Opinion

Felix Salmon

Still looking for a climate-change strategy

Felix Salmon
Mar 11, 2010 19:37 UTC

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

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

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

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

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

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

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

COMMENT

“signals that financial planning has a 5-7 year timeframe, that’s what it signals.”

Why does anybody bother to drill for oil then? I think you are avoiding the obvious conclusion.

Posted by Mr.Do | Report as abusive

It’s OK to close expensive credit cards

Felix Salmon
Mar 11, 2010 16:56 UTC

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

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

So close down the account. Easy, right?

Not exactly…

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

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

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

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

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

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

COMMENT

Is FICO a measure of expected creditworthiness or of expected profitability (fee & interest income net of credit losses, ceteris paribus) of an individual borrower?

If the former, dropping one line of credit for a cheaper one ought not have any impact on your score. If the latter, expect a lower score. Said differently, if we find out that switching negatively impacts your score, that gives us insight into the true meaning of the score (which may differ from what the scorekeepers tell the public).

Posted by Sandrew | Report as abusive

Why inflation is worse for investors than default

Felix Salmon
Mar 11, 2010 15:47 UTC

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

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

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

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

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

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

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

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

COMMENT

Not so sure you can separate the two risks anymore, when sovereign debt effectively undergirds every asset class today, via explicit and implicit government guarantees. For sovereign debt, inflation is simply default by another name. We are all sovereigns today, and so are all the risks, inflation or default.

Posted by maynardGkeynes | Report as abusive

Twitter datapoint of the day

Felix Salmon
Mar 11, 2010 14:51 UTC

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

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

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

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

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

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

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

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

COMMENT

What amazes me about Twitter – and CNN – is that it’s ever taken seriously.

There is no doubt you can squeeze more news content into Twitter format than one may derive from watching hours of CNN (don’t try this at home). But that’s still not saying much.

Posted by HBC | Report as abusive

The payday lender CFPA carve-out

Felix Salmon
Mar 11, 2010 14:26 UTC

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

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

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

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

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

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

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

COMMENT

Most states have their own laws in place for payday lenders. dWj makes excellent points. I work for a payday lender and all of our rates are posted in plain view for every customer to see. Every customer that leaves my store knows exactly what they are going to pay back when their loan is due. We offer $100-$300 loans that the average fee would be $15-$45 for. That’s less than an nsf fee from a bank in most cases. We don’t offer $200,000 loans like banks do that have sent the housing market and economy to shambles.

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Counterparties

Felix Salmon
Mar 11, 2010 05:13 UTC

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

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

Google Maps Finally Adds Bike Routes — Wired

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

Reuters social media guidelines — Reuters

Investors Need Climate Information to Make Decisions — American Progress

Don’t cork up consumer financial protection! — Prospect

COMMENT

Don’t clap, would be my strong feeling, just keep listening

Posted by thelanigan | Report as abusive

Why did Nick Denton truncate Gawker’s RSS feeds?

Felix Salmon
Mar 11, 2010 00:27 UTC

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

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

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

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

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

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

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

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

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

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

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

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

COMMENT

There might be a reason for that fact, although if there is I don’t really understand it. But I do see this move as a signal that Denton is exiting the blogosphere and that he has his sights set on higher ambitions. Expect his next move to be to rejigger the home pages of Gawker and his other blogs so that the big featured stories at the top get bigger, and the amount of real estate devoted to a simple reverse-chronological listing of all blog entries gets ever smaller. The NYT has Times Wire, if you want a reverse-chronological bloggish content stream, but it’s buried within the site and is something of an afterthought. Gawker is likely to be moving in a similar direction: towards an edited home page and away from an automatically-generated blog page. It’s the beginning of the end of an era.
thompson44

Colorado Business Immigration

Posted by thompson44 | Report as abusive

That stubbornly high credit card debt

Felix Salmon
Mar 10, 2010 23:17 UTC

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

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

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

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

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

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

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

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

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

COMMENT

We should be talking about how to stay out of debt, after we have managed to pay off those debt. most families are deep in debt not becouse of low income, but becouse of the way they spend, we need reeducation.

Posted by Anonymous | Report as abusive

The perfect overdraft

Felix Salmon
Mar 10, 2010 20:29 UTC

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

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

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

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

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

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

COMMENT

“On average in the industry, 85% of customers have NEVER had an overdraft transaction”

Well, a good part of that is because overdraft fees are horrific in the US. In the UK, I’d suspect that more than 85% of customers have had an overdraft transaction, and maybe a majority are regularly overdrawn. I’ve got a job that pays reasonably well (for a journo, anyway) and I’ve been overdrawn many times in the last year. Most students spend pretty much their entire academic career carrying an overdraft.

Basically, in the UK system an overdraft is a pre-arranged revolving credit facility with no minimum payment and with the limit determined by the bank based on your history of repayment and of course your regular income.

Posted by GingerYellow | Report as abusive
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