Felix Salmon

The Chase online-banking fiasco is continuing into this morning, at least according to Twitter chatter. The bank’s website went down on Monday night, was completely offline until Wednesday, and has been unreliable since then. And the response from the bank has been laughable:

Bank spokesman Joseph Evangelisti said that it did not want to post updates until it had a full understanding of the problem.

Have these people learned nothing from corporate cock-ups from Eurostar to BP? You get out in front of the issue, you apologize and make good to your customers even before you know what went wrong, and, crucially, you communicate frequently on Twitter, which is the first place that people look, these days, for updates relating to rapidly-evolving situations.

Except — get this — Chase isn’t on Twitter. There’s an @chase account, but it belongs to a guy who describes himself as “just some punk kid with a camera”. Similarly, @jpmorgan belongs to Josh Morgan.There’s an @jpmorganchase account, but it’s empty. And at one point there was an @chasebank account, but that has now been suspended, for reasons which are unclear.

The results are predictable enough:

“From this customer’s point of view, management doesn’t seem to care one bit,” said Mike Underhill, a J.P. Morgan Chase customer in West Chester, Ohio…

J.P. Morgan said it expects to issue an apology to consumers, but it had said little on Tuesday about why more than 16 million online customers lost electronic access to their accounts…

“There is a brand and reputational risk here,” said Jacob Jegher, an online banking analyst for financial-services consultancy Celent, citing a flurry of Twitter posts on Wednesday critical of the bank. ‘There is a backlash going on in social circles that is out of control.”

One of the biggest issues that customers have with their banks is that of communication: banks are incredibly bad at telling their customers what’s going on.

What’s more, this whole episode underlines the way in which it’s silly to assume that bigger banks have more robust websites. In fact, the opposite is true, especially in the case of banks like Chase which are the result of many mergers and therefore have to cobble together all manner of disparate legacy systems.

And it also says a lot about redundancy within big corporations, or the lack thereof. The damage from this outage is many orders of magnitude less severe than the damage from the BP oil spill, but both of them are cases where any attempt at back-up plans or redundancy failed. Chase tried to update its website, but didn’t have a backup system in case the update failed; BP tried to put in a blowout preventer, but it didn’t work.

Evangelisti told the NYT’s Eric Dash that the outage “would not have a material effect on the bank’s earnings”, and I daresay he’s right about that. But investors should still care. Chase is one of the biggest consumer banks in the world, and it has proved, this week, that it’s incapable of communicating with those consumers. Insofar as it still has customers inherited from more outgoing banks like WaMu, this episode is likely to accelerate the rate at which they leave for somewhere smaller, simpler, and more reliable. If and when such banks finally arrive.

Obama to name critic Warren to consumer job — Reuters

The razors and blades myth — SSRN

Not going to Eleven Madison for my anniversary this year — Black Von

US 10-year returns by asset class. Sobering — TBI

James Kelleher profiles a long-term unemployed worker who’s voting Republican and doesn’t want his benefits extended — Reuters

Hiding Losses, Via the Calendar — NYT

“When we first opened the John Dory, we spun it as British. This time we got our story straight, it’s Mediterranean.” — Eater

Japan, with a 99% conviction rate, sentenced 112 people to death and executed 46 from 2000-2009 — NYT

“Franzen has little interest in the world of work. (The same applies, incidentally, to whoever edited the novel.)” — Atlantic

Can someone work out what kind of leverage Barnegat must have to get these returns from this trade? — FT

The Portland (Maine) Press Herald “sincerely apologizes” for running a photo of peaceful, observant Muslims on Sep 11 — TBI

What’s the best way to monetize a blog? I don’t know how much John Hempton has made off this blog entry, but it’s surely up there in the annals of the most lucrative posts of all time.

Hempton found an obscure Chinese travel company which somehow managed to get itself a listing on the NYSE: Universal Travel Group. He tried to book travel through Universal Travel’s website, and failed. And after 5,500 words of explaining exactly why he was doing it, he shorted Universal Travel’s stock. Which turned out to be a great trade: the stock plunged by 20% today, entirely because of Hempton’s blog post.

Universal Travel put out a press release at the close of trade today saying that it “categorically denies all the allegations contained in the blog”, but not getting into specifics; there’s vague but ominous language about “aggressively pursuing all legal remedies against Bronte Capital and John Hempton”, but I very much doubt they’ll come to much.

Historically, short-sellers have been shadowy types; they like to publicize their findings, but they tend to do so behind the scenes, giving journalists information and having very long conversations off the record.

