Felix Salmon

Roddy Boyd’s new home — The Financial Investigator

Sarah Ferguson: “I’m very honest and real and authentic to it, but, whatever. I’m a tiny little newborn chick.” — Jezebel

“Mr. Buffett has elected to provide written testimony” — FCIC

Get well soon Floyd Norris — NYT

I spent most of this afternoon attending a fascinating discussion looking at Greece from the perspective of emerging-market veterans who are used to sovereign debt default and restructurings. There was quite a lot of consensus on the panel, and not in a good way: everybody agreed that the bailout of Greece was only postponing the inevitable, and many people reckoned that it wasn’t going to postpone it very long: one pair of hedge fund managers in the audience reckoned that it would last about six months before the default finally happens.

The form of the default, too, seemed pretty clear: an act of parliament in Greece would do most of the work, given that most Greek debt is issued under Greek law. It will be a par exchange — the new bonds will have the same face value as the old bonds, but with lower coupons and extended maturities — so that with a bit of accounting fudgery, no banks would need to mark their Greek debt to market and take a huge loss. And Greece, in a fiscal bind, will probably at some point start issuing its own scrip alongside the formal national currency of the euro, much as California did in 2009.

Most surprising to me was how mainstream Adam Lerrick seems to be these days. He was making a lot of good points, including a simple extrapolation showing that if Greece continues on its present path through 2012, the EU and the IMF are going to end up owning more than half of all Greek debt by the time the current program comes to an end. At that point, with Greece’s debt-to-GDP level somewhere around 150%, the country still won’t have access to private markets, and therefore the only alternative to default would be to essentially remain a ward of the multinational community more or less indefinitely.

Whether or not Greece defaults is in Greece’s hands, and Greece itself will be hurt much less badly by a Greek default than the rest of Europe would be. So a default is still inevitable, I still think. It won’t happen during the World Cup. But once that’s over, it might happen any time — and Europe will respond by turning its liquidity firehose on the Spanish banks, to try to contain the problem. You never know, it might even work.

I recorded a lively sit-down discussion today with Charles Komanoff, the subject of my Wired article; Reihan Salam; Skymeter CEO Kamal Hassan; and Corey Bearak of Keep NYC Free. We were safely ensconced in Reuters’s fourth-floor studio overlooking the traffic of Times Square, and the full talk should be available on Friday. But here’s a couple of teasers, courtesy of Hassan: firstly, might it be possible to implement a de facto congestion-pricing scheme using only parking fees, with no fees for driving? Is that the way Chicago is headed? And secondly, did you know that after London implemented its Congestion Charge, subway ridership went down, rather than up?

Here’s a video promo for the debate:

Shahien Nasiripour has found an interesting report from the Federal Reserve, looking at whether the credit-card rules which apply to individuals should apply to small businesses as well. The Fed, weirdly, fudges the question, but it’s clear to me that small businesses deserve all the same protections that individuals get.

At the same time, I’m impressed with how conservative small businesses are when it comes to credit cards:

Despite the widespread use of credit cards, only a minority of small businesses—18 percent—reported borrowing on credit cards… In 2003, when 24 percent of small businesses reported borrowing on credit cards, credit card debt accounted for just 1.4 percent of all debt held by small businesses and the majority of credit card–borrowing firms reported borrowing less than $5,000 in total on all their credit cards.

Available evidence indicates that relatively high-risk firms, as measured by their business credit score from Dun & Bradstreet, are less likely than relatively low-risk firms to use small business credit cards. Nonetheless, higher-risk firms borrow more frequently on small business credit cards than lower-risk firms. Higher-risk firms also have a greater propensity to use and to borrow on personal credit cards compared with lower-risk firms. But again, total credit card debt accounted for less than 2 percent of higher-risk firms’ total debt in 2003.

Small businesses, it seems, are like large businesses: they’re fundamentally conservative, and the overwhelming majority of them pay off their credit cards in full every month. These businesses wouldn’t be hurt at all by any marginal increase in interest rates that card issuers might (or might not) impose should they be forced to comply with the Truth in Lending Act (TILA). And the rest, of course, would be protected by the provisions of the act.

