Felix Salmon

My Wired article about Charles Komanoff went through a lot of editing, as you might expect for a story in the June issue of a magazine which starts with a lunch in December. And sadly, one of the big bits which ended up on the cutting-room floor was the stuff about Skymeter, a Toronto-based company which gets a brief shout-out at the end of the piece, and whose chief scientist, Bern Grush, has a great blog devoted entirely to congestion pricing.

The idea behind Skymeter is that they use what they call financial-grade GPS: devices in your car which are much more accurate than the GPS devices found in navigation devices or cellphones. They can tell where you are to within a few centimeters, and once you can do that, all manner of possibilities open up in terms of charging not just to get into a city center, but rather to charge by the mile or by the minute on specific streets. Raise prices where congestion is worst, keep them low where it isn’t a problem, and solve lots of other problems at the same time — like easy charging for parking (you just park your car on the side of the road and pay for however long it’s parked there) and for pay-by-the-mile insurance. Or transform the economics of something like Zipcar, which currently just charges by the hour even when charging by a combination of hours and miles would make more economic sense.

A GPS-based congestion-pricing system makes an enormous amount of sense: no gantries to build, and no weird artifacts like the ones you’d get in New York if you just charged everybody driving south of 60th Street. That’s the way to charge lots of money to drive on Avenue D, and no money to drive around downtown Brooklyn: it’s silly. And the technology is already up and running: Germany and the Slovak Republic are using GPS devices on trucks, and Singapore has announced it’s going to install it on all motor vehicles at some point. What’s more, the European Union is heavily invested in it, now that it’s spent $4 billion on a new GPS satellite network called Galileo.

Skymeter has done a very good job of making sure that it addresses privacy issues very carefully: essentially there aren’t any, and it’s easy to wipe all history of where you’ve been when you pay your bill. (Of course, you can keep that history for your own records if you like.) The company is also careful on the billing front: the system is designed so that where there are errors — and there will always be errors — they will be in favor of the driver, not the tax collector.

Skymeter devices wouldn’t even need to be mandated: you just make them so desirable that everybody wants one, because they make things like insurance and parking so much easier and cheaper. In theory, lots of things are possible: you could even pay people not to drive on a certain day if you wanted. And you make life hard on cars without the devices, by charging them large tolls to cross bridges, and lots of money for parking — that kind of thing.

The main problem with Skymeter right now is the up-front cost of manufacturing and installing the devices, but that’s coming down rapidly, and I’m pretty sure that eventually we’re all going to live in a world where our auto-related expenditures are paid automatically, and a dynamic system of congestion prices keeps traffic speeds up. (The devices can even give you a big rebate if it takes you longer than say 15 minutes to get across town.) It’s all a bit sci-fi, but I believe it both can and will happen at some point. I just don’t know when.

In 1995, Shearson Lehman options trader Max Keiser had a dream — a dream of creating a futures exchange based on movie box-office grosses. It was a dream which lasted at least through 2007, when he gave an interview to Trader Daily’s Robert LaFranco, wistfully talking about what might have been.

“We were going to change the way Hollywood worked,” says Keiser today. “It was an industry ready for change.” …

“I suddenly looked at the movie industry like Michael Milken viewed the bond market. The original business plan of HSX was an exchange for predictive products that would lead to re-monetizing the industry and breaking up the Hollywood cartel. Using this platform we would allow many, many, many more people to have access to funds.”

LaFranco explains some of the history of the Hollywood Stock Exchange, going back to 1999:

Although Keiser and Burns were still enamored of the notion of building a real futures exchange, their new investors dismissed the idea outright; they were, instead, eyeing an IPO. HSX built up a staff of about 100, more than a third of them in public relations and marketing, and the company went to great lengths to generate awareness, drive traffic and boost ad dollars — the favored revenue model of the day.

“I was outvoted,” Keiser grumbles today. “It was gut-wrenching. The board bailed on me and my vision.”

You can imagine my surprise, then, when I saw Keiser’s vision being eviscerated in The Big Money by… none other than Keiser himself!

Hollywood is based on hype, and a derivative of hype is zero, Keiser argues. “This could be the Enron of 2011 or 2012,” Keiser warns. He adds with sarcasm, “Let’s take the fantasy of Hollywood and mix it with the fraud of Wall Street. That’s a winner. You’re mating two species of egomaniacs.” …

Keiser points to the popular phrase “Hollywood accounting,” a euphemism for the opaque and often dishonest ways of keeping the books to maximize studio profits. “They’re going to take an industry famous for its false accounting, and create a derivative on that!” Keiser said.

