Felix Salmon

How well is Goldman serving its IPO clients?

Felix Salmon
Jul 14, 2010 22:01 UTC

Bloomberg has placed an interesting headline on Michael Tsang’s story about the performance of Goldman’s IPOs: “Goldman Can Show SEC Clients Get Best Returns on Its IPOs”.

Let’s ignore the silly SEC angle: it’s utterly irrelevant. The interesting thing is the idea that Goldman’s clients, when it comes to IPOs, are not the paying customers who are forking over 7% of the proceeds in order to get the best execution, but rather the friends-of-Goldman getting in at the IPO price. Do we, or does the SEC, really care about people like Josef Schuster?

“For the underwriter, first-day success is a very important measure in terms of certifying the power and the credibility of the franchise,” said Josef Schuster, the Chicago-based founder of IPOX Capital Management LLC, which oversees $3 billion. “A good first-day pop certifies the quality job the underwriter has done with investors and the company in order to further deals.”

Schuster, who purchased Tesla shares for his Direxion Long/Short Global IPO Fund, sold 30 percent of his stake on the second day of trading.

The answer, of course, is no. And the story that Tsang didn’t write — but could have written just as easily, given exactly the same data — is the story of Goldman systematically lowballing IPO price ranges, and cheating its corporate clients out of millions of dollars in IPO proceeds, giving them instead to flippers like Schuster.

Instead, Tsang’s lead is positively misleading on that front:

Goldman Sachs Group Inc., accused by the U.S. government of defrauding investors, is generating better returns for companies and buyers of initial public offerings than any other Wall Street firm.

Tsang never specifies what he means by “returns for companies”, but it seems to me that companies going through an IPO ultimately care about three things: the quality of their investors, the amount of money that they raise, and the ultimate market capitalization of their company. None of these things can be measured by looking at the amount by which the stock rises or falls in the first day or 20 days, as Bloomberg does here. But if one underwriter in particular gets known for generating a lot of first-day pops, then speculative hedge funds are liable to pile in to those IPOs. And no company particularly wants its shareholders to be speculative hedge funds looking to sell their stock in a matter of hours or days.

So if the SEC cares about Goldman’s clients, it should care mostly about the clients who paid Goldman Sachs $580 million in fees in the first half of 2010 alone — and not the clients who made money by flipping their IPO allocations at a profit. It’s entirely possible that the companies were well served by Goldman. But Bloomberg’s numbers don’t come close to demonstrating that.


If you’ve got the time and money it takes to cleanse the stench of corruption out of doing a deal with Goldman Sachs, you definitely have the wherewithal to think twice about doing business with them in the first place.

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Wealth managers covet hedgies’ pay

Felix Salmon
Jul 14, 2010 20:46 UTC

People, we have a problem: financial advisers aren’t being paid enough. But there’s a chap named Scott Welch who has a solution: pay them more!

During the turmoil of 2008, many advisers moved clients out of some high-flying assets or employed hedging strategies that limited losses. Yet many accounts are still below their peaks, and adviser income remains depressed…

“When assets dropped precipitously in ’08 and ’09, that may have been when you (the adviser) were most valuable,” Welch said. “Maybe you prevented them from panicking, did some tax-loss harvesting or bought some defensive stocks. Yet your fee for services probably dropped by 20 to 40 percent.”

Advisers typically get a fixed percentage of assets. Which means that if adviser income dropped by 20% to 40%, so did the assets they were managing. Which doesn’t seem to me like the kind of performance which should carry enormous rewards.

Structuring an incentive-based fee for financial advisers is, I think, a very bad idea, because it’s very hard to quantify objectives. You don’t want to set a benchmark to outperform, since that’s just a way of asking your adviser to take on more risk. If you want your adviser to do something like preserve real wealth for multiple generations, it’s hard to measure that on an annual basis and pay a condign bonus.