Yet somehow the Fed can’t bring itself to the obvious conclusion:

If, however, the Congress were to consider the application of these provisions to small business cards, it would be important to recognize the potential for adverse effects on the cost and availability of small business credit cards. For example, because credit card issuers have more difficulty assessing the creditworthiness of small businesses than of consumers, restricting issuers’ ability to adjust interest rates may lead to higher initial interest rates, which would harm those firms that borrow on small business credit cards. In addition, if credit card issuers were to reduce credit limits in response to such restrictions, even those businesses that use credit cards for transactions and cash management would be harmed. Thus, it is not apparent that the potential benefits of applying substantive restrictions similar to those in TILA to small business cards outweigh the potential risk of increased cost and reduced credit card availability for small businesses.

I really don’t buy it, and I say this as someone with a small business credit card myself. I got the card from American Express when I was a freelance journalist: that was all they needed in terms of me being a small business. (And the ease with which individuals such as myself can get these cards only goes to underline the necessity of treating all credit cards equally.) The credit line on the card, when it was first issued to me, was embarrassingly enormous — many multiples of the credit line on my personal Amex card. I’ve never come remotely close to using the credit line I was given, I’d never want to, and if it was reduced that wouldn’t harm me in the slightest.

The card companies love issuing these cards, because they carry the biggest interchange fees of all. And if these cards continue to be carved out from TILA requirements, you can be sure that more and more individuals will end up applying for and using them: they’ll act as an obvious loophole for the card issuers to take advantage of.

So let’s make sure that all credit cards are treated equally, and let’s keep an eye too on the Federal Reserve, which still seems to be unduly captured by the very institutions it should be regulating. This paper doesn’t bode well for the Fed having much teeth going forwards.

I talked about “Jingle Mail 2.0” on Tech Ticker this morning, and Henry Blodget made the good point that freeing up mortgage payments for small-business operating expenses or consumer goods does provide a short-term boost to the economy — at the expense, of course, of banks’ balance sheets.

I’d be interested to see a economic take on this. In theory, the economy should be better off when you’re spending your money on mortgage repayments, because those repayments go straight into bank equity, which can then get levered 10X in the form of new bank loans. Similarly, if you stop making your mortgage repayments, the write-down at your bank can be enormous, and comes out of that bank’s equity, and therefore provides a significant constraint on that bank’s ability to make new loans.

But in the real world, things don’t seem to be working like that. The banks seem to be making good money while being very parsimonious in terms of new lending: all indications are that they are hoarding equity no matter what their customers do. Meanwhile, the money which would otherwise go to mortgage payments has very high utility and velocity: it keeps the employees of small businesses in their jobs, it gets spent at local businesses, and it can transform people’s lives.

And if the banks do end up in another solvency mess as a result of all this? Well, they seem to be good at raising new equity these days, and if that doesn’t work then maybe they can put together some kind of a debt-for-equity swap. So long as their cashflows are strong, a bit more deleveraging in the financial sector would probably do little harm, and might in fact improve systemic robustness.

I wonder though what would happen to mortgage lending over the long term. Right now it’s almost all being underwritten by the government, in one form or another — Fannie Mae, Freddie Mac, FHA, etc. At some point, banks are going to have to step in and take over that business. But when and how will that happen, if borrowers are significantly more willing to default than they ever have been in the past?

Koblin keeps the Truffle Kerfuffle alive — NYO

Cramer, post-spill, recommends BP at $50, and then, a week later, at $49 — CNBC, ibid

How should ETFs account for dividend arbitrage, collateral costs, swap spreads, etc? — Index Universe

Basis points – an admonition — Dsquared

How a meme spreads, MSM stealing from blogs edition — Daggle

Spiegel fingers the culprit! “It was ECB President Jean-Claude Trichet, a Frenchman…” — Alphaville

Albany is withholding hundreds of millions of dollars in dedicated transit tax revenue from the MTA — Streetsblog

Basic broadband in Germany is $75/mo — WSJ

Immigrants don’t take jobs, they create them — OECD

Tad Friend dismantles Gary Vaynerchuk — TNY

A couple of people want to know what I think about the Nick Carr essay doing the rounds of the internet, where he advocates relegating links to the bottom of blog entries. Well, I think it’s silly. Links should stay where they belong, if only because that’s what we’re used to these days. When I read a phrase like “Laura Miller, in her Salon review of The Shallows”, I expect a link and there’s much more cognitive load placed on my brain — there’s much more buzzing in my frontal cortex — if there isn’t a link there than if there is.

