Opinion

Felix Salmon

Auto dealers vs Treasury, part 322

Felix Salmon
Jul 21, 2010 06:15 UTC

Jim Surowiecki didn’t even scratch the surface when it comes to the power of auto dealers in general and Big Three auto dealers in particular. They’re grossly inefficient, as this chart from Monday’s SIGTARP report on them shows.

sigtarp.tiff

Despite this, their political clout is enormous. When Treasury insisted on closing many dealerships as part of its restructuring of GM and Chrysler, the auto dealers went straight to Congress and managed to get more than half the 1,100 closed dealerships reinstated.

Treasury, failing to learn its lesson, then insisted that auto dealers wouldn’t get a carve-out from consumer financial protection laws. It failed there, too.

And now the auto dealers have managed to slam Treasury one more time, via the SIGTARP report, which the Washington Post describes as “mostly a rehash of familiar dealer complaints about the supposedly unfair process by which the companies selected dealerships for closure”.

In this case, however, I think that Treasury’s argument is weak. Herb Allison, the Treasury official in charge of such things, just says that closing some dealerships was obviously better than closing all the dealerships, which would have been the outcome if GM and Chrysler had been liquidated. Well, yes. But as the report responds, “this is a false dilemma with no factual support”. Keeping more dealerships alive would not have killed the entire restructuring.

A stronger argument, I think, is that the combination of Ron Bloom and Steven Ratner went in guns blazing with a strategy of getting as much pain as possible out of the way as quickly as possible — not only with respect to the dealers, but even more with respect to the bondholders as well. If you’re going to declare bankruptcy, get as much benefit as possible out of it and make it quick. And that’s exactly what they did.

So yes, with hindsight, it might have been possible to cause less pain. But the task facing Bloom and Ratner wasn’t to do the perfect restructuring, it was to get something done at all. And Ratner, in particular, has a big ego and is unlikely to have taken the dealers’ complaints seriously: I absolutely believe that he ignored them and felt quite proud of the fact that he was taking advantage of bankruptcy law to get a lot of them out of the way.

As such, the SIGTARP report — which was authored I think mainly by Kurt Hyde rather than Neil Barofsky — is worth listening to, rather than simply railing against in Treasury’s knee-jerk fashion.

A more realistic response from Treasury would be simply that the deal was rushed by necessity and that no one had the luxury of time to make sure that everything was optimal; what’s more, the dealers, once they knew that a deal was on, had everything to gain by being obstructive and could not easily be trusted in what they said: they were fighting for their very livelihoods, and would say anything to keep them.

Still, that’s no reason to ignore them completely and the Auto Task Force would have done well to task one of its own members with crunching the dealers’ numbers in good faith. I think that Ratner sometimes forgot that he was working for the nation as a whole and that every extra unemployed former auto dealer was an outcome best avoided if possible. Or maybe it wasn’t yet clear just how bad the national unemployment situation would get. I do think that he failed to give the dealers a fair shake; I understand why that would be the case; and I think that it behooves Treasury to learn from its errors, once in a while.

COMMENT

“What’s good for GM is good for America” isn’t just an Eisenhower-era punchline. I don’t begrudge individual businesspeople, or groups, the right to promote their interest. But I have spent most of my life in and around various aspects of the auto business, and have also done my share of work with the likes of (e.g.) Silicon Valley, Hollywood and Wall Street; while each of those three groups has its share of fits-the-stereotype a–holes, as a group none exhibit the overblown sense of entitlement that auto dealers and manufacturers do, especially those from the Big Three.

Posted by 77SunsetStrip | Report as abusive

Will wine ever be democratic?

Felix Salmon
Jul 20, 2010 19:53 UTC

My latest wine column is up, and because I couldn’t do it there, I’d like to send out a big thank-you to Mike Veseth, whose post I drew liberally from both for quotes from Thomas Pinney and for its central idea.

One of the subjects of the column is a look at the pitfalls inherent in writing a wine column at all:

Pinney draws a distinction between what he calls Wagnerians, who aren’t happy unless they can drink a sound wine every day, and Martians, who are unhappy with anything less than the superlative and the rigorously-informed. (Wagnerians are named after Philip Wagner, a journalist and winemaker active in the 30s and 40s; Martians after uncompromising California wine pioneer Martin Ray.)

