Felix Salmon

Michael Barr’s departure is a serious loss for Treasury. I spoke to him on Friday; he was in Ann Arbor, where he’s returning to law school, and he wanted to take serious exception to my three monkeys post, where I accused Treasury of willfully ignoring the banks’ culpability in the mortgage crisis.

Barr rattled off a laundry list of reviews which are being done by various arms of the government, including what he described as an “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”. That information is finding its way to the state attorneys general, in their review. Meanwhile, said Barr, an alphabet soup of regulators (OTS, OCC, FDIC) is looking at various financial services companies (MERS, along with lots of different servicers, trustees, and banks); HUD is holding everybody to FHA and HAMP guidelines; and the FTC is looking at non-bank lenders. And keeping everything coordinated is the new Financial Fraud Enforcement Task Force which has been put together under the leadership of Justice’s Tom Perrelli.

“Why are we investing these resources and including Tom Perelli in the discussions?” asked Barr. “We’re holding the banks accountable to fix it.” I asked him whether he thought that was even possible. “Their conduct suggests they can’t,” he said, adding that “they can be held accountable for not following the law. HUD can assess significant fines on them.”

Barr was clear about what he expected to happen in 2011. Specifically, he said, “if there are legal violations found, banks are responsible for fixing them and for addressing the problems.” And more generally, the government’s actions “will increase the chance that when foreclosures happen, they will happen according to established law.”

The timetable for all this? The reviews should be largely completed this year, with the full scope of the problems being apparent by the end of January. By the end of the first quarter, the banks should be in serious discussions about how they’re going to fix what’s broken. And then it gets necessarily hazier: “Institutions are resistant to change and have difficulty implementing,” said Barr, but “you’ll see flow improvement over the course of the next year.”

Could I hold Treasury to that? Sort of: “You should hold us to whether things get better or worse. If a year from now nothing has changed, that would be a reasonable criticism.”

I have two fundamental reasons to be skeptical of this approach. Firstly, it won’t work: the banks and the servicers simply aren’t set up to magically make their processes perfect, and the threat of lawsuits isn’t going to change that. And secondly, insofar as the problems are systemic and threaten the solvency of the banks, Treasury is going to blink first. As we just saw in Ireland, today’s governments are constitutionally incapable of forcing real pain onto banks.

But at the same time, there’s zero chance of getting any kind of resolution to the mortgage-mess problems if the government doesn’t have a firm grasp of exactly what they are. Barr told me that they’re doing file reviews which take between five and eight hours to go through a single loan file: this is hard, detailed work, and at the end of it all there will be a real understanding of what needs to be done—something necessary, if not sufficient, to finally resolve this mess.

Barr is a very honorable man, and a very hard worker, and I give him a lot of credit for the (mostly) excellent CDCI project. (I have quibbles about it, but can’t go into detail about what they are because most of what I know I learned as a board member of LESPFCU.) I think that Treasury is entering into this whole mortgage investigation in good faith, and will do what they can to push the banks to fix what’s fixable.

But I’m also pessimistic about their prospects: I suspect that only a radical restructuring of the entire securitization architecture—and especially the broken relationships between investors and trustees, and between trustees and servicers—has any chance of actually working. That is clearly not going to happen. But if you believe in the power of legal action to effect change, then maybe Treasury’s approach might work.

How long will it take to get readable credit-card contracts? My guess is somewhere in 2012, if we’re lucky. Right now, although we’re moving in the right direction, we’re also moving far too slowly:

In a follow-up to its July 2010 credit card agreement readability study, CreditCards.com looked at the 20 most difficult to read and the 20 wordiest contracts to see if any had improved between July and October. Only six of the 20 most difficult-to-read contracts showed improvement. Nine of the 20 had the same reading level, three were more difficult to read and two were no longer offered by the credit card issuer. All were still rated at the 12th grade reading level or higher — too difficult for four out of five adults to understand.

To give an idea of what we’re talking about here, take a look at Fifth Third’s credit card agreement. For one thing, it’s 15 pages long. And for another, it includes crystalline passages like this:

I’m using an image here, rather than quoting in text, to show that banks have made no graphical concessions to readability at all: prose is presented in dense paragraphs, in the kind of hard-to-read narrow sans-serif text which just screams “don’t read me.”

And of course there’s no point in reading this kind of thing: I doubt one cardholder in a hundred could even begin to say what it means to “honor claims of privilege recognized at law.” I certainly couldn’t.

