Felix Salmon

Does the SEC have teeth after all?

Felix Salmon
Nov 18, 2010 15:37 UTC

The SEC is all over the news today. It’s investigating Citigroup! It’s examining Charles Schwab, over the YieldPlus fiasco which we thought was settled but wasn’t! And, of course, in conjunction with Andrew Cuomo, it’s coming down on Steve Rattner like a ton of bricks:

The two lawsuits seek at least $26 million from Rattner and his immediate lifetime ban from the securities industry in New York…

“Steve Rattner was willing to do whatever it took to get his hands on pension fund money including paying kickbacks, orchestrating a movie deal, and funneling campaign contributions,” said Attorney General Cuomo. “Through these lawsuits, we will recover his ill gotten gains and hold Rattner accountable.”

Technically it’s Cuomo who’s bringing the suits, while the SEC is announcing a $6.2 million civil settlement with Rattner, timed beautifully to coincide with the first day of trading in GM shares. But what seems clear is that the SEC, egged on by the likes of Cuomo and emboldened by its success in extracting half a billion dollars from Goldman Sachs over the Abacus affair, has started to grow some teeth for the first time in living memory.

This means significantly heightened regulatory risk for just about everybody in the financial-services industry. And it could, conceivably, be the beginning of a national process of holding firms and individuals accountable for their excesses in the run-up to the financial crisis. The SEC is certainly taking its time, here: these suits and settlements are dribbling out very slowly. But you can be quite sure that they’ve only just begun.


The SEC still has skeletons in its closet.

A report on options order handling practices was leaked from someone within the SEC, who thought enough of it, to jeopardize his/her job.

The SEC described, in their own words, options order handling violations, at the AMEX, in the hundreds of thousands of instances, that had been happening for years. ALL option exchanges had similar violations – all against the public. The public has never received a dime in compensation.

The SEC still meets with industry professionals to decide how to handle trading violations. The public, or their representative(s), are not invited.

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Felix Salmon
Nov 18, 2010 09:17 UTC

A big infographic on how banks sold themselves CDOs — MortgageRates

“I dislike arguments that disparage moral intuition while inviting the clever to delight in the counterintuitive” — Interfluidity

Pre-roll ad views more than doubled in six months — AdAge

Max out your credit cards: even evil card companies only want a tiny fraction of the return that VCs do — Dash

The Washington Independent, RIP — Washington Independent

New York City proposes extending subway to New Jersey — Reuters

There’s no point in appointing a Wall Street type to the NEC if Wall Street doesn’t trust him — TNR

BofA’s seizure of $500 mln Lehman deposits unauthorized — Reuters

Cookbook writers are terrible at estimating how long it will take to cook a recipe — Slate

Peter Eavis has an elegant solution to the Ireland crisis, and he even manages to squeeze it into less than 140 characters — Twitter


Danny black obviously knows more then some of us about what wallstreet is doing, but I daresay more as a Wallstreet (Goldman) insider and apologist.

If there was a way for AIG to sue much as the SEC did (they had to give up that right in the bailout…) I think you would have to eat a lot of your words on here and elsewhere. Sadly, many former Goldman cronies were all too willing to forgive Wall-street of this mess.

That the banks were stuck with the hot potatoes were merely because they couldn’t offload it fast enough. That they built the house of cards in the air, by trading it amongst themselves should no longer be in dispute. It was a feeding frenzy of piranhas trying not to let the cards fall to the ground, lest the buyers who were still trickling in see their hand.

If anyone is willing to listen to Danny Black over the article then I suggest you read the source information to see whether there really was fake demand or believe Danny who says as usual we make a tempest in a teapot with our faux outrage…

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The lessons of Andhra Pradesh

Felix Salmon
Nov 18, 2010 09:11 UTC

Are we ever going to get a good article on the hugely important microcredit crisis in the Indian state of Andhra Pradesh? The WSJ took a stab on October 29, but the article was thin, added nothing to the FT’s earlier report, and spent more time rehearsing well-known facts about the microfinance industry than it did trying to explain exactly what was going on so suddenly and why. The WSJ didn’t even mention the precipitating cause of the crisis, an ordinance passed by the state governor on October 15 which essentially shut down a whole class of microfinance lenders.