So here’s a question for Heidi Moore, the author of the TBM piece: what accounts for Keiser’s astonishing volte-face? (And, what on earth does “a derivative of hype is zero” mean?)

Moore’s article, with Keiser’s interview at its core, is scathing about the pretty benign prospect of box-office futures, asking silly questions like this:

Why does anyone think we can effectively regulate movie star futures if we had to bail out AIG?

The point, of course, is that we don’t need to effectively regulate movie star futures, since they’ll be traded on an exchange and will pose no systemic risk. Heidi finishes her piece with an open question, asking if we should be scared by this nascent market — a market, incidentally, which will almost certainly be killed by the financial-reform legislation. (Blanche Lincoln, whose sister is a Hollywood film director opposed to box-office futures, added movie grosses to onions as the two things that futures can’t be traded on.) The fact is that there’s really nothing to be scared of at all: if you don’t play in the market, no harm can befall you.

But I really do wonder why Keiser has now turned so vehemently on his former business model.

Update: Lots of reactions to this! Max Keiser himself came first, pointing to a YouTube video in which he says, while sporting a bad facelift in front of a picture of palm trees and the Hollywood sign, that what changed was the Commodity Futures Modernization Act and the repeal of Glass-Steagal. But both of those came long before 2007, when he gave his interview to Robert LaFranco.

Cynic, in the comments, speculates that what really changed was that Keiser’s investment in HSX went to zero and that he founded a new company, Kinooga, which would compete with these new contracts for business.

And Heidi responds at TBM, saying that bespoke derivatives caused lots of problems, and ignoring the fact that exchange-traded derivatives caused no problems at all. Putting derivatives on exchanges doesn’t stop people from losing lots of money on those exchanges — but it does insulate any systemic effects of those losses, which are borne by the bettor and not by society more generally.

The fact is that box-office futures are no more a financial innovation than onion futures would be. Futures markets  have been around for millennia, there’s nothing innovative about them. They’re just very handy and useful things to have.

Update 2: In the wake of a more-heat-than-light tweetfight last night, Heidi has left another comment here.

NEDAP has an extremely important new report on a particularly evil and sleazy part of the predatory financial universe: debt buyers. These institutions make hundreds of millions of dollars by suing people in low-income neighborhoods, often without properly serving them with notice that they’re being sued. When the alleged debtor doesn’t show up for court, the debt buyers get a default judgment, and start attaching bank accounts and garnishing wages. Often they do this successfully even when the debt is not legitimate.

The debt buyers are massively profitable, despite the fact that they have almost no legal leg to stand on:

When debt buyers purchase debts, they become legal owners of those debts, but obtain very little information about them. Debt buyers usually receive an electronic file that includes only a person’s name and social security number, last known address, the amount allegedly owed, the charge-off date, and the date and amount of the last payment. The portfolio does not include documentation of the debt, such as the governing contracts and account statements. This information is insufficient to ensure that the debt buyers collect the correct amount from the correct person. Debt portfolios are regularly sold on an “as is” basis, without consideration for whether collection of the debts in the portfolio is legal.

Debt buyers’ ability to obtain additional documentation from the original creditor is extremely limited: they may purchase the right to request such documentation in a limited number of cases, or they may not have access to any supporting documentation at all. If the debt is resold to another debt buyer, obtaining such documentation becomes even more difficult, as most second and subsequent sales of debt portfolios do not include any direct access to the additional documentation from the original creditor, which means that those debt buyers almost certainly lack the documentation needed to support lawsuits filed against people whose names appear in their portfolios.

The report makes a number of very sensible recommendations, including a ban on debt buyers filing lawsuits if they don’t have any evidence which proves the debt is owed. More generally, something has to be done to rectify the enormous asymmetry in sophistication and legal ability between the two sides here: as the report says, “many people sued are pressured into unfair and unaffordable settlements that leave them in a worse position than if they had ignored the lawsuits”.

This entire industry couldn’t exist, of course, if it wasn’t for the banks, which tacitly condone this behavior by selling debt buyers utter garbage debt. So while going after the debt buyers themselves is obviously the first order of business, it’s also worth putting pressure on the banks to stop dealing with them. I wonder which bank might like to be first in denouncing these gruesome parasites.

Update: I should add that the report was not just the work of NEDAP: it was co-written with the Urban Justice Center, with help from attorneys at the Legal Aid Society and MYF Legal Services.

Alphaville has most of the datapoints you need this morning. There’s the European bourses, which started off low and basically haven’t moved all day; the FTSE 100 is now pretty definitively below 5,000 for the first time since September. There’s the flight-to-Germany trade: 10-year Bunds are now below 2.86%. There’s Libor, which is looking ugly and getting worse. There’s the euro, of course, which is now at 1.22. And, in case you want policymaker panic rather than market panic, there’s the proposed German short-selling ban.

