Felix Salmon

Larry Robbins’s bridge-traffic arbitrage

Felix Salmon
Sep 24, 2010 21:00 UTC

Bess Levin has got her hands on a spectacular letter to investors from hedge fund manager Larry Robbins, in which he explains what alpha is by means of an analogy to traffic on the George Washington Bridge:

The entrance to the GW Bridge from the Palisades Expressway has a seven lane tollbooth, through which all of the traffic merges back into two lanes to enter the bridge. When I first moved to the area, I thought I had found a classic case of “short line long line” where people were simply lazy and didn’t move over to the left two lanes which had the shortest lines to the tollbooth. However, with experience and analysis, I found that the third lane from the left had a slightly longer line to the tollbooth for good reason – despite the longer line, it was meaningfully faster. The reason is simple enough once analyzed. As the seven lanes merge to two, lanes #4 and #5 combine, #6 and #7 combine, and then those two sets each combine – so in aggregate if you are anywhere in the right four lanes before the tollbooth, your lane becomes every fourth car in the right lane once merged. On the left, lanes #1 and #2 combine, and lane #3 has no partner. Then lane #3 combines with the set of #1 and #2, which results in lane #3 becoming every other car in the left lane once merged. As such, you move twice as fast in lane #3 as any other lane in the tollbooth. That’s alpha.

Robbins already won the mixed-metaphor award earlier on in his letter, with this:

As we discussed, the third and fourth legs of the stool – economy and liquidity – were subject to change rapidly, and we were focused on closely monitoring both to identify storm clouds on the horizon.

But the corker is probably this line:

The best analogy I can think of to describe the current environment, in contrast with 1995-1999, is bowling.

I do hope that Robbins wasn’t closely monitoring the legs of stools in an attempt to identify storm clouds while driving in lane #3 on the George Washington Bridge. Or maybe he was, and that helps explain why his fund fell 4% in the second quarter of 2010.

Volume-based stock chart of the day, flash crash edition

Felix Salmon
Sep 24, 2010 16:17 UTC

Here’s the volume-based stock chart you’ve all been waiting for: the one for May 6, the day of the flash crash. Since the big spike in volume was concentrated at the end of the day, in the final hour of trading, the time-based chart squeezes a huge amount of activity into a relatively small horizontal space. The volume-based chart gives the crash a bit more space.

Volume vs Time - SPY - 20100506.jpg

On the other hand, it’s worth nothing that most of the day’s trading still took place before the crash happened.

On thing that strikes me about this chart is not the crash itself but rather the run-up to it: the initial drop from about 1,160 on the S&P down to about 1,120. On the time-based chart, the decline starts slowly and then rapidly speeds up; on the volume-based chart, however, it’s much steadier. And in fact we saw roughly as much volume in the normally-quiet hours between about noon and 2:40 as we did during the craziness of the crash itself and its aftermath. I’m not going to hazard a guess as to what this means, but I do think it shows that May 6 was a pretty unusual day in the markets even before the flash crash happened.

Many thanks to Omer Uzun at Proteus Financial for putting this together: it’s only one tiny piece in the puzzle, but surely every little bit helps.


The top axis and bottom axis use different timescales, if you look closely.
The top axis divides the day into ~ 40 min increments, and shows the amount of trading done there.
The bottom axis divides the day into 10% of TRADE VOLUME…so the time areas are variable. The % adds up naturally, but what it really shows is what % of trades are getting done in what time periods, very precisely. The top bar doesn’t convey volume, just activity.

As for reason…the only thing people can point at now is a sell off on options relating to the S&P 500, I believe. The order was so massive it borked the chain, and the HFT’s who comprise 70% of trading volume exited the market, crashing liquidity and driving prices down to unreal levels as counterparty demands evaporated.

There’s probably more to it, but we’ll see.


