Felix Salmon

Why did Nafta have no effect on banking?

Felix Salmon
Jun 9, 2010 16:22 UTC

When Bank of America bought 25% of Santander’s Mexican operations in 2002, it said that it was making a long-term strategic investment, both in Mexico and in the Latino market in the U.S.:

“The Mexican-American population is the fastest growing segment in the country and in most of our major markets,” said Kenneth D. Lewis, Bank of America chairman and chief executive officer. “We are excited about the opportunities this will provide us and know we will benefit from Santander’s expertise in serving the Hispanic market…

With approximately 75% of the U.S. Hispanic population living within the Bank of America footprint and along the Mexican border, the Santander expertise will be invaluable to improving banking products used by the Hispanic community. “This investment demonstrates how seriously Bank of America takes its commitment to the Hispanic community,” said Rivera. “This enables us to strengthen existing relationships and build new ones in both the United States and Mexico.”

It didn’t take long, after the deal closed, for BofA to unveil its excellent SafeSend remittance product, which allows people with a Bank of America checking account to transfer money at no charge into a Santander account in Mexico.

So now that BofA has unwound the deal, selling the stake back to Santander at a $900 million profit, whither the prospects for serious banking links between the U.S. and Mexico? The big Mexican banks own some small banks in Texas and California, but the biggest consumer banks in the U.S. — BofA, Wells Fargo, and Chase — have essentially no presence in Mexico at all. Citigroup does: it owns the biggest bank in Mexico, Banamex. But Citi is weak at banking the Hispanic community in the U.S., and it has gone to great lengths to keep Citibank and Banamex at arm’s length from each other. (Mexico is the one country in the world where most Citigroup banking is done under a non-Citi brand name.)

I guess we’ll see how long the SafeSend relationship between BofA and Santander lasts, now that BofA has no financial interest in Santander Serfin any more. But it is striking, to me, how little cross-border activity there has been in the banking system since Nafta arrived. Canada’s TD Bank has taken advantage of the financial crisis to make some opportunistic acquisitions in the U.S., but in general the three countries are still very separate, banking-wise. I don’t think anybody would have predicted that, in 1994.


Is it me or are Mexico’s two biggest banks foreign owned: Banamex is Citi (American), Santander is Spanish… maybe that’s why they don’t make a footprint in America – they themselves are the footprint from elsewhere.

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The interchange fee panel

Felix Salmon
Jun 9, 2010 15:50 UTC

This morning’s panel on interchange fees was a little bit frustrating, for me: there were lots of arguments, but everybody seemed to be talking past each other to a large degree. I particularly wanted to get into the argument, which was made by Todd Zywicki in his paper and also by Geoffrey Manne on the panel, that interchange fees were an important way of banks passing on credit losses to merchants. Here’s the comment that Zywicki left on my blog:

I am not arguing that credit risk is overall a money-losing proposition for card issuers for exactly the reason you state–purchases is what generates a customer base for issuers. What I am arguing is that merchants want to argue that the only costs that matter are the marginal costs of processing transactions. That ignores the costs of credit risk. Once that variable is considered, with respect to credit cards, it is not obvious at all that merchants are being overcharged on interchange fees. For reasons discussed in the paper, merchants likely would have issued much of this credit in-house (or foregone sales) and would have suffered similar, and probably larger, credit losses.

My take is exactly the opposite: that the provision of credit is a source of profits, not of losses, and that talk of “credit losses” makes no sense without looking also at credit profits, in the form of fees and interest payments. It’s undoubtedly true that merchants get higher revenues as a result of their customers being able to buy things on credit. But it’s silly to say that the merchants are dodging losses insofar as those customers default on that credit: after all, no one accuses them of dodging profits insofar as other customers end up paying much more, over time, for their purchases than the merchant received, after factoring in those fees and interest payments.

I was also interested to hear a number of people try to make the case that interchange fees are rising because of the rising amount of fraud and identity theft. I haven’t seen much in the way of hard numbers on this front, but it does seem obvious to me that if banks were seriously worried about fraud and identity theft, they would lobby for the same EMV (or chip-and-PIN) system that most of the rest of the world uses, rather than relying on cards with magnetic stripes. The UN’s credit union has just started offering these cards to its customers in the U.S., probably because they tend to travel abroad so much. Why are the banks happier to suffer fraud losses and raise interchange fees to make up for them than they are to implement EMV? Because EMV would involve a cost, for them, while interchange fees are a significant profit center.