Now the NYT has published its own attempt to cover the story, under the striking headline “India Microcredit Faces Collapse From Defaults”. The story does a good job of bringing us rapidly up to speed on the extent of the crisis:

Responding to public anger over abuses in the microcredit industry — and growing reports of suicides among people unable to pay mounting debts — legislators in the state of Andhra Pradesh last month passed a stringent new law restricting how the companies can lend and collect money.

Even as the new legislation was being passed, local leaders urged people to renege on their loans, and repayments on nearly $2 billion in loans in the state have virtually ceased. Lenders say that less than 10 percent of borrowers have made payments in the past couple of weeks.

I’m not sure that the language about legislators is true: the ordinance clearly states that “the Legislature of the State is not now in session” and that it is being promulgated by the governor.

More importantly, the NYT fails to mention the main reason why the ordinance was passed, which is that the government runs a rival microlending program, known as self-help groups, or SHGs. As Justin Oliver explains,

It’s only the MFIs that are affected by the current crisis. Clients in Andhra Pradesh have essentially stopped repaying MFI loans, but SHG loans continue to be repaid for the time being. It’s worth noting that some of the loudest complaints about MFIs have come from the Andhra Pradesh state agency that oversees and promotes the SHG program.

All of this starts getting very messy very quickly; the Center for Global Development’s David Roodman, who has been the foremost blogger covering the crisis in detail, feels the need to qualify one recent post by saying that “as an outsider, I only half-understand the extraordinarily complex situation.”

But the way to make sense of a complex situation is not to do what the NYT does, and simply concatenate a series of quotes from various important participants. In one long and frustrating passage, the NYT quotes Vasant Kumar, the state’s minister for rural development; Reddy Subrahmanyam, a government official; Vikram Akula, the chairman of SKS Microfinance; Vijay Mahajan, the chairman of Basix; Ela Bhatt, head of the Self-Employed Women’s Association; and then Mahajan again, this time identifying him as chairman of the Microfinance Institutions Network. They all talk their various books, and the NYT writers — Lydia Polgreen and Vikas Bajaj — seemingly just throw their hands up in the air and leave it to the reader to decide whom to believe.

That’s pretty much impossible, not least because the NYT fails to spell out all the biases: the story neglects to mention, for instance, that Basix has moved beyond microfinance to offer many other financial services, which explains why its chairman is willing to be quite critical of the industry.

The NYT also ignores a strong counternarrative which blames the whole crisis not on predatory microlenders but rather on the government of Andhra Pradesh. Impassioned blog entries along these lines from Eric Bellman at the WSJ and Vineet Rai at the Harvard Business Review are contentious (which is fine, they’re blogs), but they are also much more deeply informed than most of the reporting we’re seeing. Much the same can be said of Milford Bateman, who takes the other side of the debate with virulence and verve, accusing the microlenders of greedily looting the poor. If you read, say, Rai and then Bateman, you’ll learn a lot more about what’s really going on than you will if you try to follow the tenuous thread of the NYT article.

The blogosphere is also the best place to look for a genuinely fair and balanced one-stop take on the whole affair. Beth Rhyne, of the Center for Financial Inclusion, wrote a great blog entry on the Andhra Pradesh crisis for HuffPo a couple of weeks ago, spreading the blame for the crisis liberally among microlenders, federal regulators, and state-level politicians. If you want to read a short piece explaining the crisis and its implications for microfinance globally, this is undoubtedly the place to go. And in an interesting twist, Rhyne only wrote it after the WSJ story came out, because she felt that story was in such dire need of a corrective.

In fact, I’m beginning to think that this is one of those stories which is better reported from your neighborhood coffee shop with wifi than it is from Andhra Pradesh itself. There’s nobility in sending reporters halfway around the world to get the story at first hand, and the NYT does provide the compulsory human-interest color by ending the story with a 38-year-old farmer who owes $2,000 and has no ability to repay it. But the paper breaks no news with this story, and seems so keen to re-report everything by talking to the principals involved that it’s forgotten the first purpose of stories such as these, which is to explain the world clearly to the readers back home.