To put this in context, check out this two-pager from the University of Illinois Employees Credit Union. It leaves something to be desired in terms of graphic design, and parts of it could be cleared up a bit, but there’s certainly no gratuitous legalese. It’s possible, bankers! Don’t let the lawyers stop you!

Last week, Chris Whalen appeared on Tech Ticker with Henry Blodget; he said, in the accurate if sensationalist words of the Business Insider headline, that CALIFORNIA WILL DEFAULT ON ITS DEBT.

The interview was actually pretty intelligent and informative, by the standards of financial TV. Whalen talked about the politics of federal-state relations; about prior cases where states defaulted; about California’s pension obligations; about the ability of a Republican-controlled House to pass any kind of bailout bill—all things which are decidedly germane to anybody looking at California’s credit.

But Brett Arends didn’t like what he was hearing, and decided to push back a bit. The results were much more illuminating than anything Whalen said on Tech Ticker.

When I e-mailed Whalen, asking him for specific calculations, none were forthcoming.

“My general comments have to do with my guess as to the impact of mounting foreclosures and flat to down GDP on state revenues,” Whalen replied.

Your guess? These are important problems, to be sure. But do you have any actual numbers?

“Revenues fall and mandates rise to the sky,” he wrote. “You do the math.”

Er, no, actually. It’s your assertion. You do the math.

Whalen blamed the matter on Blodget.

“I am a bank analyst,” he wrote. “I have not written anything on this. My comments have taken on a life all their own… This is all Henry’s fault.”

Henry’s fault? Not really: Henry wouldn’t have started asking Whalen questions about California if he didn’t already know pretty much what the answers were going to be. And Whalen was clearly prepared for Blodget’s questions.

In reality, what we’re seeing here is expertise mission creep, and a rare example of an expert admitting to it. Whalen’s company is highly regarded when it comes to analyzing banks’ balance sheets, and as a consequence of that regard, Whalen has gotten for himself a nice perch in the punditosphere, as well as a new book.

But Whalen, as he admitted to Arends, is no more an expert on municipal finance than Freeman Dyson is on global warming. And so the proper stance for Blodget to take was not to deferentially pose questions to Whalen and then passively receive his oracular words of wisdom, but rather to push back and have a proper debate about Whalen’s assertions, much as Arends might have done.

The California debate is an interesting one: the state has massive future liabilities, in the form not only of debt payments but also of public-sector pensions, but at the same time its legislature is incapable of raising taxes in order to ever pay for them. It’s a fundamentally unsustainable status quo—something has to give—but realistically no one knows what will give, or when, or how. It might be those debt payments, but a debt default wouldn’t really solve California’s problems, since California’s debt isn’t actually all that large, as a percentage of GDP.

More generally, the municipal bond market is a very complicated place, where expertise is hard-earned and voluble new entrants are inherently mistrusted, normally for good reasons. (See Bond Girl on Meredith Whitney; she doesn’t even mention the conflicts inherent in having a rating agency give investment advice.)

But complex doesn’t play well on TV; strongly (if briefly) held opinions do. So, as ever, expect more heat than light whenever you see an expert on TV talking about anything.

Pull up a chair, folks, the show has already begun, complete with photographs of unidentified “law enforcement officials” in decidedly casual clothes walking cardboard boxes full of “Evidence” out of a Boston hedge fund’s offices. There’s a lot of theater here:

At the Diamondback offices, the FBI agents were interested in information stored on computer servers, the employee at the firm who described the raid said…

“They could have just as easily come in before hours and gotten what they wanted,” the employee said. “Why did this have to be in a dramatic, Hollywood manner?”

The NYT explains what might be going on:

Taking the aggressive tack of using search warrants to raid the firms’ offices, rather than issuing grand jury subpoenas demanding the production of documents, suggests that federal prosecutors are concerned about the destruction of evidence related to possible crimes, lawyers say.

It is also possible that the government has already served these firms with subpoenas, and it is looking to scoop up any remaining documents.

“This guarantees that the government can quickly and securely get its hand on evidence,” said Fernando L. Aenlle-Rocha, a lawyer at White & Case and former federal prosecutor who is not involved in the investigation. “Tactics such as this tend to make people at the targets very nervous and may even prompt some employees to speak to government agents.”

In other words, the theater has a very specific target audience: the employees of any banks or hedge funds which are being investigated. It’s a sign that they can’t kid themselves that this is any kind of routine investigation, and that they should seriously consider turning witness against their bosses.

Part of the problem is that insider trading is a hard crime to nail, as the man in charge of this investigation, Preet Bharara of the Southern District of New York, has said quite openly.

Speaking last month to the New York City Bar Association, Bharara called insider trading a “rampant” problem that prosecutors need more tools to fight.