All of which makes the downward lurch in US stock prices seem pretty reasonable, in context. Stocks are naturally volatile things, and when you decisively break a barrier like Dow 10,000, there’s no predicting what will happen next. But you might want to have another look at the spreadsheet that Frank Tantillo and I put together comparing the Dow at the bottom of the flash crash to the Dow now: not only is the average at pretty much exactly the same place, but nearly all of the component stocks are within a point or two of their flash-crash lows. (IBM, 3M, and P&G are the outperformers; Caterpillar and Microsoft are the underperformers.)

The S&P 500 is down 2.8% today: another day like this, and it’ll break back down into triple digits. Just remember, though, that it was not all that long ago the S&P was trading below 700. As ever, if you’re invested in stocks, make sure you have a strong stomach. And expect a lot more volatility going forwards.

Peter Kafka actually bothered to ask the NYT about how traffic from side doors (as opposed to the “front door”, which is the home page) would be treated once the paywall goes up. And he got a pretty unambiguous answer:

Readers that are referred from third party sites such as blogs will be able to access that content without hitting their limit, enabling NYTimes.com to continue being a part of the open web.*

That’s great news, and it confirms that the paywall is more of a navigation fee than an FT-style meter. All paywalls have workarounds, and it’s silly to spend a lot of effort trying to stop the determined from reading your content for free. The NYT paywall instead targets the loyal readers who go straight to the site.

Of course, there are consequences to that decision. For one thing, it shrinks the universe of potential subscribers, and therefore the amount of revenue the paywall scheme might realistically make. And more invidiously, it places the NYT’s own blogs at a huge disadvantage compared to everybody else’s. I can link to an NYT article knowing that my readers will always be able to follow the link, but Paul Krugman can’t. Which isn’t going to make him very happy.

And then there are all those devilish details as regards what counts as a story for the purposes of the meter. If a David Leonhardt column links to his rent-vs-buy meter, does following that link tick the meter up a notch? If I go to a blog home page and then click to read an individual post in full, is that an extra story-view? If I quickly click through half a dozen David Pogue blog entries, is that six? And what about search? Is the NYT essentially telling its non-subscribers that they should only use Google to find NYT stories, rather than its own search product? Does a page of search results even count towards the meter, or just when you click on one of those results to read a story?

Many of these details will surely emerge in coming months. But it does now seem as though one of the biggest questions seems to be settled. If you come to the NYT from Twitter or Facebook or Google or blogs, your pageview will not count towards your quota. That’s good news.

Update: The NYT has now sent me their own version of this statement, which explains that the side door works a bit like foul balls in baseball: they count when you’re not about to strike out, but they don’t count when it really matters.

Once the pay model is implemented next year, the majority of our readers will be unaffected when using the site and will continue to have the same experience they have always had. Readers will only be prompted to pay after reaching a certain reading limit. The pay model will be designed so readers that are referred from third party sites such as blogs will be able to access that content. Links from referrals will count toward reading limits but never trigger the gate, enabling NYTimes.com to continue being a part of the open web. Additional details we be unveiled later in the year including the reading limit and pricing.

Murdoch, online: “Non-members who reach a story page are greeted by a Times+ sign-up and login overlay, obscuring the article; there’s no taster, no excerpt and no way that anyone will find those articles via search sites.” — PaidContent

In which IBM appropriates Mehretu imagery in service of congestion measuring and pricing — YouTube

If your ad is such an obvious Christo rip-off that it needs a disclaimer at the end, prolly best to scrap it — YouTube

My profile of Charles Komanoff and his congestion-pricing crusade — Wired

Between 1990-2007, GDP per working age adult increased by 32% in the US, by 30% in EU, and by 31% in Japan — MoJo

Watch Geithner sink a 3-pointer — TBI

The president of the SF Fed makes $20 more per year than her NY counterpart — WSJ

I’m quoted in Tim Fernholz’s piece on banking the underbanked — TAP

Back in November, I had some advice for the Loeb judges: don’t start up a blogging award, it won’t work. They responded by making me a judge — not of the blogging award, but of the Magazines category. The preliminary judging was held in Los Angeles in March, where the shortlists were decided. Today, the shortlists were announced and I believe that the winners have now been decided.

Reuters nominated me for the Online Commentary and Blogging category and I didn’t make the final four. And this is the point at which according to convention I should talk about how wonderful the nominees are and how any of them will make a worthy winner. But I won’t, because this award is broken — and indeed is even more broken than I had thought it would be when I first wrote about it in November.