What’s more, a link is a very easy way of explaining without words what I’m talking about, for those who wouldn’t otherwise understand. And a hyperlink, artfully deployed in just the right place, is a thing of great beauty. Consider, for instance, this post, in which Kevin Drum disagrees with me about whether credit default swaps can ever be benign. Near the end of the post, he writes:

I guess I have two questions about that. First, does it really work? Are CDS marks really reliable indicators of creditworthiness? That’s debatable. Second, even if they are, is this a big enough benefit to make the instability risk worth it?

That link is very funny and absolutely perfect where it is. If it were relegated to the end of the piece as some kind of footnote, all of its power would be lost; it would be the hypertext version of explaining a joke.

I’m sympathetic, in theory, to the whole issue of placing extra cognitive load on the brain. I have found myself of late using the Readability plugin a lot when I’m not reading text directly in my RSS reader. I’ve even been known to throw a minor diva fit with the style police at Reuters, who at one point insisted on turning every reference to the US into a reference to the U.S. That was something I hated, because I consider that placing a period in the middle of a sentence is a crime against readability: it draws you up short for no good reason.

I also dislike hyperlinks which give no indication of what they’re linking to (yes, Balk, I’m looking at you). It’s rude to make me click on links to understand what you’re saying, as though you’re still writing for Suck circa 1996. We’ve all grown up, at least a little, since then.

But for all that, links belong in hypertext. Indeed, they’re integral to it. Without links, blogs cease to be a part of the conversation and become instead essays with footnotes, a bit like Wikipedia articles. (And even Wikipedia, which puts links at the end of its articles, also makes very clear exactly which bit of the text each link is linking from.)

A blog entry with links at the bottom has aspirations to being self-contained, like say a newspaper column: the links are optional extras. I never have such aspirations and anybody looking to make full use of the power of the internet is doing themselves a huge disservice if they start thinking that way. In these days of tabbed browsing, there’s a difference between clicking and clicking away: most of us, I’m sure, control-click many times per day while reading something interesting, letting tabs accumulate in the background as we find interesting citations we want to read later.

Someone writing online should no more put their links at the end of their essay than a university professor should first give the lecture and then run through the slides. It makes no logical sense, and it does no good for the consumer of the information. So let’s nip this meme in the bud, and encourage the likes of Barry Ritholtz to always put their links where they belong, in the text, not buried at the bottom of the blog entries, where they’re easy to miss, or where they’d just pile up cacophonously if there were many of them.

I’m having quite a lot of difficulty coming up with someone to take the anti-congestion-pricing stance in the debate that I’m taping at Reuters in Times Square tomorrow. Policy wonks from left to right seem to like the idea with remarkable unanimity, at least in theory if not in the exact form that any given proposal might take. Libertarians, for example, quite like the idea of pricing externalities to avoid the tragedy of the commons — they tend to the econogeeky that way.

For me, the strongest argument against a congestion charge is that there’s a decent chance that it will be a very expensive way of achieving not very much. After all, there are lots of urban planning ideas which work in theory but not in practice. Mark Ambinder has a good interview with Joe Flood, who wrote a whole book about how a bunch of geeks from the RAND Corporation managed to persuade New York authorities in the 1970s that shutting down fire stations wouldn’t result in more fires. They were disastrously wrong.

More recently, notes Flood, the Bloomberg administration ran all manner of studies designed to demonstrate that the Atlantic Yards project in Brooklyn would create jobs and tax revenue, rather than lose money for the city.

If I have any skepticism about the wonders of congestion pricing, it’s in the gap between theory and reality: to talk to someone like Charles Komanoff, it’s easy to come away believing that just about everybody will win. Drivers will get faster commutes, bus riders won’t pay fares and will travel faster, subway riders will save money — what’s not to like?

But as my previous article for Wired showed, there’s always model risk, and it’s impossible to price. Empirical evidence from London is mixed: the quantity of traffic is down, and revenues are up, but the speed of traffic doesn’t seem to have increased very much, and the initial gains seem to be eroding over time. Even Komanoff expects something similar to happen in New York: in order to keep congestion constant, the congestion charge is going to have to rise at a pretty substantial rate, pretty much in perpetuity. No matter where it starts, be it $8 or $16 or something else, it’s certain to get higher pretty quickly.

What’s more, there’s no doubt that a congestion charge is politically unpopular, especially in the outer boroughs: people see only what they would pay, and not what they would save — especially when, as with the Bloomberg plan, there’s no decrease in transit fares.

But if someone has stronger arguments against the congestion charge, let me know — especially if you’re free at noon on Wednesday.