He said the increased speed and volume of trading makes it harder to pinpoint specific illegal trades and that a “veritable explosion of newsletters, websites, blogs, tweets, and feeds” can make it easier for the accused to argue that they traded based on information obtained legally.

Another part of the problem is that the net here is being cast so broadly—it includes not only traders and bankers but also “expert network” firms that connect hedge funds with industry specialists—virtually anybody trading on non-public information should probably reasonably be very worried right now.

It’s worth emphasizing that—at least up until now—trading on non-public information is not, in and of itself, illegal. Neither is disseminating that information, if you’re not an insider. (To take just one obvious example: disseminating non-public information is what journalists do every day.)

But, as Integrity Research points out, this is an area of jurisprudence which is constantly evolving:

Insider trading is a broad topic which is mostly defined by case law rather than clear regulatory statutes. Because of the gray areas surrounding the definition of insider trading, it is easy to be swept up in the emotion surrounding what the WSJ is billing as the mother of all insider trading cases.

One company which seems to have got swept up in the emotion is Big Lots, which has retained Cravath, Swaine, and Moore, no less, in a lawsuit against Retail Intelligence Group, a small Tampa, research firm. That, in and of itself, looks like bullying to me. The researchers went out and got intelligence on individual store sales and pieced those datapoints into a picture of a company which was about to disappoint the stock market. They were right. And now, for their pains, they’re being sued by Big Lots, which—given its earnings and stock price—really ought to have bigger things to worry about.

In a short video accompanying the story, the WSJ‘s Dennis Berman—a former Deal Journal blogger—tells viewers that “I suggest people go read this lawsuit because it really speaks a lot about where insider trading law is headed.” I’d love to, Dennis, but you didn’t post it. Come on, Dennis, there’s no copyright in lawsuits. Post it. That’s your job. And more generally, it would be good to have some well-reported explanations of what is and isn’t illegal when it comes to trading, and whether Bharara’s investigation might move the needle on that front.

Update: The WSJ has now posted the complaint.

Number of Americans Ignoring Their Finances Doubled in 2010 — WalletPop

Jesse Green’s profile of Spiderman and Julie Taymor. I’ve been walking by the theater every day, now I want to go in! — NY Mag

Adam Levitin weighs in on the legal nitty-gritty of the mortgage mess — Credit Slips

Did DC’s top ethics cop break her own rules? The further machinations of the anti-anti-for-profit-college crowd — Salon

One man’s victory against the TSA idiocy — No Blasters

Can QVC Translate Its Pitch Online? — NYT

NYT vs WSJ on the effects of NYC’s new bike lanes — NYT, WSJ

Reuters people most numerous in roll of slain journalists — The Baron

Money really can buy ugly — Curbed

Remind me never to go to hospital in the US — Currency

If you have a “what if somebody steals my idea?” mindset you will never get funded — Information Arbitrage

Ireland’s Hottest T-Shirt — TBI

What Tynt reckons New Yorkers find most engaging — Tynt

Quadrangle kaput — NYP

The TSA apologizes for delays to its wait-time calculator — TSA

“He is among the top 20 powerlifters in the world in his weight class, and he was runner-up two years in a row for the best paper in the Journal of Finance” — Modeled Behavior

Worst Android tablet ever — Ars Technica

In September, one Benjamin Wey, calling himself “Chinese American Financial Expert Foremost Expert On Chinese Business in U.S.”, put out a press release announcing that he’d engaged a PR company. And it wasn’t just any old PR company: it was 5WPR. Go on, look them up.

Amazingly, the gambit worked. Before you knew it, Wey was on Fox Business! He was on TheStreetTV! He was a speaker at the Bloomberg Hedge Funds Asia conference! His In the Media page, with absolutely nothing in the three-year gap between August 2007 and August 2010, suddenly came to life, with 13 different media appearances between September 8 and November 15 of this year. I daresay more are on the way.

The point here is, basically, that you really shouldn’t listen to people quoted in the media just because they’re quoted in the media. After all, Benjamin Wey got all this attention just by hiring an incompetent superflack — and despite having been comprehensively exposed back in 2006 by Herb Greenberg:

Before getting his MBA in 1999 from the University of Central Oklahoma, Benjamin Tianbing Wei became an investment advisor and started an investment advisory firm in Oklahoma…

In 2002, he ran into trouble with securities regulators, including a brief suspension and fine by the NASD…

Last year, after several years of legal wrangling, he was censured by the Oklahoma Department of Securities. While not admitting or denying the charges, he agreed he wouldn’t ever again seek to do any brokerage or investment advisory business in the state…

Wey had been founder, majority shareholder and CEO of Benchmark Global Capital in Oklahoma, which like New York Global, specialized in Chinese stocks. When I first asked, through his spokesman, whether he had ever been associated with “Benchmark Capital” — not Benchmark Global Capital — and whether he changed his name from Wei to Wey, his email response was, “No.”