The irony here is that by flying across the planet for the story, the NYT has missed the big global picture, which is that Andhra Pradesh is simply the latest and largest proof that microfinance as an industry is at the mercy of regulators and politicians, who are more likely to get things wrong than they are to get things right. Remember Nicaragua? It doesn’t take much in the way of political demagoguery to persuade a population to stop paying its loans en masse, driving the local lenders into immediate bankruptcy. Similar things have happened in Bolivia, Bosnia, Pakistan, and Morocco, but the microfinance true believers are often oblivious to this kind of political risk. Silicon Valley billionaire Pierre Omidyar has put some $200 million of his own money into microfinance, for instance, but when I met him in New York recently and asked him about this risk to the model, he had no idea what I was talking about.

It’s pretty clear to me that there’s a direct causal relationship between the IPO of SKS Microfinance, which garnered $117 million for another Silicon Valley billionaire, Vinod Khosla, and the collapse of the microfinance industry in SKS’s base state of Andhra Pradesh. When outside dollar investors make millions off the backs of the poor, the poor are liable to rise up and display a decided lack of gratitude.

But that’s not a story you’re going to read in the New York Times — not when Vikas Bajaj, one of the reporters on this story, filed a gushing profile of Khosla last month, calling SKS a “roaring success”:

Some nonprofit experts say commercial social enterprises have significant limitations and pose conflicts of interest. But proponents like Mr. Khosla draw inspiration from the astounding global growth of microfinance — the business of giving small loans to poor entrepreneurs, of which SKS Microfinance is a notable practitioner…

Mr. Khosla said his experience with microfinance had helped shape his views on the best way to tackle poverty. He has invested in commercial microfinance lenders and has donated to nonprofit ones, and he said that moneymaking versions had grown much faster and reached many more needy borrowers.

But did SKS actually make those needy borrowers any richer, even as it was multiplying Khosla’s own investment 37-fold? I suspect that the single best financial decision that many of them ever made was to simply stop paying their SKS loans entirely.

SKS won’t ever be able to collect on the loans where its borrowers have gone on strike, and there’s no point in even trying; neither can it sell those loans to anybody else. Roodman says that “microcredit portfolios are like sand castles” — if you try to pick them up and move them to another institution, they disintegrate, since they’re based on a personal relationship between lender and borrower.

SKS’s loan portfolio in Andhra Pradesh has effectively evaporated, and no for-profit microlender is immune from the same thing happening to them. This is a global issue, which should be addressed by scaling back, going local, giving borrowers ownership of their lenders, and generally being much less ambitious when it comes to growth rates. Much better that full-service banks grow organically out of local communities than monoline microlenders parachute in, flush with venture-capital funds, make a huge splash, and then implode.

Update: Roodman, who should know, says that the best reporting on the AP crisis is coming from M Rajshekhar of The Economic Times in India.


Interesting……………………http://www.youtube.co m/watch?v=nLwgSMH5Jt4

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Twitter datapoint of the day

Felix Salmon
Nov 17, 2010 22:17 UTC

I work for a global information company which makes billions of dollars a year selling valuable data to banks, hedge funds, and other people in the financial markets, often at very high prices: $2,000 a month or even more.

And then there’s Twitter, which jealously guards access to its full stream of tweets (roughly 1,000 per second, these days). As of now, however, it’s signed a deal with Gnip whereby you can get a randomly-selected 50% of those tweets for $360,000 a year, which works out at $30,000 a month. You’re not allowed to republish them, but that’s OK—the people willing to spend that kind of money are likely to be high-frequency trading shops who want to keep the data as private as possible in any case.