In fact, the current system is quite a good way of doing things, I think. If you manage to smooth out volatility in wealth during a time of volatility in markets, then you get rewarded with a less volatile income. And if you build wealth steadily over time, then your income goes up steadily over time as well. And, of course, if you impress your clients with your work, they will stick with you and recommend you to their friends.

The alternative — where advisers get huge paychecks in boom years and then feel aggrieved when those paychecks fall sharply after a bust — does no one any favors. So while the “hedge fund model may be good for wealth firms”, in the words of the story’s headline, I don’t think it’s good for their clients. And that’s where the conversation should end.


In my experience, the primary issue with an hourly fee (or, as in the legal profession, a retainer fee that is drawn against as services are used) is the “ticking clock” syndrome. That is, clients often are reluctant to call their advisors because every time they do, “the clock is ticking”. Of course, there is also the temptation for the advisor to stretch out the time spent on a project in order to drive up revenue.

Unfortunately, no pricing model is perfect, and I suspect the best answer is that each advisor should use a pricing structure that best fits their particular business model. Perhaps the more important point is that advisors should give serious thought to(and discuss with their clients)the pricing structure they use, so as to (a) fit their fees more closely to their tangible services, and (b) maximize alignment of interests between client and advisor.


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The Basel III jockeying continues

Felix Salmon
Jul 14, 2010 15:21 UTC

Bloomberg has a good update on Basel III negotiations today. To save you slogging through the whole thing, which is very long, the news is that in the war of banks vs regulators, the banks seem to be winning the battle of how to define capital.

Specifically, European banks are worried that they won’t be able to count their minority stakes in other banks as capital. That makes sense to me: in the middle of a crisis, you can hardly be expected to liquidate a strategic stake in some foreign bank. But European banks would need to raise a lot more capital if this rule passed, and so a compromise is in the works.

One of the smart things that the Basel III framework does is force banks to take responsibility for the liabilities of the banks in which they have minority stakes. Right now they can count those stakes as assets, but at the same time pretend that if the foreign bank runs into trouble, they won’t end up needing to bail it out. In reality, of course, big banks looking to protect strategic minority stakes are always going to be the first sources of liquidity that any troubled foreign bank looks to for help in a crisis.

The proposed compromise seems to be that banks can count their foreign stakes as capital — but only against the risks at the foreign bank. The stakes wouldn’t count as capital for the purposes of their own domestic liabilities and capital adequacy.

That compromise — a bit like the extended timeframe for getting up to new capital-adequacy levels — seems OK to me. In an ideal world it wouldn’t be necessary, but if it brings the Europeans on board, then fine.

But I’m less happy about possible delays in putting Basel III together: apparently the publication of new liquidity requirements might be “pushed back to the middle of next year.” And in this game, any delay is a real win for the banks: the longer they can drag out negotiations, the weaker the final rules are likely to be.

There’s also news on the Basel Committee’s forthcoming response to the bank lobby, which claimed that the new rules could reduce G7 GDP by 3.1% by 2015:

“Preliminary results do not point to a growth problem coming from the regulation,” Jaime Caruana, general manager of the BIS, said in Basel on June 28. “On the contrary, it would support resilience relatively rapidly.”

The Basel committee may publish the study later this month or in August, according to a person with knowledge of the matter. The report is expected to show an impact on economic growth of about one-third what the IIF calculated, another person familiar with the research said.

This is heartening. The whole point of the Basel rules is to help prevent exuberant credit bubbles during booms and recoveries, in order to also prevent disastrous crashes during busts. The banks will scream and shout about how expensive the new rules will be, but they’re best ignored on such matters, since they will always prefer less regulation to more, and lobby hard to get what they want. The international community is now faced with a once-in-a-generation opportunity to increase bank regulation while the banks are on the back foot. It must act fast, or face decades of failure.