He moved the company to New York in June 2002 through the purchase of his Oklahoma operations by a New York-based entity of the same name. Within six months he was fired as CEO and as a director by his board.

In an era when television stations and other media outlets are desperate for “experts” they can wheel out on any subject at all, but especially stocks, and especially China, and extra especially Chinese stocks, it seems that anybody with any kind of PR firm can get themselves booked and quoted all over the place, by people who probably never even bothered Googling the guy, and who almost certainly never got around to reading his bonkers rant against Greenberg over at 10Q Detective. The media, it seems, can be much more gullible than, say, the public at large: Wey’s Twitter profile has exactly zero followers. (Not even 5WPR, which links to it.)

So the next time you see someone quoted from a firm you’ve never heard of and you have no idea who they are, feel free to ignore everything they’re saying. There’s a good chance they’ve simply been planted by a PR firm rather than chosen for their expertise by a conscientious journalist.

(Full disclosure: the last place that Wey was quoted, before he went dark for three years but after the Greenberg exposé, was Reuters. And it was Greenberg who tipped me to Wey’s reappearance on the media circuit.)

This week’s New Yorker features 8,000 words from John Cassidy on how financiers extract rents from the real economy rather than adding real value. His article features not only The Epicurean Dealmaker, star of blog and Twitter, but also Paul Woolley, a former fund manager who now runs the Woolley Centre for the Study of Market Dysfunctionality, a man who knows how to give great quote:

“I realized we were acting rationally and optimally,” he said. “The clients were acting rationally and optimally. And the outcome was a complete Horlicks.” …

“Mispricing gives incorrect signals for resource allocation, and, at worst, causes stock market booms and busts,” Woolley wrote in a recent paper. “Rent capture causes the misallocation of labor and capital, transfers substantial wealth to bankers and financiers, and, at worst, induces systemic failure. Both impose social costs on their own, but in combination they create a perfect storm of wealth destruction.”

Cassidy is good at focusing on excessive pay in the industry:

Perhaps the most shocking thing about recent events was not how rapidly the big Wall Street firms got into trouble but how quickly they returned to profitability and lavished big rewards on themselves. Last year, Goldman Sachs paid more than sixteen billion dollars in compensation, and Morgan Stanley paid out more than fourteen billion dollars. Neither came up with any spectacular new investments or produced anything of tangible value, which leads to the question: When it comes to pay, is there something unique about the financial industry?

Thomas Philippon, an economist at N.Y.U.’s Stern School of Business, thinks there is. After studying the large pay differential between financial-sector employees and people in other industries with similar levels of education and experience, he and a colleague, Ariell Reshef of the University of Virginia, concluded that some of it could be explained by growing demand for financial services from technology companies and baby boomers. But Philippon and Reshef determined that up to half of the pay premium was due to something much simpler: people in the financial sector are overpaid. “In most industries, when people are paid too much their firms go bankrupt, and they are no longer paid too much,” he told me. “The exception is when people are paid too much and their firms don’t go broke. That is the finance industry.”

Cassidy concludes with an ode to an earlier era:

In 1940, a former Wall Street trader named Fred Schwed, Jr., wrote a charming little book titled “Where Are the Customers’ Yachts?,” in which he noted that many members of the public believed that Wall Street was inhabited primarily by “crooks and scoundrels, and very clever ones at that; that they sell for millions what they know is worthless; in short, that they are villains.” It was an extreme view, but public antagonism toward bankers and other financiers kept them in check for forty years. Economic historians refer to a period of “financial repression,” during which regulators and policymakers, reflecting public suspicion of Wall Street, restrained the growth of the banking sector. They placed limits on interest rates, prohibited deposit-taking institutions from issuing securities, and, by preventing financial institutions from merging with one another, kept most of them relatively small. During this period, major financial crises were conspicuously absent, while capital investment, productivity, and wages grew at rates that lifted tens of millions of working Americans into the middle class.

Since the early nineteen-eighties, by contrast, financial blowups have proliferated and living standards have stagnated. Is this coincidence? For a long time, economists and policymakers have accepted the financial industry’s appraisal of its own worth, ignoring the market failures and other pathologies that plague it.