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Those unpredictable bank fees

Felix Salmon
Sep 24, 2010 15:13 UTC

As Elizabeth Warren starts building the Consumer Financial Protection Bureau, there’s never been more uncertainty and upheaval surrounding the costs and fees associated with consumer finance.

There’s definitely a fair amount of good news. Old-fashioned overdraft fees now banned unless you opt in to them, and the Wells Fargo case, in which the California bank was ordered to pay $203 million to customers who had their largest transactions processed first, could set an important and expensive precedent for banks. Kate Davidson reports that smaller community banks are likely to fall into line on this front, but it’s still amazing how opaque the national banking system is when it comes to such policies. Get this:

Community banking companies that process transactions highest-to-lowest include the $3.6 billion-asset Renasant Corp. in Tupelo, Miss.; the $10.5 billion-asset Citizens Republic Corp. in Flint, Mich.; the $13.7 billion-asset Susquehanna Bancshares Inc. in Lititz, Pa.; the $6 billion-asset First Commonwealth Financial Corp. in Indiana, Pa.; and the $8.5 billion-asset Hancock Holding Co. in Gulfport, Miss.

Many banks that KBW surveyed would not disclose information about their processing practices. Several declined to comment when reached by a reporter, or did not return calls seeking comment.

It’s a simple and powerful strategy: simply don’t tell anybody, whether they’re a bank analyst or a reporter, what your policy is when it comes to overdrafts. That way, people shopping for a new bank will have to simply go on your public marketing materials, rather than being able to make any kind of easy apples-to-apples comparisons.

One of the things I hope that Warren does is to make every bank’s fees and policies public, in an open database which can be easily parsed by personal-finance websites. It’s not like these things are a secret, per se: they’re just very difficult to find right now. Let’s make these things as transparent as possible, instead.

Meanwhile, the ABA is, predictably and depressingly, pushing back against the idea that consumers would rather have fewer overdraft fees:

Nessa Feddis, a vice president and senior counsel at the American Bankers Association, said she expects regulators will eventually consider changes to rules affecting the order of processing. But she noted that the issue has been the subject of debate and litigation for decades, and said a Federal Reserve study found that customers want important payments — such as rent, mortgage or other bills — processed first, and they’re willing to pay for it.

I’ve looked for this Federal Reserve study, and can’t find it, does anybody know what she’s talking about? If it exists, it only serves to underline how important it is that the CFPB have full independence from the rest of the Fed. And if it doesn’t exist, then the ABA is even more mendacious than I’d imagined.

In any case, banks are definitely looking for new fee-revenue streams, and that’s where the uncertainty comes in. Blake Ellis has a look at some of them: Wachovia, for instance, will now charge you $10 to transfer money from your savings account to your checking account if you don’t have enough money in checking. It’s essentially an overdraft fee without an overdraft, and it’s existed for some time at Wells Fargo, which is now imposing it on Wachovia customers too.

I see four main forces here, all pulling in different directions.

The first is banks’ desire for income streams: they are going to want to introduce as many new fees as possible, especially banks like TCF which were highly reliant on those overdraft fees. (TCF’s business was particularly cunning: it banks a large number of students, who then learn the hard way about how much overdraft fees cost. Once they’ve learned their lesson, they move on to other banks, but TCF just stays there, signing up a new cohort of naive freshmen each year. It, like Wells Fargo, is being sued over its overdraft practices.)

The second is lawsuits. The Wells Fargo decision is the biggest, but other decisions are important too, like the $18.75 million settlement in North Carolina against a payday lender there. The more such decisions there are, the warier banks will be of trying to push the envelope.

The third is Warren’s new bureau, which could become an invaluable public resource for holding bank practices up to scrutiny.

Finally, of course, there’s the constant scramble, on the part of banks, for market share and customers: the more confusing the landscape becomes, the more appealing it is to try to attract new customers by promising them a simple product with no hidden fees. bank

It’s impossible to predict where we’re going to end up once all these factors have been working for a while, but it’s easy to predict that the route from here to there is going to be a rocky one and is not going to go in a straight line. So be careful out there. Your bank is having to deal with a scary and unfamiliar regulatory landscape, and might well react in unexpected ways.