Hempton’s different in that he’s happy, on occasion, to make his allegations in public, under his own name. He doesn’t always publicize his shorts, even when he suspects outright fraud, but his blog does have enough of a following now that he knows he’ll be widely read if and when he chooses to do so. After today’s big payday, I reckon he might try the tactic more often.

The story of Universal Travel is far from over: if Hempton’s right about the company, and I think that he is, then the SEC and the NYSE are both going to have to answer some very pointed questions about how and why they allowed the company to get this prestigious New York listing in the first place.

But I do love the way that the blogosphere is moving markets. Reading a blog entry from someone with real skin in the game is often a lot more fun than ploughing through “objective” journalism from someone who isn’t allowed to invest in or short what they’re writing about.

This Charles Schwab survey is fascinating. People want investment advice when it comes to their 401(k) plans, especially if they can get it for free. And when they take investment advice, they change their savings habits significantly. But it turns out that even when companies do provide free investment advice for their employees, the employees don’t take it.

Here are the numbers:

• On average, someone who receives 401(k) investment advice increases their monthly deferrals by a huge amount: 5.4 percentage points.
• Approximately 70% of participants that receive and implement 401(k) advice make a change to their deferral rates.
• People who change their savings rate as a result of getting investment advice nearly double the amount of money they put away each month, from approximately 5% to 10% of pay.
• 74% of Schwab plan sponsor clients make advice available to their participants at no additional cost.
• 55% of people surveyed say if free advice was available they would use it.
• BUT the reality is that less than 10% of participants actively use investment advice available to them.

It’s rare for a survey to show such a blatant difference between what people say they would do, and what they actually do in reality. You can lead your employees to water, and your employees will tell you that if you lead them to water, they will drink. And employees who drink do end up the better for it. But still your employees don’t drink.

My feeling is that the main reason here is the simple distinction between opt-in and opt-out, which governs so much retirement-saving behavior. Employees save much more in opt-out plans than they do in opt-in plans. And for much the same reason as they don’t opt in to 401(k) plans, they don’t opt in to taking investment advice, either.

Would it help to make investment advice opt-out? It would be hard to structure, but essentially firms would automatically schedule a retirement-planning session for all their employees, who would then have to actively cancel it if they didn’t want it. That would surely improve employees’ retirement savings. But would it take paternalism too far? And how many companies are qualified to pick genuinely good financial advisers for their employees, in any case?

Update: My commenters are pretty unanimous that free advice is worth less than you pay for it. And I’m sympathetic: whenever I’ve received “free” investment advice, I’ve been unimpressed. But the fact is that I’m not representative of the financial sophistication of the average 401(k) participant, and neither are the kind of people who comment on this blog.

And while it’s true that many investment advisors are just going to end up putting you into too many funds carrying excess fees, it’s also true that by far the single most important determinant of how much you get out of your 401(k) is how much you put in. And the really important investment advice which is given out by nearly all investment advisers is, simply, “save more money”. It’s simple, but it’s powerful.

The advisers are, naturally, going to go further than that, and start recommending places to put your money. Smart people might well take issue with their asset-allocation strategies. But so long as you end up saving more, you’ll also, almost certainly, end up with more money at retirement. Which is the main goal here.

Has a central bank ever intervened successfully in the foreign exchange market when the momentum trade was against it? The yen has been rising alarmingly of late, and now the Bank of Japan is trying to push it down.

At first glance, the action looks like a something-must-be-done-this-is-something-therefore-this-must-be-done move: a new prime minister and a “bold action” doomed to be proved ineffectual. The FX markets are so enormous (dollar/yen alone trades some $750 billion per day) that it’s hard to believe a single sale of less than $20 billion in yen could even have the short-term effect we saw last night, let alone have any lasting consequences.

But this isn’t just about FX-market intervention. This is also about monetary policy, and that could make a real difference:

Unlike in previous forays, the Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said.

That indicated the central bank plans to use the sold yen as a monetary tool to boost liquidity and support the economy.

Authorities that sell their own currencies to weaken them often issue bills to “sterilize” the funds and keep the excess money from becoming inflationary. In Japan’s case, it wants to promote inflation since the economy has been dogged with deflation for much of the past decade.

“The government’s aim, and the aim of authorities in general, is to add monetary injections to the economy,” Callum Henderson, global head of foreign exchange strategy with Standard Chartered in Singapore, told Reuters Insider.

“Unsterilized intervention should be yen-negative, it should be very bullish for higher risk assets, very bullish for stocks in Japan and obviously it should add to the impact of the intervention of the yen,” he said.