Cassidy’s view is a clear-eyed and straightforwardly reported version of, say, this, from Noam Chomsky:

The capitalist class in the ’50s was sort of part of a social contract. It was part of the tenor of the times… Changes have taken place since then… In the financial institutions, which by now dominate the economic system, the management level repeatedly acts in ways which will destroy their own institutions if it’ll increase their benefits, and benefits are not small. You know, you take a look at the revenue of, say, Goldman Sachs – a very high percentage of it just goes to payment of management and bonuses. There was a time traditionally – say, GM in the 1950s – it was trying to develop a consumer base that would be loyal and lasting and they were thinking in terms of an institution that would remain and grow and thrive in the society. By now, a lot of the investment firms – bankers, hedge funds – are perfectly happy to destroy what they’re in and come out with huge, tremendous benefits. That’s a new stage of capitalism.

Chomsky praises Yves Smith’s book as being “really good”, and says nice things about Simon Johnson, too; I’m sure if asked he’d be equally complimentary of, say, Joe Stiglitz or Jamie Galbraith. Elsewhere, he praises Dean Baker, and dates the beginning of the end to the dissolution of the Bretton Woods system:

In the mid 1970s that changed. Bretton Woods restrictions on finance were dismantled, finance was freed, speculation boomed, huge amounts of capital started going into speculation against currencies and other paper manipulations, and the entire economy became financialized. The power of the economy shifted to the financial institutions, away from manufacturing. And since then, the majority of the population has had a very tough time; in fact it may be a unique period in American history. There’s no other period where real wages — wages adjusted for inflation — have more or less stagnated for so long for a majority of the population and where living standards have stagnated or declined.

There’s clearly a large and appreciative audience in the blogosphere and in middlebrow magazines for this kind of analysis, which has even now become a feature-length documentary. But equally clearly it doesn’t even begin to play with the electorate as a whole. Look at what happened in the mid-term elections: insofar as Dodd-Frank was an issue at all, it was criticized for going too far — for being too much of an incursion by government in private industry — rather than for being too weak.

What has changed since the 1940s and 1950s, when popular mistrust of Wall Street was more than sufficient to constrain its ambitions and dangers? When even well-heeled investment bankers are on pretty much the same page as Noam Chomsky (or, for that matter, Eric Cantona), why is it that such sentiments still seem confined to the chattering classes? Maybe it’s just that this stuff is complicated, and that there’s little incentive for most people to put in the work needed to begin to understand it.

It’s certainly a lot more complicated now than it was in the 30s and 40s. As I noted in my review of Michael Perino’s book on Ferdinand Pecora, the Wall Street excesses of the 1920s were far simpler and more obviously egregious than the Wall Street excesses of the 2000s. Unless and until we see a parade of bankers in handcuffs being convicted of serious crimes, I suspect it’s going to be impossible to persuade the public at large that Wall Street is out of control and needs to be brought down to size. Even when former Wall Streeters like Woolley are clear of what needs to happen:

“The amount of rent capture has been huge,” Woolley said. “Investment banking, prime broking, mergers and acquisitions, hedge funds, private equity, commodity investment—the whole scale of activity is far too large.” I asked Woolley how big he thought the financial sector should be. “About a half or a third of its current size,” he replied.

That would be nice. But it’s not going to happen.

Many thanks to my colleague Eric Burroughs for sending over this chart, showing how Portugal’s CDS curve has evolved over the course of this year:

The black curve is how Portugal looked in April: a pretty standard upward-sloping curve, with default more likely the longer you go out.

By June, however, with the onset of the Greece crisis, things looked very different. (This is the green curve.) Obviously default probabilities were higher across the board. But they were highest at the short end of the curve: 6 months to a year out. If Portugal could make it that far, markets were saying, then it would become steadily less likely to default thereafter.

Today, with the red curve, it’s very different yet again. The contrast from just a few months ago is striking: while the 1-year CDS showed the highest default probability back then, today it’s the lowest. The EU bailout of Ireland confirms that Portugal will probably not be allowed to default any time soon.

But then look at where Portugal’s CDS curve goes after that: straight up, to the point at which the country is now considered more likely to default at 3 years out, and on from there.

The implication is clear: any bailout now only serves to make a future default more likely.

Which is not, I’m pretty sure, the message that the EU is really intending to send.

John Gruber wrote the definitive article about “Tynt, the Copy/Paste Jerks,” back in May. Tynt is the company which adds what Gruber quite rightly calls “a bunch of user-hostile SEO bullshit” to your clipboard every time you copy text from a website; most of the time that text comprises a unique link back to the post in question.