Impossible to be sure what Feddis was referring to, but it may have been the “consumer testing” mentioned on p.7 of this press release: http://www.federalreserve.gov/newsevents  /press/bcreg/bcreg20091112a1.pdf. This says:

“… participants in consumer testing indicated that they would prefer to have their checks paid into overdraft, because those transactions represented important bills.”

If this is what Feddis is talking about, she is being deceptive, because the very next sentence continues:

“In contrast, consumer testing indicated that many participants would prefer to have ATM withdrawals and debit card transactions declined if they had insufficient funds, rather than incur an overdraft fee, because those transactions tend to be more discretionary in nature.”

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Felix Salmon
Sep 24, 2010 05:48 UTC

Gothamist blogs my bike-lane episode today so I don’t have to — Gothamist

Felix Salmon smackdown watch — IPE@UNC

House approves $30 billion small business lending fund — Reuters

Richard Holbrooke, with well-oiled access to top NYT brass, can get it to admit mistakes it didn’t make — NYTpick

The Tax Plight of the $250,000 to $500,000 crowd — HBR

What a princess goes for today — Black Von

Actual copy from the FT: “The Lasy sunbed is designed to take the effort out of sunbathing” — CJR

iPad design tropes moving onto the web — Nieman


What a princess goes for today — Thanks for introducing me to your wife’s blog.

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Adventures with otiose trustees, RMBS edition

Felix Salmon
Sep 23, 2010 18:22 UTC

Carrick Mollenkamp writes today about Talcott Franklin, a lawyer in Dallas who has taken it upon himself to wage war against trustees — those impossible-to-find people buried deep within big banks who technically work on behalf of bondholders but who in practice do absolutely nothing.

Last year, I wrote about US Bancorp as being one of the worst of these trustees, and it’s no surprise to see them on Mollenkamp’s list. Here’s what they’re meant to do:

If a trustee, for example, discovers that a borrower lied when getting a loan, the trustee or loan servicer is responsible for forcing the originating bank to repurchase the loan on behalf of mortgage investors. Trustees enforce warranties made by loan originators when they sell loans to a trust, and oversee loan-servicing firms.

In practice, you won’t be surprised to hear, the trustees ended up doing little or nothing, despite their obligation to protect the rights of bondholders:

In the past, complaints by mortgage-security investors went unheeded. But because Mr. Franklin now represents enough investors to meet certain legal thresholds—he, for example, represents 50% or more of the voting rights of 900 mortgage securities—his clients could fire a trustee, demand changes in the way a mortgage bond is managed or ultimately file a suit on behalf of a huge group of bondholders.

In the letter, Mr. Franklin said that in some trusts where the lender and servicer sit inside the same bank, the number of recent repurchases by the lender is zero, even though the default rate for the loan pool is 25%.

Things have come to a pretty pass when bondholders need to group together to sue their own trustee. But it’s been clear for a while that almost nobody has been looking out for bondholders’ rights; certainly the government has been much more interested in keeping the banks solvent. Good for Mr Franklin for fighting this fight; I hope he gets results.


If you want something done right, do it yourself. If the bondholders can’t look out for themselves they have no business in the business (retail investors are a whole ‘nother story I won’t get into here)

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More bikes means slower bikes

Felix Salmon
Sep 23, 2010 17:16 UTC

Rachel Brown has a fantastic little 5-minute film about biking up First Avenue to work:

I love the way that she’s caught on camera all of the annoyances which drive bike commuters mad: the cars cutting across the bike lane to make left turns; the pedestrians blithely stepping out into the lane in front of you; the trucks using the lane as a parking spot; the taxis driving up it. And, of course, the Evil Bike Salmon.