To understand why, put yourself in the position of an editor who asks a writer to start up a new blog. The writer agrees, but the blog never takes off. The writer insists on filing carefully honed and balanced self-contained news analyses and does so only every few weeks. After a handful of these things, the blog is abandoned as a failure and the writer continues doing the old-fashioned journalism he’s clearly good at.

Well, a blog just like that is a finalist for the Loeb award. After filing the grand total of 21 blog entries over the course of all of 2009, Jim Prevor, or his editors, picked the best three and submitted them, along with a $100 check; the blog had already been killed by that point and Prevor has posted nothing this year.

The judges were under quite specific instructions. First, they had to judge the blogs by exactly the same criteria used by all the other judges:

* News Value: insight, informative qualities and durability.
* Originality and/or Exclusivity: enterprise and discovery.
* Reportorial Quality: thoroughness and balance.
* Writing Quality: clarity in dealing with description, concepts, findings and complex issues.
* Analytical Value: application of current economic thinking, breadth and depth of coverage, contribution to helping readers see complex issues in a new light.
* Production Value and Visual Impact: (where applicable).

Without violating any confidences, I can say that the judges did just that and did indeed, for instance, look for “balance” in the entries they were judging. That was, after all, their job.

But it gets worse: the judges were also told that although they had to judge the entire submission, they could judge only the submission — and remember that the submissions comprised the grand total of three blog entries. Everything which makes a great blog great was, essentially, placed out of bounds by this restriction. Here’s what I wrote in November:

Blogs are a conversation, and a lot of the value they add lies in their comments sections and in the interplay between each other. The unit of quality for a blog is the blog itself, a living thing, rather than any individual blog entry or even series of entries. The only way to judge blogs is to read them and interact with them in real time. That just doesn’t work in the context of a Loeb jury, which consists of important and busy journalists receiving packages of printed-out entries and then sitting in their armchair reading them in sequence. It’s hard enough to get them to watch all of the broadcast entries; it’s simply impossible to ask them to start regularly reading a list of blog nominees.

At least I thought that they would try; that a number of different blogs would be submitted and that somehow the judges would attempt to pick the best ones. But in fact it never even got that far. The Loeb award for Online Commentary and Blogging is an award not for a blog but rather for a submission of exactly three blog entries, with the concept of a blog being stretched far enough so as to include another of the finalists, the Economist’s Online Debates.

The other two finalists are more familiar to the blogosphere: Francine McKenna‘s single-minded blog on auditors and David Pogue‘s chatty blog at the NYT, where he interacts with the readers of his technology-review column. Certainly it’s impossible to imagine either of them being nominated for any other prize at the Loebs, but that just underlines how weird this award is: it’s meant to recognize that great business journalism has moved online and into the blogosphere and should be awarded when it appears there just as when it appears in print or on TV — but in doing so it seems to be happy to give up some quite specific standards of what great business journalism should be.

If something like Pogue’s Posts would never get a Loeb nomination if it was a front-of-the-book column in a weekly tech mag, what’s it doing getting a nomination here? It was certainly helpful to me, during my deliberations as a judge, to ask whether I felt that this particular article was worthy of winning the most distinguished prize in business journalism. But it’s hard to apply that question to the two new categories this year — blogging and Personal Finance, which by its nature is servicey and tends to retread the same ground repeatedly. Indeed, one of the finalists in that category was at heart a reworked version, with more of a personal-finance perspective, of a story which appeared in the same newspaper more than two months earlier. Does it matter to readers if a personal finance story doesn’t break news? Of course not, so maybe that shouldn’t be a criterion. But then you’re treating that category differently from all the others — and if you’re going to start doing that, then you should definitely start judging blogs for what they are, rather than as something which can be judged by reading three posts.

“Cynic”, in the comments to my blog in November, says that while blogs deserve to be considered for Loeb awards, they should be considered for existing awards, rather than being shunted off into a new, unhappy category which many bloggers didn’t even bother to enter. (Yves Smith, for instance, genuinely considered the email from the Loeb awards to be spam, since it sent her off to a funny-looking Australian awards site which then asked her for cash.) There’s already a Commentary award, featuring three great finalists and Michael Wolff; it would be great if that last spot were taken by, say, Ezra Klein or James Kwak. Then, I think, it might really mean something if a blogger won a Loeb. Instead, someone is going to go home on June 29 with the blogging award, having beaten out three other finalists whose work bears no resemblance to what they themselves do. The fact that all four finalists are online doesn’t make them similar in a way that allows judges to judge them against each other; in reality they’re so different that such a determination is to all intents and purposes impossible.