In other words, the Bank of Japan isn’t simply selling yen, it’s printing yen. (And then selling them.) Given (a) that it’s the central bank and that it can print as many yen as it likes, and (b) that it would actually welcome a bit of inflation, there’s actually a non-negligible chance that this kind of non-sterilized intervention could work.

Of course, a hint of inflation in Japan could end up driving Japanese bond yields up. That in turn could make a huge difference to the government’s annual interest bill on the country’s monster national debt. So this kind of policy is hardly cost-free; indeed, the real costs might well be much larger than the nominal size of the intervention. But at least it has a chance of making a difference, which is more than you can say for most currency interventions.

I’m unapologetically happy and optimistic about the outcome of the Basel III process, and I haven’t been impressed by most of its critics — until now. In two posts, the first at the Economist and the second at The American Scene, Noah Millman does an excellent job of explaining the biggest weakness with Basel III. Which also happens to be the biggest weakness with Basel II.

The problem is that while Basel II was a bold experiment which took a decade to put together and which even then never really got implemented, Basel III was much more of a rush job, and therefore could not be a soup-to-nuts reimagining of what a global macroprudential regulatory regime should look like. Even if that were a good idea.

Instead, Basel III is essentially a bold new layer built over the old Basel II architecture, in much the same way that early versions of Windows were layered on top of DOS. And just as early versions of Windows shared some of the weaknesses of DOS, do has Basel III inherited some of the problems of Basel II.

The main one is the whole concept of risk weighting: the idea that some assets are riskier than others, and that banks should hold more capital against risky assets (unsecured loans to people with a 550 credit rating, say) than they do against much safer assets, like loans to the US government.

That makes a certain amount of sense, but there are two main problems with it. For one thing, it’s backwards-looking: it reckons that the securities which have been risky in the past are the same as the securities which will be risky in the future. That obviously isn’t true. And secondly, it’s easy to game. Here’s Millman:

The consequence of this Basel II reform was to discourage banks from lending to risky enterprises, and to encourage the accumulation of apparently risk-free assets. This was a primary contributor to the structured finance craze, as securitisation was a way to “manufacture” apparently risk-free assets out of risky pools. What brought banks like Citigroup and Bank of America to their knees wasn’t direct exposure to sub-prime loans, but exposure to triple-A-rated debt backed by pools of such loans, debt which turned out not to be risk-free at all.

Since it did not change this risk-weighting, Basel III effectively doubles down on Basel II. Banks will need to hold more common equity than ever—against their risk-weighted assets. That massively increases the incentive to find low-risk-weight assets with some return, since these assets can be leveraged much more highly than risky assets. Unless I’ve missed something, lending to AA-rated sovereigns still carries a risk-weight of zero. So one result of Basel III could be to encourage banks to increase their lending to sovereigns at the margins of zero-risk-weight status. If that happens, anyone want to guess where the next crisis will crop up?

This is all absolutely true, but at the same time a sovereign default is always going to cause a banking crisis, no matter what kind of capital-adequacy rules are in place. Central banks can’t protect banks from sovereign default, and neither can banks themselves. If you’re a bank and the country you’re based in goes bust, then you’re going to go bust too.

But Millman’s broader point is spot-on:

Since taking any additional measurable risk is now stigmatized, the game becomes how to increase returns without increasing measurable risk…

Developments in banking regulation in the last decade, meanwhile, have turbocharged this process, and I’m increasingly convinced contributed mightily to the financial crisis. At the heart of the financial crisis, after all, was banks investing in highly-rated debt backed by lousy mortgages. But why did they hold so much of this debt? In part because they could plausibly argue that it was risk-free or nearly risk-free… If the exposure was classified as market risk rather than credit risk, the Basel II framework was based on Value-at-Risk, which showed very low volatility.

The big-picture point to take home is: the regulatory framework recommended by Basel II assumes that banks are in the best position to measure their own risks, and that a regulatory framework that aligns regulatory capital requirements with the risk being taken is to be desired. In other words, the regulatory framework was pushing banks hard in the direction they were already going: towards avoiding measurable risks and hence (since you still have to make money) into risks you can’t easily measure (or don’t know exist).

As Joe Nocera explains, the whole Value-at-Risk structure gives banks every incentive to push risk into the tails. And because tail risk can be ignored, banks then go on to embrace other mechanisms — like the Gaussian Copula Function — which essentially fatten the tails, stuffing them with ever more risk. There’s not much in Basel III which directly addresses this problem.