I don’t have a problem with Twitter monetizing my public tweets in this manner; as I understand it, DMs aren’t included, and neither are any tweets from protected accounts. But it’s quite astonishing how much those tweets are worth, when they’re aggregated into a fat pipe. And it’s also interesting to me how much more 50% of the full stream is worth than 5%, which you can get for just $5,000 a month. Given the rapidly-diminishing marginal returns of each additional Twitter stream, I wonder where the added value comes from. I’d imagine that if a topic starts trending on the 50% feed, it will almost certainly be trending on the 5% feed as well.

I do, on the other hand, have a problem with other sites—Facebook in particular—monetizing my private information. I worried that Mint might be doing that kind of thing back in March, and in general if any website wants to sell any information of mine which isn’t public, I want them to ask my permission first. As Twitter shows, aggregated user data can be very valuable indeed. And with that kind of money on the table, there’s a lot of incentive to be ethically flexible.


You are in fact incorrect in claiming that 5% of the stream is roughly equivalent to 100% of the stream for capturing trends.

Secondly, trends are just one facet of all the interesting things that can be accomplished with the Twitter. For example, if you wanted to – given an arbitrary Twitter id – find out their topics of interest, good luck doing that with 5% of the stream.

Similarly, if you want to build a social media monitoring service (of the kind that Sysomos built and sold successfully last year) and then sell the service to large brands, once again, good luck doing that with 5% of the overall stream.

Lastly, the folks who license the firehose – and that list of companies is easily available via a google search – are inherently uninterested in being a reseller. They are not high-frequency trading shops but are mostly Silicon Valley companies trying to build innovative apps and services on top of this mass volume of data.

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The story of Deutsche Bank’s Las Vegas casino

Felix Salmon
Nov 17, 2010 20:19 UTC

Alexandra Berzon has an enjoyable piece in today’s WSJ about the Cosmpolitan, the new $4 billion casino, fully paid for by Deutsche Bank, which is opening up in Las Vegas next month.

Berzon gets the obligatory isn’t-Wall-Street-a-casino-anyway shot in at the beginning of the piece, and then walks through the chain of events which resulted in a $60 million loan to a Las Vegas developer somehow morphing into ownership of a $4 billion project. But I would have loved to see a bit more detail on the finances:

Deutsche was originally just funding the project, pumping in a loan of $1 billion to build the soaring two-tower development. But its original developer, Ian Bruce Eichner, defaulted on Deutsche loans in 2008…

By the time the Cosmopolitan holds its grand opening next month with a New Year’s Eve party featuring Jay Z and Coldplay, Deutsche will have spent an additional $3 billion from its own coffers. That makes it one of the most expensive resorts in Las Vegas history.

Already, Deutsche has written off nearly $1 billion of its Cosmopolitan investment, according to securities filings…

After Mr. Eichner left the development, the bank was still uncomfortable about getting directly into the casino business. It tried to cut deals with more established players, including Hilton Worldwide and MGM Resorts International, but the deals didn’t come through.

Several other potential investors declined because they weren’t confident the Cosmopolitan could cover its loans, according to people involved in the talks.

What’s missing here is any explanation of its decision from Deutsche itself, beyond a bland statement that Thomas Fiato, the bank’s head of corporate investments, made to Nevada regulators. Berzon has talked to “people involved in the talks”, and there’s nothing about Deutsche refusing to comment, so I assume she talked to Deutsche executives off the record. But after reading her article I’m left with a lot of questions.

For one thing, how did Deutsche come to the decision that the best thing to do with a construction site in the middle of Las Vegas was spend $3 billion of its own money turning it into a new casino? I can see how it might have been a bit overoptimistic when it lent $1 billion to Eichner in the first place. But when Eichner defaulted on that loan and Deutsche defaulted, clearly there were problems in the Las Vegas real estate market. And when big casino operators took a look at the construction site and walked away, that was obviously a sign that Deutsche’s sunk costs were never going to be recovered.

And yet, somehow, Deutsche decided that the smart thing to do was to throw $3 billion of good money after its $1 billion of bad money. Why? What made them think that they could see a healthy return on that $3 billion even as no one else showed any interest in the deal? And given that casino investments are always risky, what justification did they have for adding such a big one to Deutsche’s balance sheet?