At the same time, there’s more than a hint of tension, in this film, between relatively serious bike commuters, on the one hand, and slow hobbyists, on the other. And this tension, I think, is likely to get worse rather than better, even as the other problems might alleviate themselves somewhat as the number of cyclists in New York grows.

There’s safety in numbers, when it comes to cycling, and a similar phenomenon is likely to happen with regard to pedestrians and car drivers being increasingly conscious of bicyclists in their midst. Already, the First Avenue bike lane has reportedly cut injuries to all street users by 50%. But as the number of cyclists rises, the average speed of cyclists necessarily falls. Everybody thinks of northern European cities like Copenhagen as bicycling paradises — and they are. But if you’re biking around Copenhagen, you’re going to go a lot more slowly than if you’re biking the same distance in NYC.

A slow cyclist can cope with most of the dangers and obstructions that Brown complains about much more easily than a fast cyclist — and the fast cyclists, as Brown’s film shows, are now shunning the lane entirely, moving over to the right-hand side of the street, where they’re much less likely to get cut off by a car. (Cars often turn left off First Avenue, which runs up the east side of Manhattan, but much more rarely turn right.)

It’s going to be very interesting to see how fast cyclists cope with an influx of slower cyclists in Manhattan, as bike lanes continue to get built and average bike speeds continue to decline. I love to zoom down avenues at high speed, but I also love being safe. Maybe that means I’m just going to have to start going a little slower.


CycleartNY is dead on. I’ve ridden these paths multiple times at rush hour, and they support up to 15 MPH bike traffic safely. That’s faster than the subway, and plenty fast for many, probably most “serious” bike communters.

Folks who want to ride more like 20 MPH can ride with the motor vehicle traffic, although they should not ride illegally in the bus lane as the video seems to suggest they consider doing. But these faster riders certainly shouldn’t expect to be free from all the same things found on a bike path–slow cyclists, pedestrians, counterflow riders–OR from double-parked and dangerously operated motor vehicles and opening car doors, which you find only occasionally in a bike path.

These bike paths have been in place just a couple of months. It’s a little early to declare them unsuitable for “serious commuters.”

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The FSA’s foolproof method for preventing M&A leaks

Felix Salmon
Sep 23, 2010 16:38 UTC

The UK’s FSA has conducted an investigation into the way that big M&A transactions can get leaked before they are formally announced. Its conclusion might shock you, so make sure you’re sitting down for this:

Our enquiries revealed that media reports containing leaks were often closely preceded by telephone conversations between insiders occupying senior roles on a corporate transaction, and the journalists who published those media reports. Due to their position as insiders, these senior individuals held detailed knowledge of the transaction. The calls between the insiders and journalists lasted up to 20 minutes in length and in some cases took place with journalists the afternoon or evening before the leak was first published.

The FSA is unhappy about this: “leaks ahead of announcements pose a threat to market integrity”, they write. But never fear, they’ve worked out how firms should deal with this problem:

Regulated firms should have a robust and detailed media policy…

Internal policies should require all initial media enquiries received by a regulated firm’s staff to be immediately directed to the firm’s media relations team…

Internal policies should also require that once an initial media enquiry has been passed to a regulated firm’s media relations team, the media relations personnel should review the enquiry to decide if it potentially relates to inside information…

If the enquiry potentially relates to inside information, [and] if it is necessary to involve non-media relations personnel, the media relations team must only grant authorisation to other staff members to communicate with the media… where the conversation between the other staff member and the journalist is held on a recorded telephone line.

There, that should do the trick. I’m sure that from here on in, there will be no more M&A leaks in UK newspapers. I only wonder why the SEC hasn’t figured this out yet.



“I am shocked, shocked to find that gambling is going on in here.”

“Your winnings, sir.”