And there’s another weakness in Basel III, too. I was at a Manhattan Institute event this evening, at which Paul Singer of Elliott Associates stood up and declared that the big systemic losses which resulted from the bankruptcy of Lehman Brothers were not actually a function of any kind of monster hole in Lehman’s balance sheet. Instead, after Lehman declared bankruptcy, its enormous derivatives book needed to be unwound very quickly, and it was that unwind which caused something between $50 billion and $75 billion of losses, precipitating the worst months of the crisis.

Singer wasn’t saying that the derivatives book caused Lehman’s collapse — far from it. The book was actually pretty kosher. The cause of Lehman’s collapse was liquidity problems, and Basel III does a pretty good job tightening up the rules on bank liquidity. But if a bank with a big derivatives book does end up declaring bankruptcy, the effects can still be catastrophic. Again, that’s not something that can readily be addressed in the Basel III architecture — it requires instead a lot of detailed tinkering with bankruptcy laws. Still, the tail risk remains.

Ultimately, Basel III does a good job of reducing foreseeable risks, and, like any ex ante regulatory structure, it does a bad job of reducing unforeseeable risks. The problem is that as a result, banks are incentivized to load up on the kind of securities which can blow up in unforeseeable ways. I’m not sure that’s something that the Basel Committee could ever really address, but it’s worth remembering, all the same.

Some people are like Winston Wolfe. They’re professional, they’re reassuring, they solve problems, they always know exactly what to do. These are the people you want staffing a bank regulator when there’s a banking crisis.

And then there’s Afghan central bank governor Qadir Fitrat:

Afghanistan’s central bank has stepped in to take control of the troubled Kabulbank, its governor said on Tuesday…

Fitrat told Reuters investigations had also started into the dealings of the bank’s top two directors and shareholders, who were told to resign…

The central bank had previously maintained that Kabulbank had not been taken over, despite a central bank official being appointed as chief executive officer…

Fitrat had described reports in The Washington Post and New York Times newspapers and other U.S. media of possible graft at the bank as “baseless information and rumors.”

However, on Tuesday Fitrat said Farnood, Fruzi and Fahim’s brother, Mohammad Haseen, were now under investigation for suspected irregularities, among other shareholders…

“We conduct our own investigation (and) once we see that there are elements of criminality involved, then we submit those cases to the attorney general’s office,” Fitrat said of the investigation process…

Fitrat insisted Kabulbank was still solvent and that its troubles would not spread to Afghanistan’s other private lenders.

“Fortunately, in other banks, mostly professionals are in charge. The good thing is that the other banks follow the rules.”

None of this, it hardly needs be said, is the kind of stuff which calms a restive population and reassures both local and foreign observers that everything is under control. We will probably never know the true state of Kabulbank’s balance sheet, or how much Afghan and US money is going to be needed to get it back on its feet. And there’s no chance that anybody is going to be successfully prosecuted.

In a failed state like Afghanistan, a strong independent bank, plugged in to a reliable international network, can actually be safer than a huge bank taken over in a chaotic fashion by a central bank governor with precious little credibility. The nationalization of Kabulbank does not mean that the bank is now safe, or that the black hole in its balance sheet is going to start getting smaller rather than larger. It’s still a major risk to national security in Afghanistan, and I hope that some US technocrats are being parachuted in somehow to help patch it up as much as possible.

When the financial crisis caused a sudden stop in the availability of home equity lines of credit, credit-card default rates naturally spiked. No longer could consumers spend as much as they like, and then, when their credit-card debt got out of control, pay it all off with a cash-out refinance.

But two years after Lehman Brothers collapsed, credit card default rates are still high — in fact, at 10.8% in the second quarter of 2010, the charge-off rate is hitting new highs and rising alarmingly. (It was 9.8% in the same quarter of 2009, and 10.1% in the first quarter of 2010.)

Consumers are continuing to rack up new credit-card debt: far from paying down their balances at all, they’re charging new stuff every month. Yes, the total amount of credit-card debt outstanding is falling — but that’s only because the banks have given up on collecting an enormous amount of it — they wrote off $81.6 billion in 2009, and another $43.5 billion in the first half of 2010.

I, for one, didn’t expect credit-card charge-off rates to rise in 2010: aren’t we meant to be in a recovery? Weren’t they extremely high to begin with? Haven’t card companies been reducing credit limits and generally trying to rid themselves of uncreditworthy customers for a couple of years now?