Most wine drinkers — including sommeliers, and retailers, and journalists — would put themselves at the Wagnerian end of the spectrum. But look at how they behave in public, and you’d be forgiven for considering them die-hard Martians.

They might happily and unceremoniously drink cheap and wonderful wine daily at home, but put them behind the counter of a wine bar, or give them a wine column, and they’ll suddenly start acting as though the only way they ever drink wine is with great concentration and connoisseurship.

The gist of the column is that although we can all laugh at someone who thinks they need to spend $350 in order to get a wine worth drinking, the fact is that a weaker but fundamentally identical message is sent by far too many wine lovers, far too frequently. And the message gets through: you can tell, quite easily, by looking at the number of wine drinkers in this country compared to the number of beer drinkers. Beer is democratic, in a way that wine simply isn’t, in this country. And, sadly, probably never will be.

COMMENT

It is mostly a matter of history and geography. Wine consumers tend to be in countries that produce wine. The same goes for beer and spirit drinkers. See here:

http://www.greenfacts.org/en/alcohol/fig tableboxes/table4.htm

and here:

http://strangemaps.wordpress.com/2010/01  /30/442-distilled-geography-europes-alc ohol-belts/

For the most part, Americans did not emigrate from wine producing regions and, at least until the 20th Century in California, was not itself a major wine-producing country. Product snobbery or anti-snobbery may reinforce the status quo, but they are not the primary reasons for the status quo.

Posted by slowlearner | Report as abusive

Unemployment chart of the day

Felix Salmon
Jul 20, 2010 19:03 UTC

Chart of the day comes from Derek Thompson:

median longterm unemployment.png

The dynamics here are terrible, of course, because there are five unemployed people for every job opening. In that kind of context the only way that this chart is going to start reverting to the mean is if millions of Americans simply give up looking for work at all, and therefore stop counting as unemployed for the purposes of these statistics. The ranks of the demoralized are growing fast — but, clearly, not enough to stop the median period of unemployment rising inexorably past the 6-month mark.

All of which provides perfect context for the latest piece of claptrap to emanate from Ben Stein:

The people who have been laid off and cannot find work are generally people with poor work habits and poor personalities. I say “generally” because there are exceptions. But in general, as I survey the ranks of those who are unemployed, I see people who have overbearing and unpleasant personalities and/or who do not know how to do a day’s work. They are people who create either little utility or negative utility on the job.

How does Stein know this? Because, believe it or not, he’s been friends with these people for decades:

I get letters and e-mails from friends of decades standing asking for money every single day. Their common denominator is that they lacked prudence and lived in a dream world.

What kind of dream world would that be, Ben? One where they believed that they could time the market? Or maybe just one where they believed in the value of a decades-long friendship? Silly them.

COMMENT

From my econ 101 class 14 years ago:

Perhaps Keynes’ biggest insight was regarding ‘sticky’ wages. Employers and workers are both reluctant for any reduction in nominal wages. As a result unemployment can get stuck at a high level instead of a market-clearing level.

With some inflation, wages could reset at a full-employment level without nominal wages going down.

With inflation at zero or less, high unemployment is with us to stay.

Posted by DanHess | Report as abusive

Banking: Can small beat big?

Felix Salmon
Jul 20, 2010 18:09 UTC

Whither small banks? Matt Goldstein has a big story today about the large number of private-equity shops and other financial investor chomping at the bit to acquire small banks — and the way in which they’re so far being rebuffed by the FDIC and other regulators.

Matt’s story appears on the same day that the WSJ runs a dispatch from Orlando, Florida, all about the way in which America’s largest banks are squeezing out any attempt at competition from smaller fry:

Fortified by infusions of taxpayer capital and takeovers of other large institutions killed or wounded in the crisis, a handful of hulking banks is emerging from the mess to dominate everything from mortgages to checking accounts to small-business loans…

The three huge banks made 57% of all home mortgages in the first quarter, up from 28% in 2008, according to Inside Mortgage Finance, an industry newsletter…

Measured in loans and other assets, Citigroup Inc. and the three other giants had $7.7 trillion as of March 31, up 56% since the end of 2007. Their combined assets are nearly twice as big as the assets of the next 46 biggest banks…

By providing more branches, ATMs and features like free online bill payment, the newly consolidated banks have made many basic services more convenient and cheaper for customers. The banking giants often offer lower mortgage rates and other types of loans than smaller players…

Bank of America, J.P. Morgan and Wells Fargo “can make money beyond belief” because of their low costs and volumes of scale, and “there is no chance of anyone challenging them,” says Arnold Danielson, a bank analyst in Bethesda, Md.