Every so often, I’m approached by someone who has an idea of giving out some awards for business and finance bloggers. I normally try to scare them away by telling them that simply judging such a project would necessarily involve a lot of work. The Loebs took that incredibly difficult task and tried to make it manageable for the judges; in doing so, they failed themselves. And so the Loebs’ first foray into the blogosphere is, as I feared it would be, both unbecoming to the Loebs and utterly irrelevant to the blogosphere.

Update: Cynic’s comment is well worth reading.

Remember the Global Business Oath of the Young Global Leaders at Davos? Let me remind you: it’s a terribly silly and earnest document which begins with “As a business leader I recognize that” and ends with “This pledge I make freely and upon my honor.” In between is a bunch of do-goody pablum. But thanks to Ben McGrath’s wonderful Talk piece in the latest New Yorker, I now know that the Global Business Oath has a rival: the MBA Oath. This one has a few small differences — it starts with “As a business leader I recognize my role in society” and ends with “This oath I make freely, and upon my honor.” But it also has a big difference: it’s a book, which can be bought at places like 800 CEO READ.com.

In hindsight, this was probably the biggest problem with the Global Business Oath, whose Twitter feed has only 264 followers, to the MBA Oath’s 568. For one thing, there are many more MBAs than there are Young Global Leaders, so the MBA Oath has a naturally larger constituency of smug young backstabbers to cultivate. And more importantly, the first thing that the inventors of the MBA Oath did was sell the book rights to the concept, with some unspecified “portion” of the proceeds going to “support the MBA Oath movement”. After all, in this world, if you’re not doing well by your idea, then you hardly count as even doing any good in the first place. So Max Anderson and Peter Escher first sold their book, and then parlayed their advance, before the book was even published, into well-paying jobs in asset management. Which I’m sure comports perfectly with the final principle of their oath:

I will invest in developing myself and others, helping the management profession continue to advance and create sustainable and inclusive prosperity.

So far, over 3,000 people have taken this oath, all of whom were presumably unfazed by the idea that they were pledging their personal honor to “help the management profession continue to advance”. If, that is, they actually read the thing.

It’s the headline which strikes you first: “Strippers Declare Inflation Dead as Dealers Revive Zero-Coupon Treasuries”. Ha, strippers. Geddit? But behind the headline is a very long and dry article about the market in long-dated zero-coupon Treasury bonds, which apparently are all the rage right now:

“We are in some sort of a new normal environment and inflation is not going to be a problem anytime soon,” said Jeffrey Caughron, an associate partner in Oklahoma City at Baker Group Ltd., which advises community banks investing $20 billion of assets and is recommending that some clients buy zero-coupon Treasuries. “Strips would be beneficial if we go to anything close to deflation.”

Treasury 30-year zero-coupon bonds have returned 16.7 percent this year, including 15.2 percent in May, according to Bank of America Merrill Lynch indexes.

Strips are outperforming the rest of the $7.9 trillion market for Treasuries…

They’re beating the Standard & Poor’s 500 Index, down 2.46 percent in 2010, and the Reuters/Jefferies CRB Index of 19 commodities, which has fallen 11.3 percent. Treasury Inflation- Protected Securities, or TIPS, developed in 1997, have also lagged behind, gaining 3.32 percent on average.

It’s true that strips are great buys in a deflationary environment, because they carry no reinvestment risk. But it’s also true that these things are highly volatile, and I would think very long and very hard before advising any small or even medium-sized community bank to play in this particular pool.

Here’s a graph of the yield on 30-year strips since the beginning of 2008. The 17% return this year, as you’ll see, is positively quiescent by Strips standards, and comes only in the wake of a torrid 2009, in which strips lost about half their value. As for 2008, well, the less said about that, the better:

I’ve mentioned in the past that TIPS strips would be an interesting long-term investment, if they actually traded and existed, which they don’t. But long-dated Treasury bond strips are for sophisticated investors only, and I think it’s very dangerous to read too much into their price action. Either the yield on these things closely tracks the yield on 30-year Treasury bonds, in which case you’re in much safer territory with the more liquid plain-vanilla instrument, or else it goes completely haywire, in which case you’re simply on your own and good luck to you. (It’s not just 2008: note the crazy spike in strips yields one year ago last week.)

If you want to make a leveraged bet on the future direction of interest rates, there are lots of derivatives markets where that’s very easy. If you’re a community bank and you’re barred from making such bets, then you’re basically violating the spirit of those regulations by buying strips. They’re dangerous things, and it’s probably best to stay well away.