The bizarre wedding of WaPo and Bloomberg

Felix Salmon
Jul 14, 2010 14:22 UTC

I’m very confused by WaPo’s new “Washington Post with Bloomberg” business section. Bloomberg gets a lot of branding at the top of the page, but at least at launch it had no stories at all above the fold.

wapo.jpgIf you zoom out or scroll down you can finally see some Bloomberg stories appear, I’ve marked them with arrows here. And if you look really carefully, you’ll see that they say “(Bloomberg)” after the headline, in hard-to-read light grey type.

There doesn’t seem to be any top-level editing of these stories: the third Bloomberg story, “Sales at U.S. Retailers Decreased for a Second Month in June”, is basically exactly the same as the top WaPo story, “Retail sales drop 0.5 percent in June.” Bloomberg, here, is adding nothing to the WaPo file.

But the real weirdness happens when you actually click on those links. The WaPo story looks and feels and is part of the WaPo website. It’s hosted at washingtonpost.com, and has the familiar three-column view with lots of easy navigation.

The Bloomberg story, by contrast, takes the new biz-section header, pastes it on top of the Bloomberg wire copy, drops a WaPo footer at the bottom, and hosts the whole thing at bloomberg.com. It’s neither one thing nor the other: after spending a lot of time and money on a very good new redesign of its main site, Bloomberg seems to have slapped together a new co-branded site for the Washington Post in about five minutes. If you try to navigate to the top-level URL, http://washpost.bloomberg.com/, you just get a useless error message.

In the accompanying press release, Bloomberg’s Matt Winkler proves himself a master of PR gibberish:

“As Bloomberg has become the first, fastest and most factual provider of the story of money in all its forms, readers of the redesigned online business section conceived with the Washington Post can look forward to a unique blend of actionable news,” said Matthew Winkler, founder and Editor-in-Chief of Bloomberg News.”

Insofar as this means anything, I think Winkler is saying that the WaPo’s readers can and should trade based on what they read there. That’s the only reason to care so much about the news being “first” and “actionable.” But that would be a really bad idea, for a large number of reasons which should be obvious to anybody thinking about it for more than five seconds.

At heart, this looks to me as though it’s the online-news equivalent of one of those Europudding movies, co-produced by nine different state-backed film production agencies. I’m sure it seemed like a good idea at some BizDev meeting, but from a purely editorial perspective it makes little if any sense. Why go to the trouble of building a whole new site co-branded with Bloomberg, when the WaPo was always welcome to simply link to Bloomberg stories from its business-section homepage any time it liked? This deal just makes it that much harder for WaPo to link to anybody else.

I suspect that what’s really happening here is that Bloomberg is desperately trying to turn itself into a consumer-facing brand in as many ways as it possibly can — through television, BusinessWeek, co-branding at the Washington Post, and anything else it can come up with. It has the budget to put together something like this, and so it has done so. But it’s being weirdly slapdash and inconsistent about it, from the perspective of the actual consumer. And the decision to force readers of the Washington Post to navigate to a whole new bit of bloomberg.com when they want to read Bloomberg’s stories — that just makes no sense at all. Either you integrate your material into the WaPo website, or you don’t. This attempt to find some kind of middle ground simply fails.


I’d guess that we’ll see a ramping up of Bloomberg content. The WaPo’s business section has always been incredibly bad and its demotion to a few pages in the back of the A section has only made it worse. They may eventually outsource just about the whole thing, and that would be good.

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Felix Salmon
Jul 14, 2010 05:31 UTC

Pimco launches GDP-weighted sovereign debt indexes: seems like a very good idea to me — Reuters

“For reasons that aren’t clear, almost all adult picky eaters like French fries” — WSJ

SLAPP fail: ML-Implode’s parent company will likely file for bankruptcy in wake of baseless nuisance libel suit — ML-Implode

The $0.99 comments paywall — Guardian

The Lost City List of classic, utterly New York places worthy of your patronage — Lost City

“The average amount of time the ball is in play on the field during an NFL game is about 11 minutes” — WSJ

Did speculators cause commodity price spikes? The OECD says no. But David Frenk says their paper is very flawed — Traders Narrative


Regarding that Pimco article. Wouldn’t an alternative to use the market value of the outstanding bonds rather than the face value outstanding or is it normally done on the basis of market value. For instance, if a country’s bonds are trading at 50 cents on the dollar due to heightened risk aversion, then only 50% of the outstanding value should be used when computing the weights in the index. I’m not sure whether that is done or not.