I’m not convinced: I suspect that the private-equity guys are right, and the people saying that the banking industry is doomed to being dominated by the big four banks are wrong. I’ve seen no evidence that there are economies of scale, in banking, once assets exceed $10 billion or so; and I’ve seen real evidence that consumers are shopping around for the best banking deals like they never have before. As the Accenture report says:

Customers tell us that they are much more willing than in the past to buy products from multiple providers. This volatility is a key factor in customer behavior post-crisis… Customers had the tools to shop around before the crisis, in fact the banks had put them into their hands via direct channels, and the aggregators and informal blogs simplified the comparison process further, but the crisis has accelerated their willingness to use them. This key trend was described by retail banking senior executives Accenture interviewed, but has also been confirmed by recent market research amongst consumers.

This volatility is closely associated with a loss of trust in the banks. Two thirds of global senior executives surveyed identified shopping around, decreased loyalty and price sensitivity as the key changes they are observing in customer behavior. Importantly, more than half of the senior executives Accenture spoke to had seen customer trust drop in banking brands.

This says to me that there’s a big opportunity right now for smaller banks to capitalize on the unhappiness that the big banks’ customers are feeling. (Not many holders of WaMu checking accounts are exactly overjoyed right now to be banking with Chase.) And as free checking slowly disappears, there will surely be a move to consolidate the many different accounts that people are now opening into one relationship institution. While there are reasons to use a big bank for such purposes, there are also reasons to use someone more local, where they know you personally, and where you’re not at the mercy of some balky computer.

One of the things I’m looking forward to finding out about BankSimple is the degree to which they’ll interact with their customers personally, over the phone, via email, and via Twitter and Facebook, applying human intelligence on a case-by-case basis. It’s high-touch, but also high-reward, if customers end up essentially giving them all their money as a result. What’s more, that kind of thing very hard to scale to a monster organization, the hiring of Frank Eliason by Citi notwithstanding. Small banks can be nimbler and more responsive, and can become very profitable for their owners in that sweet spot between say $1 billion and $10 billion in assets.

To put those numbers in perspective, Citibank has $1.5 billion of deposits at its 120 Broadway branch alone. Small can work; big won’t necessarily always win.

COMMENT

I would like to read the Accenture report – any idea how I can get it – is it free or does Accenture charge for it? SOunds interesting. Thanks

Posted by Clive1953 | Report as abusive

Goldman Sachs starts looking human

Felix Salmon
Jul 20, 2010 15:43 UTC

Steve Eder reports on Goldman’s earnings:

Second-quarter net income was hurt by several one-time charges, including a $550 million settlement of civil fraud charges brought by the Securities and Exchange Commission and a $600 million expense related to a UK tax on bank executive bonuses.

But even stripping out those costs, Goldman’s return on equity, a measure of the bank’s ability to squeeze profits out of shareholders’ money, was just 9.5 percent. Over the prior four quarters, the average was close to 25 percent…

The bank said client activity fell in the second quarter, particularly in May and June. It blamed worry about global growth rather than client concerns about the SEC civil fraud charges.

As Paul Murphy says, it’s “kinda sad, really” that Goldman felt the need to include a line showing “Net earnings applicable to common shareholders, excluding the impact of UK bank payroll tax and SEC settlement”. It’s as though Goldman feels the need to try to spin its results, rather than simply taking its lumps as they come and quietly making obscene amounts of money.

But of course Goldman didn’t make obscene amounts of money this quarter — its earnings fell a whopping 82%, and it seems to be pulling back the reins on its cash-cow traders.

So why is Goldman, of all banks, pointing its finger at “worry about global growth”? That’s the kind of nebulous and meaningless concept that lazy journalists fall back on when they need a reason why the stock market fell today and can’t find a good one. It’s not the kind of thing which accounts for a fall of well over $2 billion in a bank’s quarterly earnings. Think about it this way: if Goldman’s earnings went up by $2 billion in one quarter, would they ever credit “optimism about global growth”?