Did the markets really think the top kill was going to work? Evidently so — BP shares fell 15% today, to $36.52. But before we declare this the end of BP, let’s put this in perspective: the shares traded as low as $34.06 in March 2009. And over the last three years, BP is down 46%, compared to 30% for the S&P 500 (and Exxon Mobil) and 93% for Citigroup.

The most likely fate for BP at this point isn’t death but rather takeover. There’s been a lot of speculation along those lines, and with BP’s leadership looking even weaker than its stock price, the rest of Big Oil is surely salivating at the prospect of picking BP up without much difficulty.

What’s more, BP could easily be broken up, like ABN Amro, and divvied up according to its various geographical units. Here’s what the analysts at Norwegian financial group DnB NOR are thinking:

If several companies were to bid on BP – on a combined basis – Exxon, Royal Dutch Shell, Total and Statoil would fit well together. Then more companies could split the risk of the final massive oil spill bill.

My guess is that this kind of a disappearance into the footnotes of oil history is now the base-case scenario, and the main thing supporting the BP share price. The Deepwater Horizon catastrophe might well spell the end of BP as an independent company, and it’s unspeakably tragic for hundreds of thousands of families in the Gulf. But it might just represent the opportunity that ambitious oil executives in other companies have long dreamed of — and I doubt that BP shareholders, scared as they are of billions of dollars in possible costs and fines, would put up much of a fight.

David Streitfeld has a great NYT piece on the way in which jingle mail, or strategic default, seems to be reaching its logical conclusion. Right now, about 24% of all mortgaged properties are underwater. And if you’re being foreclosed upon now, you probably defaulted 438 days ago. In New York, that figure is 561 days.

What’s more, the “limbo” period between default and foreclosure is growing fast: it has risen from 251 days in January 2008. Doing the math, that means that the average amount of time in limbo is growing by 1 days roughly every 4.4 days. Which means that if you default today, then you probably won’t get foreclosed upon until about 567 days from now — or roughly Christmas 2011. That’s 19 months, give or take, without having to make any mortgage payments at all. And if it turns out that your mortgage is one of the millions whose documentation is so screwed up that the loan servicer can’t prove you actually owe them any money at all, then there’s really no end to the amount of time you can sit in your house rent- and mortgage-free.

This turns out to be a great business for opportunistic lawyers, who can gross over half a million dollars a year just by spending a few hours per client stringing the mortgage companies along:

About 10 new clients a week sign up, according to Mr. Stopa, who says he now has 350 clients in foreclosure, each of whom pays $1,500 a year for a maximum of six hours of attorney time. “I just do as much as needs to be done to force the bank to prove its case,” Mr. Stopa said.

Many mortgages were sold by the original lender, a circumstance that homeowners’ lawyers try to exploit by asking them to prove they own the loan. In Mrs. Pemberton’s case, Mr. Stopa filed a motion to dismiss on March 17, 2009, and the case has not moved since then.

In the vast majority of these cases, we’re not talking about borrowers with loads of money who are trying to take advantage of the non-recourse nature of their loans. We’re talking, instead, about people who overstretched on their house, who borrowed much more money than they could realistically pay back, and who now realize that they’re actually in a pretty strong negotiating position with respect to their lender.

Needless to say, the more people who jump onto this bandwagon, the worse the effects for the solvency of America’s banks. Right now, the banks are still marking at par any performing mortgage, even if the principal amount is much greater than the value of the home. But if those borrowers stopped paying tomorrow, the value of the mortgage would have to be marked down to much less than the value of the home, since foreclosing and selling the house is likely to prove extremely difficult.

Clearly, the banks’ plan A — laying the world’s largest guilt trip on their borrowers — is falling apart, even as Plan B is conspicuous by its absence. House prices in the US aren’t plunging vertiginously any more. But that doesn’t mean the mortgage crisis is over. In fact, the worst might be yet to come.

When the Greece crisis first erupted, the choice facing European policymakers was clear. Should they bail out Greece, giving it all the money it needs to pay its debts as they come due, or should they let the Greek chips fall as they may, and then bail out their national banks instead to the degree those banks lost money on their Greek bonds? Some kind of bailout was inevitable; the only question was whether it would be a sovereign bailout or a bank bailout.

It’s now becoming clear that the choice that the Europeans plumped for was “both of the above”. And the Bundesbank isn’t happy about that:

Greece received a financial rescue from other European countries and the International Monetary Fund of up to €110 billion ($135 billion) last month, ending its reliance on capital markets for funding until at least 2012.