Jeff Bercovici finds a new study which shows just how important the NYT’s business section is to its online franchise. Here’s the chart:

Jeff notes that the WSJ is nowhere to be seen on the list of the most linked-to websites, despite the fact that it has twice the print circulation of the NYT:

PEJ’s study suggests that the links that would have gone to WSJ and FT in the absence of pay walls have been going to the Times instead. The content on nytimes.com most often linked to by bloggers is business and economic news, which accounts for 29% of linked stories — as much as the next two areas (politics/national news and technology) combined. Surely in an all-free online universe, many if not most of those links would go to financial publications instead of to a general-interest paper.

The NYT can claim only some of the credit for its dominance of the business blogosphere: this was a battle that the WSJ and FT surrendered early on, ceding the field to the Gray Lady. But now that the NYT has this enviable position, one would think that it would be trying to capitalize on it as much as possible, rather than spending an inordinate amount of management time and Carlos Slim’s money putting together a paywall which risks sending all that high-value traffic elsewhere. (Like Reuters.com, for instance.)

What the NYT should be doing is reiterating loudly and as often as possible that side doors will be completely free: any blogger linking to a NYT story can know that her readers will see that story, and not barge straight into the firewall. If there has to be a paywall, then it should be put up behind the homepage, and should act more as a navigation fee than as an FT-style meter. (I hate the FT meter, despite the fact that I have a full subscription there, because when I follow a link to FT.com from Twitter on my iPhone, I run into the firewall. The FT should just automatically give a pass to all readers coming from Twitter, especially if they’re using mobile devices.)

Unfortunately, the the NYT has been backtracking on its early statements about keeping the side doors open. And if it closes them, FT-style, then it might well lose a very large chunk of its most valuable readers: the people who read business and finance blogs and who follow links from those blogs to nytimes.com. The NYT has some good business coverage, but it hasn’t got its present dominance of the econoblogosphere through merit alone: the lack of a paywall has been much more important. It’ll be very interesting to see how willing the NYT is to throw all that away, in the service of a paywall plan which will likely not make it any money at all.

It’s politics-of-finance day today, with The Big Money running an excerpt from Jonathan Alter’s new book, about Paul Volcker and Larry Summers, while John Heilemann has a big New York cover story on the relationship between Obama, Geithner, and Wall Street.

Alter is unsparing when it comes to Summers:

Inside the White House, David Axelrod was among the few representing the so‑called populist side of the argument, and a joshing debate broke out. Axelrod asked Summers, “So, what does your plutocrat constituency make of this, Larry?”

“It’s good to be hearing what Che thinks,” Summers replied.

But if Summers was more politically shrewd and more aware of the consequences of his outbursts becoming public, the old habits persisted. When Christie Romer was brought in to be the chair of the Council of Economic Advisers, Summers tried to exclude her from important meetings. Romer fought back, even suggesting to Summers that sexism might have played a role in her exclusion, a serious charge given that he was fired as president of Harvard for perceived sexism.

“Don’t you threaten me!” Summers yelled.

“Don’t you bully me!” Romer shouted.

Heilemann, meanwhile, reports that the current administration, which saved the banks from nationalization, is now held in such contempt that Lloyd Blankfein, a Democrat, “has taken to trashing Obama to his friends in unusually brutal personal terms”, and that at least one big Wall Street bank is likely to slash its Obama donations by more than 90% in 2012.

Both Alter and Heilemann trace the decision not to nationalize to a dinner at the White House in April 2009, attended by Paul Krugman, Joe Stiglitz, Alan Blinder, Ken Rogoff, and, at least according to Heilemann, Jeff Sachs as well. Krugman and Stiglitz were in favor of nationalization, but we open about the fact that it would be an expensive and fraught course of action; Obama, faced with an alternative, sensibly took it.

The overwhelming impression I get from reading both accounts, however, is that we’re still in the middle of the story and that no one has a clue what the ending is going to be. The fate of Wall Street is not remotely settled yet, and indeed it’s not at all obvious what the Obama administration wants the fate of Wall Street to be. But Wall Street, it’s clear, is not going to be satisfied with anything short of a complete return to the status quo ante. They’re going to have to get used to disappointment.

Mark Gongloff goes out on a limb today, saying that if the final financial regulatory reform bill passes in anything like the form passed by the Senate, “the rating companies will almost certainly lower credit ratings for some of the biggest banks”.

No one from any ratings agency is quoted in the piece, but it’s worth reading between the lines here: while the story explicitly says that “all of the banks either declined to comment or didn’t return phone calls seeking comment”, there’s no such disclaimer about the ratings agencies. So I think it’s fair to assume that Gongloff got his story straight from the agencies themselves, on the proviso that he not quote them directly.