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How to build a paywall

Felix Salmon
Jul 14, 2010 05:16 UTC

If you’re going to put a paywall on your website, this is a very sensible way to do it:

Press+ is aware that there are ways users can avoid paying for the content its affiliates are about to charge for, including by using this Firefox extension (as well as by using multiple browsers), if they are willing to spend the time and effort and endure the related inconvenience.

As we develop the system in the coming months we will implement our plans to address this problem to the degree it is material for any publisher. But we’ll do so from the prospective that we are talking about content that has been free for years; thus the fact that a small percentage of people may try to circumvent a modest charge for it and succeed in doing so for a short period of time must be seen in light of the fact that most won’t, which means that a new revenue stream from loyal readers will have been created.

David Brauer seems to be of the opinion that any new paywall should be “robust” and shouldn’t be able to be defeated by means of a plugin (or by using multiple browsers, or by deleting cookies, or various other methods, I suppose). But that’s exactly wrong. The purpose of a paywall isn’t to keep people out, it’s to generate revenue from loyal readers. And the expense of making the paywall harder to circumvent is almost certainly greater than the marginal extra revenue that such an action would generate: after all, the kind of people trying to get around the paywall will most likely simply go elsewhere, rather than pay.

Back in the old days of print newspapers, you could read them for free by going to your local library or your nearest hotel lobby. You want a free copy of the FT? Just pop in to the FT building at 1330 Sixth Avenue — there’s always a pile there. A paywall is like the cover price on a newspaper: it’s the amount that you’re asking and expecting your readers to pay, but it’s not a sum without which reading the paper is impossible.

LancasterOnline is asking its readers to pay it $1.99 a month if they read a lot of obituaries. That’s a reasonable request and if I was a regular reader of that site’s obituaries, I would pay the fee. To sneak around the paywall is to place oneself in an antagonistic relationship with the paper you’re reading: it might be legal, but it’s certainly impolite. It’s a bit like stealing fruit from a roadside farmstand operating on the honor system. And I can’t imagine that’s the kind of thing that LancasterOnline’s loyal obituary readers would do.

Meanwhile, high paywalls impose other costs. When I’m reading Twitter on my phone and follow a link to the WSJ or FT, I hate running into their paywall. And the FT, in particular, has a paywall which breaks in unexpected and annoying ways, barring you from reading stories even when you’re a logged in subscriber. Recently a very generous multimillionaire, a huge admirer of the FT and a loyal subscriber of many years, told me that he hates the FT paywall — partly because he runs into it sometimes and partly because it makes it harder for him to share FT stories he likes. It’s pretty obviously not good business for the FT to alienate its customers like that and I suspect that part of the reason that the NYT is taking so long building its paywall is to try to avoid those problems as much as possible.

Circumventability, then, is a sign of a sensible paywall, not a sign of a badly-designed one. People will get around any paywall if they really want — just pasting the headline into Google News will often work fine. Newspapers shouldn’t worry about the people who do that; instead, they should be flattered. And spend their efforts instead on improving their relationships with their paying customers.


The paywall is very stupid. I don’t have a credit card, and never will. I pay cash for everything, or write a check. I don’t ever want to be in 25% interest hell. So I cannot access those sites with a paywall. But this is okay, because anything worthwhile gets cut and pasted to one of the sites I read for free. Talk about cutting of one’s nose to spite his face!