This quarter, at least, Goldman is just another bank: it’s not special any more. A couple more quarters like this, and it’ll lose the premium it’s still trading at. And a couple of quarters after that, it’ll stop being able to hire anyone it likes. But for the time being, this is just one bad quarter. You can be sure that Lloyd Blankfein and David Viniar are going to do everything they can to avoid a second one like this.

COMMENT

According to the Public Version of the SEC investigation of Bernie Madoff, his average return on equity was 15.5% a year.

According to the New York Times, GS had its best year in 2007 at 38% return on equity. Immediately before the economic collapse “from November 2007 to September 2009, the Wall Street bank’s tangible common equity swelled by 74 percent.”

Think about that. The already immensely powerful and wealthy bank nearly doubled its wealth during that time period.

The guys working for GS are smart, but what they were doing to generate that kind of return of equity either is illegal or it should have been illegal.

What happened to that sudden burst of wealth? In 2007, did GS start offering Certificate of Deposit at interest rates approaching 38%? Did pension funds on deposit in GS see a 74% increase increase in value from November 2007 to September 2009?

Of course not.

That incredible burst of wealth, minus about $16 Billion a year in bonuses, was never distributed even somewhat fairly.

GS is indeed a private business, yet it operates under a federal charter and under federal laws and supposedly under federal oversight. Countries need financial systems that serve the needs of its businesses and its citizens.

However, GS has demonstrated that its prime directive is self enrichment, even if it comes at the expense of the businesses and American citizens banks are supposed to be serving.

What was the Senate Committee on Banking, Housing and Urban Affairs and the House Financial Services Committee doing during that time period to make sure the public interest was protected? An equally important question: What did those committees do in the preceding years undo post-depression reforms?

Most importantly, here is the question that I will keep asking until I hear a plausible answer:

How is it that a bunch of silk-suited wheelers and dealers in New York and Washington, DC brought the largest economy on the planet to its knees…

and nobody went to jail but Bernie Madoff?

Posted by breezinthru | Report as abusive

Elizabeth Warren’s nomination

Felix Salmon
Jul 20, 2010 15:05 UTC

The question of who will be Barack Obama’s nominee to head the Consumer Financial Protection Bureau has now been clearly framed: either it’s going to be Elizabeth Warren, or it isn’t. That’s how Damian Paletta sees it, that’s how Simon Johnson sees it, and that’s certainly how the Progressive Change Committee sees it: they’re up to 138,485 people and counting on their petition to put Warren in charge.

This is by far the most high-profile appointment that will come out of the Dodd-Frank bill: you can hardly imagine thousands of signatures for or against Daniel Tarullo as the Fed vice-chairman in charge of regulatory issues. (Given that he literally wrote the book on such things, he’s probably a shoo-in.) As such, my feeling is that Shahien Nasiripour’s bright idea that she could simply be appointed — hired “on a contract basis”, without being nominated — is a non-starter.

And in any case it’s not obvious that such deviousness is necessary: there’s a good chance that Warren would indeed get confirmed by the Senate. She grew up a Republican in Oklahoma, and she’s been one of the toughest critics of Obama’s Treasury department. It’s all but certain that she would end up butting heads with various parts of the Administration during her tenure at the CFPB, to the detriment of the incumbents and to the quiet pleasure of the opposition. And her anti-bank rhetoric dovetails reasonably well with a lot of Tea Party complaints that banks have captured Washington.

It’s also worth noting that while her main opponent for the nomination, Michael Barr, is a much more agreeable Treasury man, he’s actually to Warren’s left on many issues. The plain-vanilla option (RIP) was actually Barr’s baby rather than Warren’s: there’s no mention of it in her original conception of the agency. Barr is also the foremost defender of the Community Reinvestment Act, which Republicans hate; he wanted the CFPB to oversee the CRA, and sees actively helping the poor and underbanked as part of the CFPB’s remit. Warren’s more conservative than that, and conceives the CFPB as a narrower consumer-protection agency.