Furthermore, when did Deutsche take its “nearly $1 billion” write-off? If Deutsche knew that it was going to write off substantially all of its initial loan in any case, then wouldn’t it have been just as expensive and much less risky to just give the entire construction site away? And if Deutsche has now put $4 billion into the development, does that mean that the Cosmopolitan, which has yet to host a single paying guest, is valued at something north of $3 billion on Deutsche’s books? What would a reasonable valuation be, in this market?

Finally, what does Berzon mean when she says that other potential investors walked away “because they weren’t confident the Cosmopolitan could cover its loans”? What loans? Wasn’t Deutsche the owner of the project at that point, perfectly capable of selling an equity stake unencumbered by any debt?

The tale that Berzon tells is entirely consistent with Fiato and his team getting so caught up in the Cosmopolitan concept when they agreed to finance it that they simply couldn’t let go, wanting to retain at least a substantial debt-finance involvement and ultimately deciding to finish themselves what Eichner was unable to do, placing valuations on the Cosmopolitan that no one else was willing to ratify. But we don’t quite get there: we get hints of that story, but not enough detail to see it clearly. Let’s hope there’s a follow-up.

(Cross-posted at CJR)


“What loans? Wasn’t Deutsche the owner of the project at that point, perfectly capable of selling an equity stake unencumbered by any debt?”

Couldn’t that be the cost of the new capital that (potentially) new investors would have to raise? I suppose you could buy the equity stake with straight cash, but that’s a lot of money to have lying around. So your cost of capital is going to enter into that equation.

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Felix TV: The fiscal solution

Felix Salmon
Nov 17, 2010 18:04 UTC

We’ve seen the problem, and we’ve seen why quantitative easing doesn’t seem to be much of a solution. So what is the solution? Fiscal policy, of course. But don’t hold your breath.


But DanHess, it’s incredibly inefficient stimulus. Given who gets it and what they do with it, it’s more likely to be buying shares in Baidu than startups in Silicon Valley, or buying trips to Paris than take-and-bake pizzas in suburban Chicago.

It’s part of the problem, more than it is a help.

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Gesture politics and the Fed mandate

Felix Salmon
Nov 17, 2010 17:57 UTC

The proposal from Bob Corker and Mike Pence to abolish the dual mandate is pure gesture politics. It probably won’t even become a bill; if it does become a bill it won’t become law; and even if it does become law it won’t actually change what the Fed does.

What’s more, Corker and Pence simply don’t make any sense to the reality-based community. For instance, Corker wants the Fed to be “focusing singularly on maintaining the value of the dollar,” which sounds for all the world like a third mandate to replace or go alongside the inflation and employment mandates. What happens, for instance, if inflation is low and the dollar is falling? Or if inflation is high and the dollar is rising?

Meanwhile, Pence is declaring that QE2 “will monetize our debt and trigger inflation,” which is kinda the whole point of the exercise, since the Fed is worried that inflation is too low. Giving the Fed a simple inflation target would only make it easier to justify this kind of action when inflation is low and falling.

Neil Irwin gamely tries to come up with an example of where the abolition of the dual mandate might make a difference in practice:

In the first half of 2008, inflation was very high as energy and other prices skyrocketed. Yet the labor market was getting worse, with layoffs mounting. Bernanke and his colleagues cut interest rates to try to address the deteriorating economy, while the European Central Bank, focused as it is solely on inflation, raised interest rates to contain prices.

It’s true that the ECB was late to the rate-cutting party, although it got there eventually with 225bp of rate cuts between November 12 and January 21; in hindsight I’m sure it wishes it had started earlier. But it was hardly aggressively raising interest rates, either: there was a quarter-point hike in June 2007, to 3%, and another quarter-point hike in July 2008, to 3.25%. Meanwhile, the Fed funds rate was at 5.25% as late as September 2007, and came down to the ECB’s 3% level at the beginning of 2008.