In the annals of Tynt-based user hostility, however, I suspect that FT.com has now won some kind of prize. For one thing, their addition comes before, not after, the text you’re trying to copy. And what’s more, it actually tells you that you’re in breach of the website’s terms and conditions. Here’s an example:

Please use the link to reference this article. Do not copy & paste articles which is a breach of FT.com’s Ts&Cs (www.ft.com/servicestools/help/terms) and is copyright infringement. Send a link for free or email ftsales.support@ft.com to purchase rights. http://www.ft.com/cms/s/0/f01e34f0-f5a9-11df-99d6-00144feab49a.html?ftcamp=rss#ixzz161RfBYUK

Hilariously, even the FT’s own journalists are falling foul of this idiocy: on Thursday, in his Markets Live conversation, Neil Hume wound up pasting text onto the FT’s website saying that he was infringing the FT’s copyright. “Sorry,” he then added. “Damn disclaimer.”

It’s pretty clear that the FT doesn’t want people like me linking to them. Their Money Supply blog, for instance, after disappearing behind the paywall in June, linked to me this morning. But I don’t know what they said, because even when I paste the headline (“Would €90bn be enough for Ireland?”) into Google and click on the Google link—something which works with most FT stories—I still run into that paywall.

Meanwhile, the FT’s terms and conditions page gives me very strict instructions on exactly what I must—yes, they use the word “must”—do if I want to link to their stories:

These are the conditions you must comply with in order to produce summaries:

- you source FT as the author of any article from which you have derived a summary by way of an attribution such as “[journalist name] at the Financial Times reported that”, with a hypertext link from the word “Financial Times” to the original story published on FT.com.

And at the bottom of every story, the FT now adds this note:

You may share using our article tools. Please don’t cut articles from FT.com and redistribute by email or post to the web.

Which seems to me to basically say “don’t blog this article.”

All of which makes me agree with Matt Yglesias that there’s increasingly no point in subscribing to the FT any more. If I want to pay for the privilege of passively receiving their words of wisdom, that’s fine. And if I want to use their article-sharing tools to drive my friends into the FT paywall in an FT-approved manner, then they’re OK with that as well. But if I want to use incredibly simple and obvious ways of sharing what I’m reading—copy-and-paste, email, blogs—then the FT’s now telling me quite aggressively that I’m some kind of criminal and should just stop what I’m doing and go away.

What I don’t understand is what the FT hopes to achieve with all this user-hostile aggression. It obviously doesn’t garner any goodwill from its readers or subscribers. And it’s hardly going to get extra marginal subscriptions by telling us not to link to it or publicize its content. All I can imagine is that it’s retreating to a newsletter model, where subscribers get value not only from the content itself but also from its exclusivity: they pay for subscriptions precisely because other people don’t have one and therefore can’t read the articles. It’s a sad and narrow fate for what should be a proud and global newspaper.

Gartner’s Avivah Litan knows what she’s talking about when it comes to the relative safety of signature debit and PIN-based transactions. PIN is much safer — to the point at which Bonneville Bancorp recently banned signature debit altogether, despite its higher fees:

“All I can think of is that the fraud was so high that the lost interchange revenue is worth it compared to the cost of issuing new accounts,” said Avivah Litan, a vice president and distinguished analyst at the Stamford, Conn., market research company Gartner Inc. “It’s a statement admitting PIN is more secure” …

Litan said there is no confusion about which is the more secure method.

“From a pure technical security standpoint, PIN is much more secure,” she said. “There’s no two ways about it.”

So how on earth did the WSJ’s Karen Blumenthal manage to report this over the weekend, in an article about ATM fraud?

Use your PIN sparingly at retailers, and choose the signature option—or a credit card—instead, Ms. Litan says.

This doesn’t make any sense. For one thing, the article is about ATM fraud, and says nothing about the possibility of fraud when using a retailer’s POS machine. And as Litan well knows, signature debit is much more prone to fraud than using a PIN.

More generally, Blumenthal seems weirdly wary of the most secure form of payment there is:

Chip-and-PIN technology isn’t foolproof, and experts say U.S. banks and retailers may instead leapfrog that technology, possibly by using the capabilities of smartphones to verify transactions or to actually make the transactions instead of using a card.

“Foolproof” is an impossible and silly standard to use when it comes to payments; I can guarantee you that if and when smartphones get involved, that won’t be foolproof either. And in any case, smartphone verification is still very much in the realm of science fiction, in stark contrast to chip-and-PIN technology, which is used by hundreds of millions of people every day.