I do think that this data series is probably going to prove a good proxy for the point at which the US population as a whole gets less pessimistic and begins to think that we’re no longer in a recession. I don’t think that the goods being charged onto these credit cards are silly luxuries: it’s just that for a very large part of the country, it’s extremely difficult to live within your means. The banks keep on having to write off credit-card loans as it becomes clear they will never be repaid — but just because a loan is written off, doesn’t mean it disappears. The debt remains, and will weigh down the cardholders’ finances for many years to come. It just now belongs to debt-collection agencies rather than banks.

All the headlines about Basel III have concentrated on the new core Tier 1 capital requirements — the amount of pure equity and retained earnings that banks are going to have to have going forward. It was banks’ core equity which proved woefully insufficient during the crisis — hardly a surprise, when the Basel II requirement for it was just 2% — and it’s core equity which has seen the biggest beefing up under Basel III, all the way to 7%.

But Melvyn Westlake reckons that there might be a bigger story here in the total capital requirements under Basel III, including not only core Tier 1 capital but everything, up to and including Tier 2. Westlake knows what he’s talking about: he works for Global Risk Regulator magazine, the trade journal which covers all these issues in enormous detail on a permanent basis. Here’s what he just sent me via email:

I would suggest that the Basel Committee intends that Tier 2 capital will have a much more significant role than in the past. It is not absolutely clear what instruments will qualify for Tier 2 in the future, but they will certainly have to be loss absorbing, possibly in a “going concern” situation as well as a “gone concern” situation.

He also notes what the Basel Committee itself has said:

During the recent financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity and other forms of Tier 1 capital. This had the effect of supporting not only depositors but also the investors in regulatory capital instruments. Consequently, Tier 2 capital instruments (mainly subordinated debt), and in some cases non-common Tier 1 instruments, did not absorb losses incurred by certain large internationally-active banks that would have failed had the public sector not provided support.

It’s going to take a while (something over a decade, most likely) to fully make the switch from the current grab-bag of instruments which count as Tier 2 capital to a much safer system where holders of Tier 2 capital can and will take losses in the event that a bank comes close to failing. So far, the market in contingent convertible securities is nascent at best, and no one really understands how or whether it will evolve — maybe banks will find it easier to just issue equity instead.

But in any case, the new Tier 2 capital requirement of 10.5% is an important number: it basically means that if any bank does need a bailout, its subordinated bondholders are going to be the first to do the bailing out, rather than the government. And it should give some reassurance to the people worried about leverage, too. After all, if you calculate leverage ratios using total capital rather than just equity, they’re likely to come down substantially. And that’s without taking into account the new liquidity restrictions. Lehman’s biggest failure was in liquidity management; the new Basel rules will, if they work, stop another Lehman from happening again. The capital rules are aimed not at preventing another Lehman, but rather at shoring up the global commercial-banking system. Which is just as important.

Somebody should tell the senior executives of Grubb & Ellis that their president of capital markets, Glendon Esnard, is mad as hell, he’s not gonna take it any more, and that in fact he is seriously considering leaving the country altogether:

Apparently our president thinks that living in America is so wonderful that we will never leave, despite being directly attacked and held responsible for the political class’s inability to constrain its desire to buy votes with our money. He should think again.

“We”, here, in case you were wondering, is that beleaguered and demonized class of people making more than $250,000 a year. They We are being vilified by no less than the President of the United States himself — “for his own personal gain”! And let me tell you, they we are suffering. Take poor Glendon himself:

I have no funded retirement plan save Social Security, if it is there when I need it. I have no guarantee of permanent health care. I am paying off school loans for our three children. A meaningful number of my friends have lost their jobs, and all who are still employed, including my family, have taken significant pay reductions. My brother-in-law has been told to take every Friday off with a 20% cut in pay, but his work load hasn’t changed. Everyone I describe here earned over $250,000 per year.

I’m sure that Glendon, with his 30 years of commercial real estate experience and his extensive knowledge of both investment sales and the alternative real estate investment market, has managed to amass a decent nest egg by this point. Still like any good socialist, he still hankers for a defined-benefit pension and a guarantee of permanent health care. He’d surely love it if the government paid for college education, too. Probably that’s why he’s thinking of leaving the country: he’s decided that he wants to move to Sweden. Or maybe France.

Chris Nicholson is right, where Courtney Comstock and Marcy Gordon are wrong: the $2.26 million fine slapped on Trillium is not for quote-stuffing. Instead, it’s for layering.

The distinction is an important one. Quote-stuffing, if it exists, is a destructive attack on an entire stock market. Layering, by contrast, is relatively benign, and the only people who get damaged by it are high-frequency traders who are looking to sniff out where the market is going and place trades attempting to front-run that move.