After the panel was over, a representative of CUNA, the credit union association, introduced himself to me. I asked him why CUNA was opposed to the Durbin amendment which places limits on interchange fees, even though it explicitly excludes 99% of credit unions; he said that it was simple, really. If the Durbin amendment goes through, then interchange fees are likely to come down across the board, and credit unions make lots of money from interchange fees.

And if credit unions make lots of money from interchange fees, you can only imagine what the big banks make: 15 large banks have almost 95% of the credit card market, where interchange fees are the highest. The fact is that the banks love interchange fees because they’re an easy and invisible way of providing billions of dollars in effort-free profit. So let’s hope that the Durbin amendment goes through, and starts to tilt matters in the other direction, moving those billions of dollars out of the hands of the banks and into the hands of merchants and consumers.


Mr. Do- Well, getting millions of merchants and 100 of millions of customers creates a bit of a collective action problem. One consumer who fights the credit card companies has to deal with cash and sees no apparent upside. One merchant who decides to fight the credit card companies by denying credit cards is going to get punished in the marketplace- other merchants in the same market will quickly scoop up that merchant’s credit card using customers. The same goes for creating a transparent fee for using credit cards- a credit card using customer will go to a merchant who doesn’t have a transparent fee, because he can get it cheaper by free riding and sharing the fee with non-credit card using customers. You either need the merchants to collectively bargain with the credit card companies on fees (so they have roughly equivalent bargaining power) or you need regulation. And I suspect collective bargaining isn’t feasible (or legal for antitrust reasons) but it would probably create a more fair bargain then regulation.

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Felix Salmon
Jun 9, 2010 04:51 UTC

Twitter Links Won’t Count Against the 140 Character Limit — Mashable

If fancy words are so easy to look up, maybe the NYT should use more of them! — NYT

In which Variety criticizes Toy Story 3 on the grounds that it fails “to explore the curious ontology of being a toy” — Variety

The Hitchhiker’s Guide to the Galaxy on tail risk — WaPo

Lucy Kellaway: “it is always advisable to limit the number of academics per marriage to just one” — FT

Locals and Tourists: Where they take their NYC photos — Flickr

WP reporter with head-cam sits in vintage plane as it crash-lands at airport. No injuries; footage posted — WaPo

How a CDO is (like) conceptual art — Hyperallergic

Davis Polk’s definitive 162-page House vs Senate comparison book on financial regulation bills (PDF) — Davis Polk


Re: “If fancy words are so easy to look up, maybe the NYT should use more of them! — NYT”

The correlation between the usage of these high-falutin words by the correspondents and the opinion pages is quite high: 82%

If you had put yourself through the GRE exam you would almost easily understand and use 100% of them.

My favorite: sui generis (recent reference was in Joe Norcera’s old Business column relating to The Wall Street Journal.)

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The demographics of housing bubbles

Felix Salmon
Jun 9, 2010 01:43 UTC

I like Landon Thomas’s profile of Ed Hugh, who has been blogging for as long as I can remember, and who is an indispensable voice in the econoblogosphere. Hugh’s blog entries can be quite long, and I love the way that Thomas distilled one key argument:

“Why haven’t these countries converged” with the rest of Europe? he asks. “It’s demographics. As populations age, there are fewer people in their 20s to 40s to buy new houses, so they save more.” …

Germany, where the average age is 45 and rising even as the population is beginning to shrink, is a nation of savers, and public policy has encouraged keeping wages under control and building up export industries.

By contrast, the younger Greeks, Irish and Spaniards went on borrowing binges, driven in particular by rising demands for new homes and consumer goods that, in several cases, turned into housing bubbles before going bust. Wages were pushed up, encouraging spending but soon making it all but impossible for their industries to compete with the thrifty Germans, Dutch and other northern Europeans.

Are economies with a younger population really more likely to have a housing bubble? I’d love to see some empirical data on that. I can believe that California’s Inland Empire, and Las Vegas, are younger than much of the rest of the US — but what about Florida? But in Europe, I think that Hugh has hit on something important here: while we can intone gravely about Teutonic fiscal sobriety, a lot of what we’re seeing is simply demographic.

In the very long term, the younger countries of Iberia and Ireland (not to mention many of the newer Eastern-bloc entrants to the EU) will do wonderful things for Europe’s demographics and economic health: no one wants to see Europe turn into Japan. But in the short term, they’re a huge problem, which no one is tackling head on. As Hugh wrote, presciently enough, back in September:

I personally take the view that the global financial and economic crisis is far from over. There is another stage yet to come, and the focus of the problem will be Southern and Eastern Europe.