The fact is that chip-and-PIN is safer than PIN, and PIN is safer than signature. But you’d never guess that from reading Blumenthal’s piece. And I’m genuinely puzzled about that quote from Litan.

Update: Litan clears things up in the comments. Signature debit is definitely more prone to fraud — so in order to incentivize their customers to still use it, the banks are much more generous when it comes to fraud coverage for signature debit than they are for PIN transactions. As a result, it makes sense for consumers to use the less secure payment method — because if they are a victim of fraud, they’ll be covered more quickly and easily.

Remember the rather wonderfully worded e-mail sent out to clients by John Kinnucan of Broadband Research in October?

Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information,” the email said. “(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman’s gracious offer to wear a wire and therefore ensnare you in their devious web.

Today Susan Pulliam reveals just how harmful that visit was:

At the age of 28, Mr. Kinnucan was hit by a bus while jogging in Florida, suffering four broken bones, two collapsed lungs, a lacerated liver and internal bleeding. When the FBI visited, he says, “I just thought about being under that bus and knowing you have to keep fighting.” …

He says that he hasn’t heard back from the FBI agents since their surprise visit, but that his business has imploded. Many of his clients, he says, won’t be able to use his services now that he is under investigation. “I’ll have to figure out something else to do,” Mr. Kinnucan says.

It’s pretty easy to see, here, how the FBI agent in question, David Makol, has developed a reputation for being able to “flip” the people he’s investigating. If they cooperate, they can continue to work. If they don’t, they’re put out of business—a harsh punishment indeed given that they have been convicted of absolutely nothing.

Is investing in small business a better bet than buying stocks? — Locklin

QE2 works much less effectively when it’s broadly criticized — WSJ

Nine out of 10 accidents involving cyclists and cars in Australia are the fault of the motorist — SMH

The French (incl Eric Cantona) will withdraw their money from the banks on Dec 7. But where will they then put it? — YouTube

41% of Twitter users balanced the budget without resorting to the fanciful Medicare growth cap — NYT

Trucks account for 4% of London’s road trips, but 43% of its cyclist deaths — Guardian

“Playing Music Extremely Loud Will Not Make Up For Your Lack of Talent as a DJ” — Eater

Joao Silva, NYT photojournalist, lost both his legs to a mine in Afghanistan. Support his recovery — Joao Silver

Palin’s publisher sues Gawker over book excerpts — AP

“The looming expiration of the BAB program is creating the very conditions it was created to alleviate” — Bond Girl

Color me underwhelmed by the Irish bailout. By all accounts it’s going to be less than €100 billion — probably in the €80 billion to €90 billion range — and that sum has to cover the country’s entire borrowing needs for the next three years. The NYT has a breakdown:

While a precise breakdown was not given, analysts and people involved in the talks said that about 15 billion euros was likely to go to backstop the banks. As much as 60 billion euros would go to Ireland’s annual budget deficit of 19 billion euros for the next three years.

That leaves a few billion euros left over for one-off expenses and emergencies — but I worry that Ireland’s banks are going to need a lot more than €15 billion. The banking system is on its knees and it has roughly half a trillion euros in assets. The black hole in commercial real-estate alone — over and above the €50 billion or so that the Irish government has already shelled out — is estimated at somewhere in the €20 billion to €25 billion range and that’s before you even start thinking about residential mortgages:

Where the first round of the banking crisis centred on a few dozen large developers, the next round will involve hundreds of thousands of families with mortgages. Between negotiated repayment reductions and defaults, at least 100,000 mortgages (one in eight) are already under water, and things have barely started.

Banks have been relying on two dams to block the torrent of defaults – house prices and social stigma – but both have started to crumble alarmingly.

When a residential property bubble as big as Ireland’s bursts, there will be always enormous bank losses. But because those losses haven’t materialized yet, everybody in Ireland and the EU is sticking their heads in the sand, pretending that they’re never going to arrive at all.

The best-case scenario, then, is that the EU bailout will kick the Irish can three years down the road. But in implementing the plan, Ireland’s banks will effectively be nationalized and any future mortgage losses will have to come straight out of these bailout funds. Which aren’t remotely sufficient for such a task. If the spike on mortgage defaults comes sooner rather than later, this particular bailout package could prove to be very short-lived indeed.