What Trillium did is market manipulation, to be sure, and it deserves a fine. But it’s a bit of a stretch to paint this as the first battle in the war against high-frequency traders — not least because there isn’t actually anything particularly high-frequency about what Trillium was doing.

Yes, Finra does say that Trillium’s layering was an “improper high frequency trading strategy”. But fundamentally it was about misdirection, rather than speed.

Layering is a way of getting good execution on a trade you already know that you want to do: it’s not some kind of market arbitrage where you’re trying to make immediate profits in a fraction of a second. The profits calculated by Finra constitute the difference between the prices that Trillium got and the prices that it would have got if it hadn’t been moving the market: in other words, Trillium could easily have made a loss on the trades, while still making illicit profits in the eyes of Finra.

An example would probably help. Let’s say that XYZ stock is trading at a bid of $24.50 and an offer of $24.55. And let’s say that a trader at Trillium wants to sell XYZ stock. He could simply hit the bid, and receive $24.50. Or he could put in a sell order at $24.54, and hope that someone wanting to buy will take him out there. That would be a much better outcome, because not only does he get a better price, but he also counts as the liquidity provider, and so gets a small rebate from the stock exchange. On the other hand, there’s no guarantee that anybody will take him up on that offer.

But let’s say that he puts in a hidden offer at $24.54, in a dark pool. That means that the offer is there, but no one can see it. (This is perfectly legal, by the way.) Then comes the sneaky part: he puts in a large number of public and visible bids at prices like $24.48 and $24.47. He doesn’t actually want to buy XYZ stock at those prices: in fact, he doesn’t want to buy XYZ stock at all. But to other traders, looking at the public order book, it looks as though there’s a large amount of buying interest in XYZ. So they start putting in their own bids: at $24.51, $24.52, $24.53. They’re all trying to get in front of the big new buyer they see in the market.

And presto, when they bid $24.54, they find that hidden sell order from Trillium, which gets a very good price on its trade and gets to count as a liquidity provider. And as soon as that happens, all those fake bids at $24.48 and $24.47 suddenly disappear. But the victims are the people (or algorithms) who thought there was a naive trader posting public buy orders, and wanted to trade against that order. It’s hard to feel a lot of sympathy for them. As Kid Dynamite says,

There’s a big problem with Trillium’s strategy: it’s illegal. It’s called market manipulation, and they got bagged for it. Ironically, most of the same people who are/will be happy that Trillium is getting punished for this behavior would also be happy that the participants who Trillium was trying to fool got fooled. It’s been made quite clear that the Populace At Large does not like the trend of traders, be they high frequency (more so, lately, obviously) or low frequency, reacting to publicly displayed quotations by changing their own quotes. Or lifting bids / hitting offers in response to publicly displayed quotes. Those are the very traders Trillium was trying to (illegally) take advantage of.

And so it’s important to distinguish what Trillium was doing from quote-stuffing. Quote-stuffing is essentially a denial-of-service attack, aimed at trying to slow down a market in an environment where milliseconds matter.

With quote-stuffing, high-frequency traders enter an enormous number of bids and offers, significantly outside the current bid-offer spread, just to introduce a vast amount of noise into the quote feed. All that noise takes time (maybe just a few extra nanoseconds) for rival HFT shops to process, giving the quote stuffer a crucial time advantage.

The SEC is looking into whether quote-stuffing exists, and whether it’s a strategy that anybody has actually used to make money. Opinions differ on that front. But let’s not confuse the SEC investigation into quote-stuffing with the Finra fine on Trillium. They’re two very different things.

Exterminators made $258 million from bedbugs in 2009, up 263 percent from three years before — Slate

SEC sues Reserve Fund’s Bents for losing investors’ money. Bents say investors should foot their legal bill — Crain’s NY

White House renominates Diamond to Fed board — Bloomberg

White House denies plan to avoid Warren fight — Politico

Credit Suisse’s handy chart of the core Tier 1 capital of Europe’s biggest banks — Twitpic

NYU’s rent-control scheme — Mankiw

Bike Snob responds to my biking post — BSNYC

Barack Obama becomes the biggest arms dealer of all time, selling $60bn worth of F-15s to Saudi Arabia — Guardian

With a full news cycle now having been and gone since the Basel III accord was announced, a few things have come into more focus.

First, there will always be cynics and nay-sayers. Some of them are serious analysts who wanted a higher capital standard. But most are based on some variation on a simple, defeatist theme: “this doesn’t guarantee that there won’t be another crisis, and banks are still able to engage in dangerous behavior, therefore this is useless”. All I can say is that I’m very glad that the world’s central bankers didn’t feel that way and instead worked long and hard to try to put together a new set of standards which really will reduce systemic risk and strengthen the international banking system.