Good for him that he’s finally getting the mainstream recognition that he has long deserved — and long received, in the blogosphere.


It seems to me that a bubble could start in an area with older population if there was a constant inflow of residents. After all, it’s not so much the youth that is important in the story it’s that people who did not previously own a house in the area are now looking for one (Increase in demand for housing).

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World Cup betting pools: The price of entry

Felix Salmon
Jun 9, 2010 00:23 UTC

SOCCER-WORLD/As the World Cup approaches, I’m sure that Reuters isn’t the only place where betting pools are being filled out. Yahoo has quite a tool for such purposes, although it does require that everybody has a Yahoo account.

The microeconomics question here is the optimum entrance fee. The goal is to have the biggest possible pot with the greatest number of participants — but it seems clear to me that as you increase the fee from $5 to $10 and then to $20, the number of participants will fall even as the total size of the pot will rise. Beyond $20, I suspect you’re likely to see even the total size of the pot falling.

My feeling is that $20 is the optimum entry, and not only because it maximizes the size of the pool. If you set the entry fee at $5 or $10, or heaven forbid at some weird number like $12 or $15, then it becomes harder for people to enter, just because you start running into making-change issues. If you have cash in your wallet, chances are you have a $20 in there. Fives and tens are rarer, and in any case there’s always going to be people handing over a 20 and asking for change.

It would be nice to be able to include everybody who wants to play at say the $5 level: $20 is likely to be too much for someone who doesn’t know or care much about football. But $20, I think, it has to be.


The World Cup is by far and away, in a global sense, the largest event every four years. Small countries in economical and political turmoil rise with their nation’s football team. A World Cup goal can make the heart of a downtrodden country beat again. It’s truly a magical month, and it’s time that America joined the rest of the world in realizing the most beautiful game in the world.



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Why the payments system should be regulated

Felix Salmon
Jun 8, 2010 21:24 UTC

I’m about to head down to DC to appear on an interchange-fees panel sponsored by the libertarian types at GMU. I hope they read Mike Konczal’s blog entry (and mine, of course), but at heart I think the disagreement is simply philosophical.

In my post I wrote that “all the recent increases have been pure gouging, made possible by the Visa/Mastercard duopoly”, and one of the most interesting comments in response came from billyjoerob, who wrote:

Felix Salmon really should write the Critique of Pure Gouging, and draw a distinction between “pure gouging” and other ordinary profit-maximizing activities. Which is not illegal, not so far.

There’s a narrow answer to this, which is that when you have a duopoly it’s important to regulate gouging. But there’s a broader answer, too, which is simply that we’re talking about payments here — and it’s perfectly natural and sensible for the government (or at least the Federal Reserve) to be involved in regulating the payments process, including clearing, settlement, interchange, and everything else. In a world which going increasingly cashless, it’s important to beware the stealth transformation of what has historically been a very low-margin commodity business into a very high-margin profit center for America’s biggest banks.

Electronic payments can and should be cheaper than cash payments, for all manner of reasons. Instead, they’re much more expensive, and interchange fees show no signs of topping out. For the sake of the economy as a whole, let’s try to make the payments system as frictionless as possible. Rather than using it as a way of propping up bank profitability.


So I think the biggest part of Zywicki’s argument in your linked post (aside from the conflation of credit and debit and the nigh-total neglect of interest costs) is that he doesn’t think that there’s evidence of monopoly rents being extracted in the retail payments business. You might start by looking at what fees for electronic payments are internationally (hint: lower), but fundamentally this question can’t be understood without numbers. I’d start with 51.22%, Visa’s operating margin, and suggest that a business like that with only a few competitors is likely to be extracting rents.

File this one under “questions answerable with one bloomberg command,” in this case “V equity des3″…

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Corporate arrogance datapoints of the day

Felix Salmon
Jun 8, 2010 20:16 UTC

John Carney notes that Goldman Sachs is being much quieter in response to the FCIC’s subpoena than it was in April:

The same afternoon that the SEC lawsuit became public, Goldman vowed to “vigorously” contest the SEC’s claims and described the lawsuit as “completely unfounded in law and fact.”

Back in April, this kind of combativeness was new for Goldman. It was followed shortly by chief executive Lloyd Blankfein saying that the firm’s longstanding strategy of not engaging with the public or responding to criticism was “probably a mistake.”