It seems that the ratings agencies want to be ahead of the curve on this issue: Gongloff points out that there’s no indication in the markets that banks’ borrowing costs have been rising at all in anticipation of the coming bill; normally ratings agencies only downgrade after spreads have widened.

On the other hand, it’s not clear just how harmful a downgrade would be. Here’s Gongloff’s worst-case scenario:

A five-notch downgrade of Bank of America by Moody’s to Baa2 from Aa3, the equivalent of an S&P rating cut to BBB from AA-, could raise the interest-rate spread over Treasury yields that the bank must pay to borrow by 1.43 percentage points, according to prevailing market rates on Friday compiled by S&P.

That could add $2.38 billion to Bank of America’s annual interest expense, assuming the bank’s long-term debt rises by a net $170 billion a year, as it did in 2009.

For one thing, no one’s going to downgrade BofA by five notches: it’s still too big to fail, after all. And according to BofA’s annual report, its total interest expense last year was already $30.8 billion: adding $2.38 billion to that would be a blow, but hardly an enormous one, given that the bank’s interest expense in 2008 was $40.3 billion, and in 2007 was $52.9 billion.

But in any case, there’s simply no way that BofA would ever allow itself to get downgraded to anything with a B handle, and if that did happen then we would be back in fully-fledged crisis mode. Certainly the bank wouldn’t be blithely increasing its long-term debt by $170 billion a year: rather, it would be deleveraging as aggressively as it possibly could. And its spreads would have gapped out by much more than 143bp.

It’s also worth noting that if credit ratings are pretty useless things most of the time, they’re particularly useless when it comes to banks. Remember when Moody’s upgraded every bank in Iceland to triple-A status in February 2007?

So I take this story as a warning to the banks to position themselves for downgrade risk, if and when a final bill gets passed. But I don’t think that any downgrades — which will probably be only one notch, in the first instance — are going to make much of a dent in their borrowing costs.

Crowded Rush-Hour Roads in Utrecht — How We Drive

For Mosel wines, “a 1°C increase in temperature would yield an increase in farmer revenue of about 30%” (pdf) — Wine Economics

Graydon Carter’s virtuoso review of Martin Amis — NYT

“My ‘option’ to return to the firm has devolved into a discussion on which way I would most like to get fired” — Above the Law

Ugly Lower East Side apartment asking over $5 million — Curbed

The Street Pianos are Coming! NYC’s Latest Public Art Experiment — Village Voice

PaidContent Founder Ali To Depart Pioneering Digital News Site — All Things D

“This is the best use of the Internet that I, personally, have ever seen” — Metafilter

The hoops David Pogue needs to jump through to approve blog comments — NYT

Mohamed El-Erian had one of his most explicitly bearish op-eds yet in the WSJ this weekend, saying that “the unwind of unstable investor positions is still in its early stages”. But he also talked a little about the necessary policy responses which have yet to be seen in Europe:

Are appropriate circuit breakers being put in place to limit the collateral damage for European growth and the global economy more broadly? …

The emphasis on circuit breakers is there, but badly targeted. Rather than focus on a defensible and sustainable fire break, too much effort and money are being deployed to defend the indefensible, like Greek over-indebtedness.

I’m skeptical that “a defensible and sustainable fire break” exists even in theory, let alone that it can be implemented in practice. Fire breaks work by isolating problem areas and preventing them from infecting the broader neighborhood. But the global financial system is far too complex and interconnected for any problem area to be isolated: as Rick Bookstaber has shown, correlations can and will appear from nowhere the minute a crisis erupts.

A fire break would, realistically, take one of two forms. Either it would be a bit like a real-world fire break, where you let Greece go down in flames but put lots of resources towards stopping the flames from spreading. I suppose the example here is Lehman Brothers: its collapse was so disastrous that it rapidly became obvious that the government would let no other large financial institution fail in Lehman’s wake. But that was hardly the message that Hank Paulson and the rest of the government wanted to send; they had hoped that letting Lehman fail would be the death of moral hazard and too-big-to-fail, rather than its rebirth. Certainly it’s hard to envisage a scenario where Greece’s collapse reduces the perception of the degree of risk in the rest of Europe.

So then there’s the other kind of fire break, where you burn down a bunch of Greek debt, causing short-term pain for Greece’s creditors, in order to make the sovereign finances more sustainable over the long term. The technical word for that is “default” — which is a lot more drastic than one might normally consider “appropriate circuit breakers” to be. And it, too, is prone to spreading uncontrollably.