Of course, banking crises are always possible. But anything which reduces their likelihood is a good thing and Basel III reduces the likelihood of a banking crisis much more than all of Dodd-Frank put together.

Which brings me to Robert Peston, who’s upset at the media for not covering Basel more thoroughly. I’m sympathetic: I’m one of the few financial commentators in the mainstream media who, like Peston, has been banging on about this for a while, returning to the subject on a regular basis. And certainly, compared to Dodd-Frank, Basel III has received almost no press at all. But I part ways with Peston here:

There’s been little populist debate about how much capital and liquidity banks ought to hold for our own welfare. We’ve been presented with a fait accompli.

And most would argue that the media hasn’t exactly done a brilliant job in shining a light even on that fait accompli.

You might also ask where our [elected representatives] have been while unelected central bankers and regulators have trampled on territory that they would surely regard as their own, viz the fundamental laws that affect how [our] banks conduct their affairs.

So if you felt there had been something of a democratic failure here, you might have a point.

The way I see it, the Basel committees did a masterful job of depoliticizing the process as much as possible. The agreement is a win for Treasury, but Treasury was clever in not presenting it as such, because a large number of Republicans will automatically oppose anything that Treasury thinks is a good idea. The functionaries in Basel were generally mid-level central bankers, staying out of the spotlight as much as possible and putting together the best deal they could come up with. If politicians and the media had got involved, that might have made the process more democratic, but it would also have made it much more chaotic and quite possibly would have derailed any chance of an agreement at all.

The fact is that democracy simply isn’t the best possible way to construct a coherent regulatory regime for cross-border financial institutions. And the general public has every right not to feel the need to understand the difference between core Tier 1 and Tier 2 capital, or the finer points of how bank assets should be risk-weighted. This is something which central bankers, as a rule, know how to do — and the great news about Basel III was that they were given the freedom to go ahead and do it, while the power of the banking lobby was temporarily muted and in a period when anybody espousing a laissez-faire approach would automatically get laughed out of the room.

The main thing to take away from the Basel III announcement is that banks now need a lot more equity then they ever did in the past. It’s a little bit of a rhetorical stretch to say that the requirement for core equity has gone up from 2 percent to 7 percent, but it’s narrowly true all the same, even if the 2 percent requirement was never a central part of Basel 2 in anything like the way in which the 7 percent is the very heart of Basel III. And although the 7 percent requirement isn’t formally in effect, you can be sure that every bank in the world now feels the need to meet it. In fact, Credit Suisse said in a research note today that 8 percent is now the market standard for banks to be considered adequately capitalized.

Under previous administrations, financial regulations were quietly loosened, with disastrous results: think of the way that the SEC allowed almost unlimited leverage at investment banks in 2004, for instance. This time around, financial regulations are being quietly tightened. That’s a good thing and should definitely count as a signal achievement of the Obama administration. Even if the president himself isn’t going to make a major television address to trumpet it.

Last week, Justin Lahart presented an interesting thesis in the WSJ:

For American business, it has become a two-track economy.

While global players like industrial conglomerate 3M Co. and burger giant McDonald’s Corp. are getting ever-bigger boosts from their operations in fast-growing economies like China and Brazil, companies dependent on the U.S. market are hemmed in by recession-scarred consumers who are hesitant to spend.

The accompanying chart was one of the most incomprehensible things I’ve ever seen on newsprint:

I doubt that one reader in 20 actually understood, on looking at this chart, the information it was ostensibly trying to get across.

There are three axes here, and two colors, and all manner of confusion. It took me a while to work it out, but I got there in the end: the height of the bars represents a healthy year-on-year increase in projected revenues. They increase in volume the further that number is from zero, so that the smallest bars aren’t the companies with falling revenues, but rather the companies with flat revenues. That’s silly. And because of the 3D effect, the biggest bars have much more volume than the smallest ones, as though the product of the two variables is somehow important. (It isn’t.)

The amount of color in a bar represents the proportion of those revenues that come from outside the US. The main axis we see when we look at the chart — the one marked with a bold black line — doesn’t actually represent anything at all. Oh, and the chart claims to be “an analysis of the 30 companies in the Dow”, but it only features ten stocks.

The weird thing is that Lahart’s thesis would come out loud and clear from a simple scatter chart. Put the change in revenue on one axis, put the percentage of revenue coming from overseas on the other axis, and look for two clusters: one at the top right, with the companies active in fast-growing countries, and one at the bottom left, with the companies hemmed in by recession-scarred consumers.