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Paywalls encroach on Alphaville

Felix Salmon
Jul 13, 2010 22:00 UTC

FT Alphaville is spinning off! The fabulous Paul Murphy and Stacy-Marie Ishmael, who have been with Alphaville from the beginning, are now setting up something at even more of an arm’s length from the FT itself: “a new digital media service”, whatever that might be, called FT Tilt. It’s all quite mysterious for the time being; I can’t wait to see how it turns out.

Meanwhile, the Alphaville email newsletter is disappearing behind the FT’s ever-expanding paywall: in order to receive it, you either need to be a subscriber to FT.com (just the newspaper isn’t good enough), or else you need to subscribe to the email alone for £65 or $93 per year.

The Alphaville blog itself, however, will remain free. So I have a piece of advice for anybody pondering whether they want to pay to get multiple emails per day from Alphaville: go to Feed My Inbox, type your email address into the email address field, and type http://ftalphaville.ft.com/blog/feed?abstractlen=-1 into the “Feed URL” field. Presto, you’ll get dozens of great emails a day from Alphaville, in a more timely manner, full of links and analysis and wit, all for free. Then, if you still want to spend $93 a year for the 6am Cuts, go right ahead.

I’m not entirely clear on why this charge is being implemented, and the way that Alphaville talks about “an executive decision reached somewhere above the tree line at the FT” makes me think that they don’t understand it either. My guess is that it’s a matter of principle: the FT doesn’t want its readers to feel that they can read it for free. And maybe they want their FT.com subscribers to feel more special because they’re getting an email no one else can get. But if the FT is willing to share the information, I’ll be very interested to find out whether anybody signs up for the email-only option. My guess is that the subscriber base is going to be tiny, certainly so long as rivals like the NYT’s Dealbook email remain free.


couldnt you just set up an rss feed from alhpaville? the strange thing is that the 6am cutis amongst the most useless services the FT offers, especially if you arent an FT subscriber. Alphaville itself is excellent and much better than DealBook in my opinion, but i never found any value in those emails

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U.S. immigration datapoint of the day

Felix Salmon
Jul 13, 2010 20:52 UTC

For every person with a green card, there’s a story of exasperating grappling with an incomprehensible U.S. government bureaucracy. My own story is far too long and boring to go into, but one part of it involved what turns out to be a very common occurrence: my green card was simply lost in the mail, and I was forced to reapply (and pay hundreds of dollars) for a new one on the grounds that it wasn’t returned as undeliverable.

I’ve been reading the ombudsman’s annual report on U.S. Citizenship and Immigration Services, and it turns out that there are plans afoot within USCIS “to improve its mailing technologies”. Which means using the delivery-confirmation service of the US Postal Service. But don’t hold your breath. “This program is developed, but due to financial constraints, is tentatively delayed,” says the report, adding that there is “no scheduled deployment date.” But that’s still better than the plan to link delivery-confirmation numbers to the internal case-status system: that program hasn’t even been developed yet.

Meanwhile, some of the stories about people applying for green cards go beyond exasperating and enter the realm of the truly tragic. I got my green card because I was the spouse of a U.S. citizen; the ombudsman tells the story of another applicant, who was the unmarried child of a U.S. citizen. Have a guess how long that application took:

A U.S. citizen filing a petition in August 1992 for an unmarried son or daughter (F1) in Mexico could not be processed for an immigrant visa until February 2010, nearly 18 years later. Generally it takes another year or more to complete consular processing, including security checks, medical examination, and interviews. In total, the immigration process spanned 19 years in this scenario.

Green card holders, too, can sponsor their unmarried children for green cards — but their situation is complicated even further:

Unlike the situation for a U.S. citizen’s beneficiary, who converts from the F1 to F3 preference category upon marrying while waiting for an available visa, there is no category available for the married son or daughter of a green card holder. The marriage of the son or daughter of a lawful permanent resident (F2B) voids the pending petition, and the priority date is lost. Consequently, many such beneficiaries find they must choose between marriage and immigrating to the United States.