Commenter Engels has a bank account at Banco Popular. Checking his account online he found these weird charges:

The second charge, for $5, makes sense: if you look at the Banco Popular website, it says that there’s “a $5 monthly service charge if average monthly balance drops below $250″. But what on earth is “debit of ATM with flat fee”? There’s no schedule of fees on the website, and if you click on that line item to get a bit more detail, none is forthcoming:

Eventually Engels managed to get a human at Banco Popular on the phone, and they explained that from now on, Banco Popular will charge him $10 in every month he uses an outside ATM. And yes, that’s over and above any fees charged by the outside ATM itself.*

Obviously, with overdraft fees waning, banks are going to look elsewhere for fee income. But $10 for using an outside ATM is, frankly, beyond the pale. And the opacity and sneakiness with which the fee was introduced and presented to Banco Popular’s clients only goes to show how much of a guilty conscience the bank has about imposing it.

Banco Popular is a bank for the working classes: many of its customers will have to work very hard for well over an hour to earn $10 of post-tax income, if they’re lucky enough to have a job at all. These aren’t people who withdraw $1200 at a time from their bank’s ATM: their cashflow doesn’t allow it. So even when they’re conscientious about avoiding the charges associated with outside ATMs, they might find themselves needing to use such services once a month or so. If they do, it’s downright cruel to slap them with this unexpected $10 charge.

I’d love to see a personal-finance website somewhere put together a list of various banks’ accounts and the fees associated with them; it would ideally include prepaid debit cards, too, and would archive historical information so that customers could see how the fees have evolved over time. The problem, of course, is getting the information: as we’ve seen with Banco Popular, banks are far from transparent about their fees. Maybe someone like Mint or Yodlee could do it?

*Update: Turns out that the explanation Engels got was wrong. But in any case, Popular has changed its ways now. Details here.

Sam Glover has a great pair of blog entries up about due process in class-action lawsuits.

At Caveat Emptor, he talks about the sordid tale of Philip Stern and Robert Arleo, two lawyers who brought a class-action suit against a sleazy debt collection agency. With over 1 million consumers potentially affected and statutory damages of as much as $1,000 per case, total damages could easily have exceeded $1 billion. But Stern and Arleo weren’t interested in maximizing damages. Instead, they got the suit classified as an “opt-out class,” meaning that consumers were automatically included in the class unless they knew about it and chose to opt out. Then they put an ad in USA Today to find class members, and settled the suit for $20,000—plus fees of $84,250 for themselves.

This is a great example of a couple of lawyers essentially selling impunity in return for a nice little payday for themselves. Of course, the company wouldn’t have impunity if the class members opted out—but the class members never got that opportunity, as Glover explains in his second blog entry, at Lawyerist.

For one thing, the crime here was that the debt collectors called people without identifying themselves, which makes it pretty much impossible for people to know whether they’re members of the class at all.

And then, more broadly, there’s the fact that an ad in USA Today is not going to reach the people it’s meant to reach:

Because only a tiny fraction of the American public actually subscribe to newspapers, notice by publication is virtually guaranteed to be ineffective. It is also insufficient due process.

Let’s take USA Today as an example, since it has either the widest or second-widest circulation in the United States, and is the publication of choice for national class actions. According to Wikipedia, USA Today has a circulation of 1.8 million. According to census.gov, there are about 293 million households in the U.S. That means just .6% of American households subscribe to USA Today. Although, let’s be honest, as anyone who travels knows, a huge chunk of USA Today’s circulation is empty hotel rooms. And we can be pretty sure that, of those who do subscribe to USA Today or read it in their hotel rooms, most do not read the legal notices.

In other words, there is a better than 99% chance that service by publication in USA Today will be ineffective.

These numbers aren’t exactly right—Glover is confusing households with population, and doesn’t multiply USA Today’s circulation by the number of readers per copy—but the broad thrust of his argument is surely true. And he’s also right that if you’re trying to target a particular class of people, then often the internet is a great way of doing that:

Due process requires—at a minimum—meaningful notice before depriving someone of their property. Property includes the right to bring a legal claim, and so includes opt-out class actions…

On the publication theme, perhaps notice should follow the former readers of newspapers to blogs and websites. Advertisers have, and a legal notice is basically a form of advertisement. For example, service by publication using a one-month banner ad on any of the Top 100 blogs would probably reach a wider audience than USA Today. But that ignores the advantage of advertising on the internet: specific targeting.

Advertisers can reach just about everyone on the internet based on what they are interested in. People tend to complain about their problems and look for solutions to their problems online, on blogs, Facebook, Twitter, and many other websites. Well-optimized ad buys targeted to keywords related to the class action claims could reach a huge chunk of a class. And website analytics could quickly assess the effectiveness of the notice.

Courts have been slow to embrace the power of the internet, but it makes sense to me that they should get serious about due process and should no longer accept ads in USA Today when there are obviously better alternatives online.