Has Goldman had second—or third—thoughts about its PR strategy?

Goldman’s response to the SEC’s suit was so blunt that it is believed to have angered regulators, pushing the two sides further apart and perhaps delaying a settlement. It was a gamble for Goldman and one that may have backfired.

The main difference between now and April, from a PR perspective, is that Goldman Sachs is now being advised by the so-called “master of disaster”, Mark Fabiani. And the fact is that if Goldman does nothing to extend the FCIC-subpoena into a second news cycle, this brief burst of bad publicity is likely to go away.

Still, as I said after the Fabiani news came out, the problem here is much deeper than public relations: it’s that arrogance and secrecy are in Goldman’s institutional bloodstream. Fabiani can’t control Goldman’s relations with the FCIC, any more than Brad Stone can control silly nastygrams from the NYT’s lawyers. But here’s some $3.99 reporting for you: Pulse is back on the iPad app store, and it still features the NYT news feed, and it still frames NYT web pages. Score this Apple 1-0 NYT. As Jonah Bloom has it:

The whole idea of trying to force people into certain media consumption habits seems futile in an era when technology has enabled people to consume whatever they want, however they want it.

Most of the strategy people at the NYT appreciate this. But lawyers are always a bit slow on the uptake.


csissoko, is there some sort of confidentiality clause on what GS gives up to the FCIC because otherwise surely that would make sense and I can think of lots of people who would have fun trawling through that info – like me for instance….

As for the news going away, not really in GS’s court given that it isn’t really them that keep subpoenaing themselves or writing moronic articles for the NYT etc

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How mortgage default could get much worse

Felix Salmon
Jun 8, 2010 19:19 UTC

Brent White, in his tour de force paper on how homeowners are guilt-tripped into remaining current on their mortgages even when doing so makes no financial sense, notes that non-profit organizations setting themselves up as friends of the consumer are in fact part of the problem:

A homeowner who turned to any number of credit counseling agencies would also find little sympathy – and much moralizing – should they announce their plan to walk on their “affordable” mortgage. Gail Cunningham of the National Foundation for Credit Counseling declared for example in an interview on NPR: “Walking away from one’s home should be the absolute last resort. However desperate a situation might become for a homeowner, that does not relieve us of our responsibilities.” Indeed, the uniform message of both governmental and non-profit counseling agencies (which are typically funded at least in significant part by the financial industry) is that “walking away” is not a responsible choice and should be avoided at all costs.

Well, Gail Cunningham is back, with an inadvertently scary press release on the same subject (emphasis in original):

The National Foundation for Credit Counseling’s (NFCC) 2010 Financial Literacy Survey revealed data that supports consumers’ ongoing efforts to stay in their homes. The survey found that the overwhelming majority of consumers, even those in financial distress, still consider their mortgage payment a priority. When asked if they were unable to meet all of their financial obligations, would they be more likely to keep their mortgage current, or their credit cards current, 91 percent of respondents said they would pay their mortgage first.

The survey also asked under what circumstances, if any, they would consider it justifiable to default on a mortgage. Only 23 percent of respondents answered that foreclosure is justifiable if the property is now worth less than what is owed on it. Further, 15 percent replied that there is no justifiable circumstance under which it would be acceptable to default on a mortgage.

“Taken together, the NFCC survey data brings us some encouraging news: consumers still place a priority on making their mortgage payment, less than one-fourth think that defaulting on a mortgage is justifiable simply because the property is underwater, and a significant number take mortgage obligations so seriously that they find no acceptable reason to default on a home loan,” said Gail Cunningham, spokesperson for the NFCC.

This news is not, in fact, encouraging. For one thing, it comes as little surprise to find out that people who are current on their mortgage payments say that their mortgage payments are a priority. But actions speak louder than words. Just ask FICO, for instance:

Reversing a long historic trend, mortgage default risk for consumers with high FICO scores now exceeds their credit card default risk, even though most credit cards are unsecured credit and mortgages are secured by real estate…

In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on bankcards.

“We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO…

Or Transunion:

The share of borrowers who are delinquent on their mortgages but current on their credit cards rose to 6.6% as of Q309 (from 4.3% in Q108), according to national credit bureau TransUnion.

At the same time, the share of borrowers that are delinquent on credit cards but current on their mortgages slipped to 3.6% from 4.1%.