But at that point the Fed was already in full-on crisis-fighting mode, trying to get ahead of the rapidly-deteriorating financial situation. Of course it worried about layoffs, but the main reason for the rate cuts was the financial system rather than the unemployment rate.

It’s silly to think that the U.S. central bank won’t step in to help in the face of a financial crisis. But the fact is that Corker and Pence are embarking on their Fed-bashing crusade not because they think they’re being constructive or helpful in terms of setting the parameters of US monetary policy, but rather because they’re playing to the Tea Party wing of the GOP. This is internal Republican maneuvering, and interesting mainly on a political level. As policy, it’s eminently ignorable.


I think you’re far too quick to dismiss the possibility that Corker and Pence know as little about the Fed and monetary and policy as the people they’re pandering to, and are actually being completely sincere. The answer to “Could a Senator possibly be that dim?” is always “Yes.”

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Bailout economics

Felix Salmon
Nov 17, 2010 15:07 UTC

It’s all about the bailouts today, as Warren Buffett contributes a thank-you-for-the-bailout op-ed to the NYT to run alongside the paper’s reasonably comprehensive accounting of which bailout monies have been paid back, which might be, and which won’t be. (Think banks, AIG, and Frannie respectively.)

The next big tranche of bailout repayment funds, of course, is going to arrive tomorrow, with the upsized GM IPO. The size of the stake that Treasury’s selling has been growing impressively, and at this point it looks as though taxpayers are going to end up owning just 33% of GM, down from 61% right now.

The more shares that the government sells in the low $30s, of course, the harder it’s going to be for Treasury to realize an average price of $44 per share for its stake by the time its last share of stock has been sold. That’s the point at which the government breaks even on the deal. But I’m glad that Treasury isn’t letting such considerations stop it—holding on to stock just because it’s trading below some arbitrary 0% return figure is simply speculating in the stock market, and it’s not Treasury’s job to be a stock-market speculator.

Meanwhile, the Ireland bailout is already well under way, the protestations of Ireland’s PM that Ireland isn’t asking for one notwithstanding: we’re still in the middle of the bailout era, and we’re not even close to a point where bailouts are a thing of the past. Portugal is next, Greece is inevitable at some point, and various U.S. states might well end up getting bailed out too, sooner or later.

We haven’t even put an end to bailouts of the private sector, since any bailout, even of a sovereign, is ultimately a bailout of its private-sector creditors.

All of which means that sovereign debt is going to continue to go up rather than down: at heart, bailouts are a way of moving indebtedness from the bailed-out entity to the government doing the bailing out. With yet another debt reduction task force reporting today, it might be time to start asking how and whether crisis-related bailouts can ever be accounted for in long-term sovereign debt planning.


Maybe i am misunderstanding this bit:

“bailout monies have been paid back, which might be, and which won’t be. (Think banks, AIG, and Frannie respectively.)”

It read to me like you were claiming that the banks, AIG and Frannie were going to be the ones causing the greatest losses to the tax payer, which is clearly untrue. Assuming worst case scenarios it is Frannie, AIG, Housing and Automakers. Even under the worst case scenarios the Treasury isn’t going to lose money on Banks.

As for the dividends into Freddie, I am sure they were ***relatively*** small, like around 8 billion with Fannie doing twice that.

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Felix Salmon
Nov 17, 2010 05:47 UTC

What Joe Nocera has in common with Matt Taibbi: “Individually, I honestly think the biggest villain is Alan Greenspan” — NYMag

She still doesn’t get it — Cook’s Source

From 2006: George Osborne urges Brits to copy the Irish economic miracle “They’ve much to teach us.” — Times

Only 2 days left to bid $4,000 on a 2-week internship at Rolling Stone mag — Charity Buzz

The Murdoch plan for the WSJ: go aggressively highbrow — WSJ

Whole Foods begins rating meat based on how producers treat animals–antibiotic use, cage-free, etc. — Chicago Tribune

Unemployed English Girl to Wed Soldier from Welfare Family — Awl

Soros Fund Management now owns >4m shares of InterOil, worth $304,215,776 — GuruFocus

The state of the Celtic Tiger — Independent