Republicans, then, could well see more to object to in Barr than in Warren: he’s much closer to Treasury and to the current administration, and he tends to be more activist in terms of forcing banks to help the poor and unbanked, and telling them what products to offer. And of course most Senate Republicans will simply oppose Obama’s nominee on principle, no matter who it is.

My feeling is that the job should go to Warren. It wouldn’t exist were it not for her, and the CFPB has been set up to be very independent; as such, it should have an independently-minded head, rather than someone who can be trusted to fall into line behind Treasury and/or other regulators if and when there are any clashes. It’s never easy for a politician to nominate someone who they know will cause trouble for them down the road, but if anybody can do it, Obama can. Here’s hoping.

COMMENT

I question Michael Barr’s true commitment to financial reform let alone consumer protection .After all he was the
treasury spokesman that assured the financial community that the Lincoln provisions were “not a White House priority”
& most recently stated his belief that it would take at least a year for a Consumer Financial Protection Bureau to
come into being. In other words he does not sound like somebody that will ‘kick against the pricks’

Posted by kiaser | Report as abusive

Vine Talk: Enjoying wine for pleasure, not price

Felix Salmon
Jul 20, 2010 12:16 UTC

By Felix Salmon

(Felix Salmon is a U.S.-based financial journalist and a Reuters blogger here. The opinions expressed are his own.)

NEW YORK (Reuters Life!) – Roger Lowenstein, in “The End of Wall Street,” his book about the financial crisis, tells a story about Vikram Pandit, the former hedge fund manager and now Citigroup’s CEO.

Pandit was lunching at legendary New York fish restaurant Le Bernadin, says Lowenstein, and, looking at the wine list, saw nothing by the glass that appealed.

He ordered a $350 bottle of wine, and drank just one glass of it. That way, he explained, he could have “a glass of wine worth drinking.”

A Citigroup spokesman calls the story of Pandit’s $350 glass of wine “an untrue rumor,” but whether or not it’s true of Pandit, there’s certainly no shortage of people who are more than capable of pulling such a stunt.

The great food at Le Bernadin surely deserves to be accompanied by great wine, and people like Pandit can easily afford as many $350 bottles of wine as they feel like buying: with the $165 million Pandit got from Citi when he sold his hedge fund, he could drink 12 such bottles per day for 100 years and still have enough left over for a modest vineyard of his own.

But for most of us the idea of spending $350 on a bottle of wine — let alone a glass — is both terrifying and depressing. Terrifying because we feel that we can’t possibly appreciate the wine enough to justify its price tag, and depressing because we see that there’s a world in which a $350 bottle is the bare minimum of acceptability, and quite obviously we’re excluded from it.

That unpleasant mix of emotions helps to explain the fact that only one in three American drinkers considers wine to be their drink of choice. If you’re an American and you’re having a drink at a bar or with your evening meal, it’s significantly more likely to be beer than wine.

Wine writers love wine, as do the people who put wine lists together in restaurants, and wine retailers too. All of them, quite naturally, love to concentrate on the spectacular and the wonderful: the wines you remember for years after drinking them, the ones which floor you with their depth and sophistication and complex beauty.

But the cause of wine is not well served by such behavior: many Americans find it downright obnoxious, and end up drinking no wine at all.

Wine historian Thomas Pinney sees wines under $20 described as “bargains” in the press, and sees bottles of wine in restaurants regularly priced at well over double the cost of the most expensive entree.

“The ordinary American, unable to understand how a natural fruit product (as wine undoubtedly is) can be sold for $50 or more a bottle, sensibly decides to have nothing to do with the mystery,” he writes.

In most of America, the time and place for exposure to the ineffable and mysterious is Sunday morning, in church, rather than Wednesday night with a bottle of red. But you shouldn’t have to be a godless urban sophisticate to enjoy wine: indeed, you shouldn’t have to appreciate its finer points at all, or be exposed to incomprehensible winespeak, with its talk of wine tasting like black slate or smelling like a barnyard.

What normal person can or should embrace such nonsense? Wine culture will never make much headway if everybody is encouraged to judge wine on the basis of how closely it approximates some astronomically expensive first-growth Bordeaux, and to sneer at the cheap or the simply pleasurable.