It took me a while, but I eventually got my hands on the data that Lahart was using. So I decided to plot that scatter chart, to see what it looked like:

I’m not a professional designer, and this could certainly be a lot prettier, especially if I could get my fonts to work and if I remembered to get rid of those silly decimal places on the y-axis. Still, the message of this chart is much clearer, I think, than that of the one in the WSJ. It does show a clear correlation between revenue growth and foreign sales, but I can’t see much of a case that American businesses have diverged onto one of two tracks.

All of my numbers are exactly the same as the ones that the WSJ used — even the 0% of foreign sales for Verizon, which resulted in a correction. (Verizon claims it gets some revenue abroad, although it’s less than 10%.) So I’m puzzled why the WSJ didn’t include Caterpillar as one of the “five companies with largest share of overseas revenue”: it’s up there in fourth place, with 67%, higher than both Hewlett-Packard and McDonald’s.

So, what really happened here? Did Lahart know that a clear chart would somewhat undercut his headline talking about a “two-track economy”, and therefore contrive something messier instead? Or was there just an overenthusiastic new kid at the WSJ who hasn’t read his Tufte? Either way, it would be great to see a stronger emphasis on clear information design at the WSJ. Financial publications have an especial responsibility to do this kind of thing well, given the highly-quantitative nature of what they’re writing about. The NYT has fantastic information designers; let’s hope the WSJ tries hard to compete on that front.

Update: Andrew Burton points out there’s actually a Wall Street Journal Guide to Information Graphics, by Dona Wong, available on Amazon in hardback for $19.77. I wonder what she would have to say about the WSJ’s chart.

London fund manager Barry Olliff seems to be on the same page as Silicon Valley venture capitalist Ben Horowitz when it comes to paying employees.

Here’s Olliff:

Selfishness creates an attitude of negotiation at the point of salary, bonus and option notification. At City of London we do not negotiate any aspect of remuneration…

If we are genuine in wishing to create a team culture then there is a need to treat employees as a team. This in effect means that we do not pit them one against another. Rather we attempt to instil in them that the competition is outside the firm, which actually is where it is.

The net result of the above is that there is little intrigue at the point of salary and general compensation disclosures. Staff accept that the way it is, is the way it is. If they do not like it they can leave which sometimes happens within a year of joining.

And here’s Horowitz:

A CEO creates politics by encouraging and sometimes incenting political behavior—often accidentally. For a very simple example, let’s consider executive compensation. As CEO, senior employees will come to you from time to time and ask for an increase in compensation. They may suggest that you are paying them far less than their current market value. They may even have a competitive offer in hand. Faced with this confrontation, if the request is reasonable, you might investigate the situation. You might even give the employee a raise. This may sound innocent, but you have just created a strong incentive for political behavior.

This kind of thinking runs counter to what one finds at Goldman Sachs, where there’s a real emphasis on rewarding — and punishing — individuals:

On Wall Street, becoming a partner at Goldman Sachs is considered the equivalent of winning the lottery.

This fall, in a secretive process, some 100 executives will be chosen to receive this golden ticket, bestowing rich pay packages and an inside track to the top jobs at the company.

What few outside Goldman know is that this ticket can also be taken away.

As many as 60 Goldman executives could be stripped of their partnerships this year to make way for new blood, people with firsthand knowledge of the process say. Inside the firm, the process is known as “de-partnering.”

The two philosophies are not completely incompatible. Great team members can and should be rewarded with raises and promotions, even when such things aren’t the result of negotiations, and Goldman partners don’t negotiate their position in any real sense: they’re quietly vetted, and then called in to the CEO’s office to be told the good news. What’s more, Goldman does try to reward people who build great teams and who work for the greater glory of the franchise instead of trying to burnish their personal credentials.

But all the same, Goldman is a company of 35,000 employees with just 375 partners — and Goldman president Jon Winkelried once said that making partner was viewed as the real beginning of a career at the firm. Given that one in four of Goldman’s existing partners faces the humiliation of de-partnering next month, it’s reasonable to assume that Goldman employees, both before and after they make partner, are competing against their colleagues just as much if not more than they’re competing against their actual competitors.

I do think it’s possible to create a bank built around teams which can last for years and which aren’t torn apart by an up-or-out culture. But such banks tend to be small, and it’s definitely seems as though it’s easier to build those structures if, like Olliff, you’re on the buy side rather than the sell side. Any idea as to why that should be the case?