Since the European Central Bank began purchasing government bonds three weeks ago, it has spent about €25 billion on Greek debt, according to a senior Bundesbank official who declined to be named.

When the ECB buys up Greek debt in the secondary market, it doesn’t help Greece very much, since Greece no longer requires market access to roll over its debts. Instead, the main beneficiaries of this operation are European banks:

Selling the Greek debt would likely be an attractive option to banks eager to avoid a debt restructuring which would force them to book losses. French banks are the largest holders of Greek debt, according to Bank for International Settlement estimates, followed by German banks.

Europe, here, is setting itself up for a double whammy if and when the Greek default finally happens: it’s going to take losses on its own loans to Greece, and it’s also going to take losses on the Greek debt that it’s currently hoovering up at or near par. All of which might be manageable in the case of Greece, but this strategy doesn’t scale to Spain and Portugal and Ireland as well, lest the sovereign debt crisis become a fully-fledged EU solvency crisis. All of which signals to me that Europe’s reaction to the Greek crisis is looking panicked and ad hoc. And there’s no sign of anything more strategic coming down the pike.

Ryan Avent weighs in on my Wired article about congestion pricing with a question I’m going to be putting to some experts on the subject tomorrow. I’ve invited Reihan Salam, John Avlon, and Skymeter CEO Kamal Hassan to chat with Charles Komanoff in the swanky Reuters TV studio overlooking Times Square; the video should be up online later this week.

Ryan’s point I think will echo with Reihan, and indeed with Komanoff’s patron Ted Kheel: they all think there’s a lot to be said for a single flat congestion charge, set at $16, which would allow all transit — not just buses but subways too — to be free. Komanoff’s plan, which has many different fees per mode of transport, depending on the time of day and the day of the week, is hard for people — including legislators — to understand:

Any charge is going to be sent through the policy grinder en route to enactment, and so it doesn’t make a ton of sense to fine tune pricing before that process. [And] for now, these prices have to be processed by human drivers, who are going to want simplicity and certainty. That $16 to get into the city is easy to understand and plan around.

My feeling is that there’s a barbell solution here, and that the Komanoff plan lies somewhere in the unhappy middle. There are definitely problems with a crude flat congestion fee, including the fact that at many times of the day and week there really isn’t much congestion to mitigate. (Even Ryan, at the end of his post, starts talking about introducing an off-peak charge.) On top of that are the problems associated with making subways free at peak times: they’re crowded enough as it is, and although today’s peak-time riders are pretty price-inelastic, ridership would surely increase by some significant amount if the fare was brought down to zero.

At the other end of the spectrum is a Skymeter solution, which is granular not only on the time-of-day question but also on question of which exact part of the city you’re congesting. Komanoff’s plan makes no distinction between a car driving up Avenue D, on the one hand, and a car driving around Times Square, on the other; that’s silly. It also makes no distinction between a car driving in the CBD for 5 minutes and a car driving around the CBD for 5 hours. That’s even sillier. Those failures are failures of technology, and can be solved by Skymeter at a stroke.

If you’re going to set up a complex system, then, I think the Skymeter system is the way to go. And if you’re going to set up a simple congestion charge, then there’s a strong case for making it as simple as possible.

At tomorrow’s discussion, I’m looking forward to talking to four people with different answers to this question. Hassan thinks the complex Skymeter system is the way to go; Komanoff prefers his middle-of-the-barbell plan; Salam is fond of keeping things as simple as possible and just having one flat fee; and Avlon thinks there shouldn’t be any congestion charge at all. Should be a fun talk!

If financial journalism failed up to and during the crisis, things like this are a large part of the reason why — Talking Biz News

Answers on Credit Ratings Long Overdue — Sorkin

Google ditches Windows — FT

Pay for your own servants, Queen — Daily Mail

Louise Bourgeois dead at 98 — NYT

People who mostly avoided dairy or consumed low-fat dairy had more than three times the risk of dying of coronary heart disease or stroke than people who ate the most full-fat dairy — Whole Health Source

The exodus begins: Law blogger leaves Times to escape the paywall — Baby Barista

“‘Micmacs’ is rated R. This is a completely preposterous rating” — NYT

Me, on PBS’s Need to Know, with Jon Meacham — PBS

My BNN hit: quite a long conversation/argument about oil and regulation — BNN