recruiting, hiring and training replacements, in most cases, far outweighs the savings that chief executives assume they’re getting when they initiate wholesale firings and plant closings.

The review comes in the wake of an FT op-ed by George Akerlof and Rachel Kranton, which is a good place to start if you’re curious about whether you should buy their book:

Fair compensation should not be confused with outsize bonuses. In identity economics, performance pay demonstrates bad faith. It tells employees they are not trusted to do the right thing…

Acting in your own interest and not in the interest of clients is a failure to carry out the duties of office, to fulfil one’s fiduciary duty. While principles and responsibility sound lofty and idealistic, they can be taught, followed, institutionalised and enshrined in law. We see it every day in fire stations, on factory floors, in surgery rooms and schools. It is time to treat Wall Street like Main Street. Otherwise, it is just more risky business.

I’m not sure there’s enough here to discern a trend, but at the very least we’re seeing some signs of pushback, in the FT and WSJ, against the conventional wisdom of labor economics.

It’s also worth performing a thought experiment: how bad would the crisis and subsequent recession have been if there was no such thing as bankers’ bonuses, and banks instead paid very large salaries to their top employees? My feeling is that we would be much better off right now, and that a professionalized banking system, which looked and felt much more like other professions like doctors and lawyers, would be a much less systemically-dangerous place.

And remember too that doctors and lawyers almost never get laid off.

The problem, of course, is that it’s essentially impossible to get there from here. Still, it’s intriguing to think of what might happen if bankers started behaving a lot more like arc-welder manufacturers.

In 2001, after the 9/11 attacks, former U.S. President George W. Bush signed into law a $15 billion airline bailout, and I remember reading (I can’t find it now) a cogent argument that it really didn’t make much sense, since the airline business was reasonably competitive.

If any given airline was solvent, then throwing money at it would be unlikely to change the mathematics of any decision as to whether or not to invest money in new planes or flights. And throwing money at an insolvent airline just ends up bailing out creditors and shareholders, and makes it harder for younger, nimbler competitors to enter the market.

I was reminded of that argument when I saw Daniel Davies’s short post about how difficult it is for a government or central bank to get banks lending again:

Banks make loans and then work out how to fund them, they don’t raise deposits and then work out how to lend them. Therefore there basically is no “credit channel” of monetary policy; bank lending is exogenous (or rather, it’s exogenous to the monetary policy regime; it’s determined to a significant extent by overall macroeconomic conditions but not in a straightforward or easily analysable way).

This is a little bit of an oversimplification: if you read the BIS working paper that Davies is referring to here, it makes clear that monetary policy has little if any effect on bank lending if and only if the banking system is adequately capitalized. Monetary policy can have an effect on lending insofar as cutting interest rates helps to steepen the yield curve and thereby improve the financial health of the banking system, which generally borrows short and lends long.

But the central insight is undoubtedly true: the size of a bank’s deposit base is not a meaningful constraint on the amount of lending it does. And what’s more, if you have an adequately-capitalized bank, like say JP Morgan Chase, then throwing money at it either through fiscal policy (Troubled Asset Relief Program) or through monetary policy (cutting interest rates) is by no means guaranteed to change the amount of lending that the bank engages in.

If you want to get banks lending again, governments can try a bit of moral suasion, but ultimately it’s a decision that any bank is going to have to make on its own economic merits. And it’s likely, unfortunately, to take rather more time than most governments — and borrowers, for that matter — have patience for.

Oh, and one other thing: when the government guarantees loans, for instance through the Small Business Administration, that might do more to help increase lending — but only by transferring credit risk out of the banking sector and onto the taxpayer. And it might in fact just move lending activity into the small-business area from elsewhere in the bank, without increasing the total amount of credit that the bank makes available. It would be great to see some empirical studies on such matters.

Chris Elmendorf and David Schleicher have a plan to improve urban elections — SFGate

Andrew Sullivan on the Atlantic’s redesign — Dish

In which I recapitulate my Davos locavorism post for Foreign Policy, essay-style — FP

Ex-KGB agent Alexander Lebedev pays £1 for Independent — Times

Apple, and especially the iPad, will be huge in China. “Luxury goods are easy to fake. Premium goods are not.” — Ultimi Barbarorum

A fantastic Cockburn column on orcas in captivity — First Post

Citi’s 2009 compensation. John Havens made more than Lloyd Blankfein — SEC