There are nuggets like this throughout the report, and the section on the insane way that the USCIS toll-free support line is run will only confirm all your prejudices about government bureaucracy. As for the deep-seated structural problems at USCIS — what the ombudsman calls “the many systemic problems that arise from its antiquated environment” — IBM has been awarded a half-billion-dollar contract to modernize the agency’s systems. But the ombudsman notes drily that “until the immigration experience tangibly improves for customers, the success of Transformation remains an objective not yet achieved”, adding that “Since USCIS’ inception, every Director has attempted, and failed, to successfully implement a system overhaul.”

Immigration and visa nightmares are a large and growing problem for high-skill employers in the U.S.. Wall Street and Silicon Valley tend to complain the loudest about such things, but they happen everywhere — right now celebrated Colombian journalist Hollman Morris looks as though he won’t be able to take up his Nieman fellowship at Harvard, since the State Department has denied him a visa for reasons that no one can understand. Between dealing with capricious decisions and navigating the insanity that is the USCIS bureaucracy, it’s little surprise that many employers choose to simply set up shop abroad. The national economy will definitely continue to be harmed if we don’t fix this problem, but unfortunately to date there has been no sign of any ability or desire to really do that.


I am sorry to sound so cold-hearted. But right now, the unemployment figures indicate that adding to our population is suicidal. I hear over and over again “but Americans won’t do these jobs”. No they won’t, but if they don’t you will have to raise wages to the point that they will accept the jobs. It is a simple supply-demand problem, that can be remedied by paying a better wage, if the company wants the work done. What these protesters really mean is: “”no American will do the job at the pathetic wages I am offering with no benefits”. The population growth in the U.S. is rapidly outstripping the job growth. I am sorry for our latino and other cousins, but we cannot tolerate this level of unemployment, with continued immigration, given our current economic situation.

The rest of the world is worse. As an American, I have tried to emigrate to both Sweden and the Netherlands. Guess what? They will take in an EU immigrant from Bulgaria or Slovenia, with full work-permit status, but Americans need not apply. Other than in Japan, I can’t think of a single country that the residents will benefit from incoming immigrants.

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Steinbrenner datapoints of the day

Felix Salmon
Jul 13, 2010 19:02 UTC

What is the financial legacy of George Steinbrenner? Certainly he’s built a hugely valuable franchise: he bought the Yankees for $10 million in 1973, and they’re now worth just over $1 billion, $1.6 billion, according to Forbes, with Steinbrenner personally worth slightly more than that, some $1.15 billion. That’s a lot more money than he could have made if he just stuck with shipbuilding, and it’s proof of how profitable it can be to overpay for talent.

Steinbrenner also professionalized the business of sports teams, not only in terms of paying lots of money for free agents, but also in terms of financial sophistication when it came to things like setting up the YES Network in league with Goldman Sachs and Providence Equity Partners. He also proved adept at extracting large amounts of money from the the public sector: this breakdown, for instance, puts the total cost of Yankee Stadium at $2.3 billion, of which only $670 million was paid by the Yankees, while taxpayers ultimately ended up on the hook for $1.19 billion.

The new Yankee Stadium was also ahead of the curve in terms of reducing the number of seats while massively jacking up the price of entry, taking the cost of going to a Yankees game out of the reach of many of the most fervent fans who live in the shadow of the stadium (although they’re welcome, of course, to watch all the games on YES). When Steinbrenner first bought the Yankees, the owners of sports teams tended to be very wealthy. He was instrumental in making the players very wealthy as well. And now the crowd is getting much wealthier too. I guess rich people tend to cluster together.


So sports teams are run by billionaires, making athletes millionaires, to sell tickets only millionaires or fanatics can afford… the way of sports has definitely been lost. Even the Olympics, for all their bluster over amateur athletes blahblahblah can really only be attended by the wealthy or the guy who says ‘I don’t care what it costs, I want to be in this moment.’ It’s a shame that something that should belong to all has been given ownership by the few, but that’s capitalism eh? Everything has a price…

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