Americans don’t grow up drinking wine — or any alcohol at all, for that matter. They see how expensive it is, however, on restaurant menus, especially when compared to beer. And when they’re old enough to start drinking, they’re intimidated by just about everything to do with it: its price, its recondite language, its arcane theater of sniffs and corks and stemware purportedly designed to direct different types of wine to different parts of the mouth.

What’s missing is any sense of fun, or of simple pleasures: a bottle of screw-top rose can be cheaper, more appropriate, and much more delicious at a summer picnic than a six-pack of beer. And it would prove more versatile, too, if only people felt comfortable adding some seltzer water or cooling it down with a couple of ice cubes.

Pinney draws a distinction between what he calls Wagnerians, who aren’t happy unless they can drink a sound wine every day, and Martians, who are unhappy with anything less than the superlative and the rigorously-informed. (Wagnerians are named after Philip Wagner, a journalist and winemaker active in the 30s and 40s; Martians after uncompromising California wine pioneer Martin Ray.)

Most wine drinkers — including sommeliers, and retailers, and journalists — would put themselves at the Wagnerian end of the spectrum. But look at how they behave in public, and you’d be forgiven for considering them die-hard Martians.

They might happily and unceremoniously drink cheap and wonderful wine daily at home, but put them behind the counter of a wine bar, or give them a wine column, and they’ll suddenly start acting as though the only way they ever drink wine is with great concentration and connoisseurship.

Those of us who love wine, then, should try to do a much better job of keeping things in perspective and encouraging simple pleasures.

Are you drinking wine out of a tumbler, or even a paper cup? That’s fine. Did someone refill your glass with one wine, when it had a little bit of some other wine in the bottom? That’s fine, too — as is the adding of ice cubes or seltzer should you be so inclined.

Do you feel that you have simply no appreciation for what makes $350 bottles of wine so wonderful? That’s pretty great: think of all the money you’re saving!

And remember that when people buy $350 bottles of wine, they like them because they’re expensive, and they order them as much out of insecurity as out of discernment.

Don’t let their insecurities be infectious.

Counterparties

Felix Salmon
Jul 20, 2010 04:33 UTC

Mexican savings accounts have negative real interest rates. Affordable!– Center for Financial Inclusion

Rich Blake has an entertaining rant about Randall Lane and Trader Monthly — HedgeWorld

Ben Stein: “People who have been laid off and cannot find work are generally people with poor work habits and poor personalities” — American Spectator

John Cassidy translates Larry Summers into something approaching English — New Yorker

Dan Wineman on restaurant websites — Venomous Porridge

Dear Pinot Noir: I’m writing to tell you that I’m breaking up with you — The Gray Market Report

Iceland: CFR vs Krugman — CFR

Amazon.com customers now purchase more Kindle books than hardcover books — surely thanks to the iPad — CNet

What Sharon Waxman and I have in common — Fishbowl NY

ETFs that no one should ever touch: “Inverse S&P 500 VIX Short-Term Futures Exchange Traded Notes” — BusinessWeek

Bloomberg’s interns (Last names: Tisch, Blankfein) — NYT

“We’re Apple. We don’t wear suits. We don’t even own suits.” — Wired, via ZDNet

Do I need to know about Tea Party Express vs Tea Party Patriots vs National Tea Party Federation? Please say no — The Atlantic

Cato on “Top Secret America” — lots of good links and analysis — Cato

A Farewell to Scienceblogs: the Changing Science Blogging Ecosystem — Scienceblogs

LCH.Clearnet clears record number of interest rate swaps ($224.6 trillion) in Q2 — Reuters

Is now a great opportunity for BP to try another top kill? James Cameron (yes, that James Cameron) thinks so — NYT

Mail Online has its own dedicated newsroom and >40m uniques — Guardian

COMMENT

I’d like to know the data subset Mr. Stein was citing. He seems to hail from the same vaunted halls of thought as former Sen. Gramm (nation of whiners). I’ve read and heard stories about 100-200 candidates applying for a job. Experienced professionals (banking / lending / investments).

Neither hearing or being told the “over-qualified” line encourages a job-seeker. If each/every potential employer worries or concerns about a new hire leaving quickly…well every last employee is able to move to something better or different too. Plenty of capable people are willing, perhaps too willing, to go a little backwards in order to move ahead. Employers aren’t budging.