“Oh, thank you very much”

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The WSJ’s Goldman non-story

Felix Salmon
Sep 23, 2010 15:15 UTC

I’m generally plugged-in enough to various news streams that if there’s a big story one day, I’ll notice it before it gets splashed across the front pages of the newspapers the following morning. So I was surprised to see today’s WSJ, with its huge headline running across the top of the front page: “SEC Blasted on Goldman“. The story itself is a long one, and is the work of no fewer than four reporters, with a fifth writing an associated blog entry.

The story is about David Kotz, the SEC’s inspector general, who appeared in front of the Senate Banking Committee yesterday. Kotz was the author of a 159-page report into the SEC’s handling of the Allen Stanford Ponzi scheme, which was released on the same day that the SEC filed its explosive charges against Goldman Sachs. Unsurprisingly, the Goldman charges dominated the business-news cycle, and the Stanford report, which was highly critical of the agency, was, in the words of Reuters, “largely unnoticed”.

So when Senators asked Kotz about the timing of the Goldman lawsuit, his answer can hardly have come as much of a surprise. “It would strain credulity to think it was coincidental,” he said, adding: “I can’t give you a conclusion right now, but it was suspicious.”

Yet somehow, atop this non-commital non-news, the WSJ has managed to construct a damning indictment of the SEC and its entire case against Goldman. Ashby Jones even went so far as to say that Kotz “basically hinted that there may have been more politics than law factoring into the commission’s decision to sue Goldman Sachs”.

Er, no, he didn’t. Kotz might not have like the timing of the Goldman suit. But he said nothing about the substance of it, and he did not hint that the decision to sue Goldman was a political one. It makes sense that once the SEC decided to sue Goldman, it then decided to do so on the day that Kotz’s report was released, in order to deflect attention from the report. That’s what Kotz was implying yesterday. It does not make sense that the SEC decided to sue Goldman just so that it could have something with which to deflect attention from Kotz’s Stanford report. That’s what the WSJ is implying — and what it says that Kotz is implying.

After all, the dark arts of burying bad news hardly constitute a front-page-worthy news story with four different reporters. And I don’t in any case think that Kotz’s answers yesterday really justify an “SEC Blasted” headline, no matter where it’s placed.

But maybe the WSJ is just going back to its roots in terms of reflexively defending big banks whenever they’re attacked by the government. Back in 1933, the Pecora Commission interrogated Charles Mitchell, the chairman of National City Bank, revealing that he had paid himself astonishing sums, and furthermore had avoided paying taxes on any of it. Here’s how Michael Perino describes the reaction of the press, in his new book about Pecora:

If Pecora’s goal was to create outrage, he succeeded magnificently. The only thing dividing most newspapers was which part of the testimony was more outrageous. The Washington Post went with the bonuses (the paper ran the line “Huge Pay Told” over Mitchell’s picture). For the New York Times, it was the taxes — “Mitchell Avoided Income Tax in 1929 by ‘$2,800,000 loss,’” its headline read… The Wall Street Journal’s coverage was, perhaps not surprisingly, notably different. It thought the most significant aspect of Mitchell’s testimony was his huge purchases of City Bank stock during the crash. The Journal gave only cursory treatment to the bonuses and, as for taxes, merely buried near the end of the article that there had been “temporary transactions in connection with taxation.”

Within days, Mitchell had resigned from National City. But it seems the WSJ has no regrets about spinning stories about big banks in very favorable ways.


David Mamet is posting on this blog?! Awesome!

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Zuckerberg starts giving away his billions

Felix Salmon
Sep 23, 2010 14:07 UTC

I’m with Henry Blodget on this one: whatever the timing-related motivations behind it, Mark Zuckerberg’s decision to donate $100 million to Newark’s public schools is wholly admirable — the best possible way to celebrate the news that you’re now richer than Steve Jobs. Silicon Valley is full of billionaires like Jobs or Larry Ellison who have been dynastically wealthy for a very long time and who have evinced little if any interest in philanthropy. So it’s fantastic news that Zuckerberg is starting out so young.

It’s also easy to see the influence of Zuckerberg’s girlfriend, Priscilla Chan. Remember the New Yorker’s profile of Zuckerberg?