This is why Europe is defending the indefensible: because failure to do so means a very high chance of chaos. Maybe once markets have sold off further, that kind of chaos might be more priced in. But for the time being, the indefensible is being defended just because the markets still seem to have faith in it and governments are hopeful they’ll be able to avoid a replay of the period between September 2008 and March 2009. The problem, of course, is that they don’t have a real plan for achieving that.

There’s a lot of conspiracy-theorizing going on around the high-level rescue of Chicago’s ShoreBank by Goldman Sachs, Citigroup, JP Morgan, Bank of America, and General Electric. The founder of the bank is BFF with BHO, and Chicago politics being what it is, everybody is assuming that the banks involved are expecting some kind of political quid pro quo down the road, for rescuing one of Chicago’s most-loved financial institutions.

I daresay they are. But on the other hand, it’s not nearly as implausible as everybody seems to think that America’s largest banks would step in to rescue ShoreBank. And to see why, it’s worth looking at what one of ShoreBank’s biggest critics, Tom Brown, has written on the subject.

Recession hasn’t been kind to ShoreBank. Inner-city lending is an iffy proposition even in good times. Once the credit crackup started, the company hit the wall hard: at the end of the first quarter, non-performers accounted for 13.1% of assets, while is Tier 1 risk-based capital ratio came to -0.1%. That’s right, negative. ShoreBank lost $106 million in 2009, and projects it will lose a total of $100 million in 2010 and 2011…

ShoreBank, we now know, has a business model that is fundamentally flawed…

ShoreBank lent so much money to people who didn’t pay it bank that the bank’s entire capital has now vaporized. The bank is broke! Its business model and its execution failed. If ShoreBank gets more capital, it will almost certainly make more bad loans and go broke again…

There are reasons most banks don’t do the kind of lending ShoreBank does. To see why, take another look at those capital ratios and NPA numbers. If you want to set up an entity to make provide high-risk, socially enlightened finance, fine. Set up a nonprofit and fund it with voluntary contributions. That’s why God gave us the Ford Foundation.

I don’t know where Brown is getting his figures, but I went to the FDIC’s website (it’s not easy to navigate, I’m warning you, but this link might be a good starting point), and got a bunch of numbers for ShoreBank for the 12 months ending March 31, 2010. Here’s the balance sheet, the performance and condition ratios, and the income statement; if you want the full 69-page call report, it’s here. The numbers are certainly bad. Noncurrent assets and REO accounts for 14.6% of total assets, but the Tier 1 capital ratio is at least positive, at 2.05%, with the bank having $26.2 million in Tier 1 capital remaining. And the total loss for the most recent fiscal year was $17 million, not $106 million.

Certainly, with hindsight, a lot of loans have gone bad. But it took them a while to go bad: it didn’t happen immediately “once the credit crackup started”, as Brown would have you think. Indeed, Dan Gross, in November 2008, held up Shorebank as a great example of a bank where the loans were not going bad — along with Lower East Side People’s, where I’m on the board, and where we’re doing fine without any kind of bailout at all. Not all community development financial institutions are financially dubious things which should only be funded by non-profits like the Ford Foundation, and America’s largest bankers agree that the underbanked deserve non-predatory financial services, rather than the check cashers, payday lenders, and similar institutions which lend only at usurious rates.

This, I think, is the real reason why the biggest banks in the US are stepping up to rescue ShoreBank. If someone pointed to LES People’s as an example of successfully serving the underbanked, that would carry only a certain amount of weight: our total assets are a fraction of what Lloyd Blankfein got paid in 2007 alone, and we’re in a unique situation, in Manhattan, which doesn’t apply to similar institutions nationwide.

ShoreBank, by contrast, is about 100 times larger than LESPFCU, and if the big banks can make it work, can stand as real-world proof that community lending really is a viable business model, and can scale successfully into becoming a profitable multi-billion-dollar institution. In the best-case scenario, the investors will help to turn ShoreBank around, will learn how to do what it does, and will then themselves become much friendlier towards their low-income customers, because they’ll know how to make money from them the good way — by helping them improve their finances and ultimately to become higher-income customers — rather than the bad way, which is to bleed them dry in a predatory manner.

All of the investors in ShoreBank will get a lot of CRA credit for their investment, which makes it very low-cost for them. By rescuing this storied institution they will help a lot of Chicagoans who need all the help they can get; they will learn how to improve their own products for lower-income customers; and they will help to transition the underbanked part of the US population into becoming banked, which is ultimately good for everybody. So while the cynical take on the deal is understandable, I’m not jumping to any conclusions quite yet.