But the NFCC’s survey data is not just useless: it’s worse than that, since it encourages complacency when in fact it should be cause for great alarm. It’s clear that the number of people defaulting on underwater mortgages is rising, and insofar as the NFCC survey tells us anything, it just tells us that there’s a lot of room for strategic default to become a much bigger problem than it is already.

Imagine, for instance, that a survey showed a large number of homeowners with 30-year fixed mortgages over 7%, and who had no intention of refinancing even with mortgage rates below 5.5%. On the one hand, that might be considered good news for banks: more money for them. But more realistically, it would be worrying news, since it would mean millions of people who could suddenly wake up one morning and realize how much more money they could have by changing their mortgage situation. When there’s an easy and obvious strategy which benefits consumers at the expense of banks, consumers are likely, sooner or later, to adopt it. The NFCC survey just shows that a lot of them just haven’t got to that point yet. But there’s a good chance that, eventually, they will.


One thing to note here is the NFCC is stuck between what its backers want and what’s in the best interest of consumers. Like Fannie and Freddie being stuck between their mission to help advance home ownership and effective due diligence and balance sheet management. I totally agree that in some cases a family’s safety, security and long-term financial health are better served by walking away but how does an organization like the NFCC make that kind of statement and survive the political fire storm that would surely follow. I think the mortgage default crisis will get worse, and I sympathize with the NFCC.

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How Goldman deals with the government

Felix Salmon
Jun 8, 2010 14:59 UTC

Comment of the day comes from HBC, on the subject of the FCIC’s Goldman subpoena:

Aww, cut Goldman some slack willya… They’re just not used to cooperating with the government. For years, it’s always been the other way round.

Stephen Gandel tries to do just that, turning the tables on the FCIC:

Is anyone surprised that the FCIC got billions of documents? …

The real question is what is the FCIC looking for, and does it even know…

How about calling up the heads of CDO trading at every other bank? Goldman wasn’t the only bank pitching synthetic CDOs. There are still a lot of issues that have been barely touched, and Phil, baby, its June, there ain’t that much time left.

Firstly, yes, the enormity of the Goldman document dump is surprising. The FCIC asked in January for “documents and information concerning Goldman’s synthetic and hybrid collateralized debt obligations based on mortgage-backed securities”, with a deadline of February 26. Goldman asked for an extension, and was given until March 5. Then Goldman asked for a second extension, and was given until March 8. And then Goldman’s submission was inadequate, but the FCIC allowed Goldman some time off because it was dealing simultaneously with requests from the Senate.

After the Senate hearings were over, at the end of April, the FCIC started badgering Goldman again, and was eventually told that the information would arrive on May 3; on May 4, more incomplete information arrived. Lots more back-and-forth resumed, and far from trying to help out, Goldman simply said that they had already provided everything asked for back on March 8. Eventually, on May 18, the five-terabyte document dump began: that’s roughly 2.5 billion pages. More back-and-forth, including a further incomplete submission on May 21; eventually the subpoena was issued on June 4.

You can see the running-out-the-clock here. And you can also see how the data dump was not a good-faith attempt to comply with the FCIC’s request. Gandel writes:

They asked for all the documents for all the synthetic or hybrid deals Goldman has ever done on residential or commercial mortgages. Goldman did hundreds of those deals. And the offering documents alone for each of those deals would be hundreds of pages. The correspondence between bankers could be thousands of pages.

Fine. Let’s say 10,000 pages per deal, and 1,000 deals. That’s 10 million pages. Multiply by 10 for good measure, we’re up to 100 million pages. We’re still in the realm of a rounding error compared to the billions of pages that Goldman provided.

It’s worth remembering here that, pace Gandel’s broader point, Goldman is just one of many different lines of inquiry that the FCIC is pursuing. Yes, the FCIC is looking at other banks, and the ratings agencies, and all manner of other players in the crisis. It’s not like they’re concentrating on Goldman alone. And Goldman knows that, so they know also that if they’re obstructive and unhelpful, there’s not much that the FCIC is going to be able to do to them before its time runs out.

Except, you know, start pillorying them in public and serving them with subpoenas.


GS delivered 5 TB of data. This is very little data compared to corporate bankruptcy or giant lawsuits. There are companies that specialize in indexing all those documents so lawyers can query them like a search engine. In fact, you can buy a Google Search Appliance and index all those documents overnight and then search the data. In fact, I could probably index all this using free tools on my desktop. It’s a trivial technical issue. Thanks for blowing it out of proportion.

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