Terry Semel, the former C.E.O. of Yahoo!, who sought to buy Facebook for a billion dollars in 2006, told me, “I’d never met anyone—forget his age, twenty-two then or twenty-six now—I’d never met anyone who would walk away from a billion dollars. But he said, ‘It’s not about the price. This is my baby, and I want to keep running it, I want to keep growing it.’ I couldn’t believe it.”

Looking back, Chan said she thought that the time of the Yahoo! proposal was the most stressful of Zuckerberg’s life. “I remember we had a huge conversation over the Yahoo! deal,” she said. “We try to stick pretty close to what our goals are and what we believe and what we enjoy doing in life—just simple things,” she said.

I’m sure that Zuckerberg has already sold enough Facebook stock to be able to live comfortably on for the rest of his life. So everything else is just gravy, and certainly Newark’s kids need it more than he does.

The move is also significant in terms of the continuing development of the secondary market for Facebook stock:

Mr. Zuckerberg is setting up a foundation with $100 million of Facebook’s closely held stock to be used to improve education in America, with the primary goal of helping Newark…

The timing of the announcement was driven by Mr. Christie and Mr. Booker, over the objections of Facebook executives…

Mr. Zuckerberg will fund for the foundation with his private stock in Facebook, and will arrange for a transaction on the secondary market for the foundation to turn the shares into cash as needed, said the person familiar with the discussions.

Back in June, Alexei Oreskovic was already saying that “a vibrant market for shares of privately held Facebook has developed in the past year”; this move is going to make the market significantly more liquid — and give Facebook executives less control over exactly who holds how much stock in the company. Once the foundation is set up, the question of going public just becomes a matter of when rather than whether: it’s a tactical decision, now, rather than a strategic one.

It’s also important, I think, not to overstate the effect that this gift is likely to have on Newark. The WSJ falls down here:

The donation has the potential to be matched by another $100 million that Mr. Booker has been working on raising from private foundations and others. The $200 million that could be raised would amount to more than 20% of Newark’s budget of $940 million.

This confuses stock and flow. Zuckerberg’s gift isn’t going to be spent in one year; it’ll be dribbled out over time. Even if the total amount donated does reach $200 million, the annual amount spent is very unlikely to exceed 2% of the city’s budget. The donations are important. But private philanthropy is always going to be marginal when it comes to primary and secondary education, even when it’s confined to a single school district.


“#1 energized / engaged students
#2 energized / engaged parents
#3 energized / engaged teachers”

y2kurtus, there is some truth to that. As a teacher, I know that no amount of money will substitute for any of the above.

That said, we don’t always HAVE energized/engaged students, parents, and teachers. Rather, we have that ideal mix in certain wealthy suburbs. We have that mix in an occasional charter school. But we often lack that mix in the lower-income suburbs and in the inner city.

Moreover, all three of those elements feed off each other. If you put energized/engaged teachers into a poisonous environment, they will rapidly get worn down and quit the profession or move to a more supportive district. The same is true of promising students in a bad school.

So what can be done to break the vicious cycle? My present school is private, but serves a low-income inner-city population. The tuition is less than half the operating budget, despite the salaries being half that of the public schools in the area. Why? Because to properly serve the needs of THESE students we need small classes (generally 12-15 students). We could in theory balance the budget by doubling the class size, but then we wouldn’t achieve the 100% success rate (EVERY student for years has been accepted to college) that we aim for.

“Warehouse club” education only works if all the other pieces are already in place. Correcting deficiencies elsewhere in the system takes intensive attention, and that gets expensive.

In conclusion, we get the job done at a price that our families can barely afford (with liberal financial aid above and beyond the fact that the full tuition is less than half the operating cost). That is our mission. But to bridge the budget gap we need at least $700,000 annually in charitable support to serve our ~115 students.

Wish we could catch Zuckerberg’s attention!

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