Posted by McGriffen | Report as abusive

CNBC embarrasses itself on counterfeiting

Felix Salmon
Jul 19, 2010 23:44 UTC

The people at CNBC never got back to me when I asked to talk to them about their counterfeiting documentary, and now that I’ve seen the trailer, I can see why: it gobbles uncritically all of the baseless statistics that I’ve been railing against since 2004.

The trailer talks ominously of a “secret criminal world robbing businesses of $250 billion a year,” before cutting to a customs agent talking about how the volume of seized counterfeit goods has risen from $47 million in 2000 to $261 million in 2009. Is she really saying that Customs and Border Protection literally lets through 99.9% of all counterfeit goods, despite inspecting 8% of shipments coming into the country?

The show never does those sums; instead, it goes to a big warehouse with “just over $200 million of seized cargo,” adding that “there are 12 more like it around the country.” Hm, that would make $2.4 billion of seized counterfeit goods, if true — but when were they seized, given that ten years ago, customs was only seizing $47 million a year in such material?

And that’s not the only quantitative dissonance. “This year alone, counterfeited medicines will be a $75 billion industry,” says a representative of Big Pharma; there’s no indication that that number comes form a mysterious report which no one can ever seem to produce, which was published in 2005, and which projected the number basically out of thin air. Meanwhile, CNBC’s own slideshow puts the volume of seized counterfeit drugs at just $11 million last year.

It’s worth remembering, too, that often the values of seized goods are generally based not on how much they would sell for on Canal Street, but rather how much the real items would sell for. How can Customs claim to have seized $21.5 million in handbags? When you try to track down the figures, which is often hard, you tend to come up with implausibly high numbers for the value of one counterfeit handbag or CD.

The CNBC report insists on parroting the old “7% of world trade” number which was never based on anything at all; that allows it to inflate the numbers in the documentary as much as possible. It doesn’t even use the dreadful OECD report, which massively overestimated trade in counterfeit goods and even then could only manage to reach a “global ceiling” of $200 billion by pulling a grossly inflated number out of thin air, doubling it, and then doubling it again. CNBC, by contrast, says that trade in the US alone is more than that.

Oh, and they also say that counterfeiting costs “nearly 750,000 legitimate jobs each year.” I love that “nearly”: it makes it seem as though the number wasn’t completely invented.

The fact is that the cost of counterfeiting is almost certainly orders of magnitude lower than the insane numbers being bandied around by people who genuinely consider themselves numerate financial journalists at CNBC — indeed, it might even be negative. And every scaremongering journalist who uncritically parrots those numbers is part of the problem, not part of the solution. Carl Quintanilla, and your producers — shame on you all.

COMMENT

@magellannh –

You are right, there is a lot to be done with patents. But patents are an undeniably crucial part of the economy.

The pharmaceutical industry for instance could not even exist without patents. The man who had perhaps the greatest impact on quality of life presently, Thomas Edison, was a ferocious patent shark, getting lots of vicious patents fights all over the place.

Even Google, one of the most successful and valuable companies of all time, got off the ground on the back of a software patent of its special PageRank algorithm. Obvious in retrospect? Perhaps, but countless search firms had spent billions over more than a decade on inferior algorithms before that then.

Our founding fathers understood the importance of protecting inventions and put patents in the Constitution for a reason. Indeed patents are one of the few realms of our massive bureaucracy that actually finds support in that document.

The math of patents is funny. It is true that very many patents have no value, but that does not mean that all patents are worthless. Even if 99% of the 200,000 or so patents issued in the US have no value, that would still mean 2000 good inventions moving us all forward each year. Of course it is miserable working in the trenches if 99% of the patents you deal with are junk.

So-called trolls are an enormous problem — you are right. What to do? What if there was a requirement, in comport with your ideas, of actually making and/or promoting the invention in order to be eligible for a patent, or to keep a patent? It does seem that inventions which benefit us all are brought to life by their inventors and do not simply gather dust until brought into legal battle.

I would also note that there is another purpose to the patent system. The founding fathers felt that there was a public benefit to openly cataloging inventions for all others and all posterity to see. All patents are destined for the public domain after all. Surely that benefit remains intact.

Posted by DanHess | Report as abusive
  •