Felix Salmon

How Larry Summers hobbled Obama’s economic policy

Felix Salmon
Jan 19, 2011 23:29 UTC

I love myself a brutal takedown, and Jason Linkins’s evisceration of Peter Baker’s big NYT Magazine story on Obama’s economic policy is a classic of the genre. Except, I have to admit to being Team Baker on this one. We’ve all read a lot of stories about the economy, and what bad shape it’s in, and how we got to this sorry place. This one’s different. It’s written by the NYT’s White House correspondent, and it raises an uncomfortable question: what if part of the problem is that Obama’s economic team just wasn’t a good team? What if, in fact, it turns out to have been a very bad team?

Baker points out that most of the original members of Obama’s economic team have left, and that the new guys are generally Clinton-era veterans. And given the reputation of the two presidents, you’d expect the Clinton bunch to be more fractious and chaotic than the No Drama Obama crew. But that turns out not to be the case:

The path from crisis to anemic recovery was marked by turmoil inside the White House. The economic team fractured repeatedly over philosophy (should jobs or deficits take priority?) and personality (who got to attend which meetings?), resulting in feuds that ultimately helped break it apart. The process felt like a treadmill, as one former official put it, with proposals sometimes debated for months before decisions were reached. The word commonly used by those involved is “dysfunctional,” and in recent months, most of the initial team has left or made plans to leave, including Larry Summers, Christina Romer, Peter Orszag, Rahm Emanuel and Paul Volcker.

Most of the blame here can and should be laid at the feet of Larry Summers — and, implictly, on Obama for hiring him in the first place. Summers is no manager, and seems to have been much better at getting into fights with people than at making sure everybody was doing their best to pull in the same direction. Baker rehearses the stories of Summers’s fights with Austan Goolsbee, with Christie Romer, and with Rahm Emanuel:

Summers and Emanuel also clashed over incentives for small business — the chief of staff kept demanding a proposal, but Summers opposed the idea of using TARP money for the initiative, arguing it would not be effective. It took months to develop a policy.

Baker even comes close to saying that Peter Orszag’s decision to take Citigroup’s millions was in part a function of his inability to get Summers to care about the budget — or, conversely, of Summers’s inability to credibly pretend to Orszag that he was being listened to:

One reason Orszag left, eventually winding up at Citigroup, was the sense that the administration was trapped in a dynamic that would make it hard to reduce the deficit adequately.

All this talk about being trapped in a dysfunctional team, of “picking through the wreckage of a messy divorce”, makes some sense, given the utter inability of Obama or anybody else to articulate a coherent vision of what the Obama administration’s economic policy actually is. Obama, writes Baker,

couldn’t seem to decide whether he was going to take Wall Street to task for its irresponsible behavior or cajole it into freeing up money to get the economy moving. One day he derided “fat-cat bankers” who caused the recession; another day, he soothed them by saying that he and the American people “don’t begrudge” multimillion-dollar bonuses.

Which is weird, given the clarity with which Obama was speaking before his economic team had the opportunity to fall apart.

Summers, of course, is being as slippery as ever:

As we talked for three hours that night, he struck me as thoughtful and analytical about what went right and what didn’t. He didn’t want to be quoted from that conversation, though, preferring to polish his thoughts with academic precision and e-mail them to me later. “We always believed that the greatest risk was doing too little, not to do too much,” he wrote. “We fought for the largest fiscal program we could get.”

Except, of course, that simply isn’t true:

Obama’s instinct was to take on everything at once. “I want to pull the band-aid off quickly, not delay the pain,” a senior Obama official remembers him saying. “He didn’t want to muddle through it, Japan-style,” recalled Larry Summers, tapped to be director of Obama’s National Economic Council. Romer calculated how much government spending would be needed to fill the gaping hole of consumer demand and came up with $1.2 trillion, the highest of three options. Summers told her to leave that number out of the memorandum to Obama.

At this point, the risk is that it’s too late to fix things. Obama no longer controls the House; neither can he count on 60 votes in the Senate for anything. And on top of that, he’s already two years into his administration. For Ken Rogoff, the course is set:

After two years, he said, the president has essentially done everything he can and must wait to see if it works. “What’s going to happen with unemployment and the economy is largely set at this point,” he said. “He’s taken his decisions, and now it will unfold and things will begin to improve.”

The problem is that the improvement will come fast for capital, and very slowly for labor; it’s unthinkable that Obama will run for re-election with a lower unemployment rate than when he ran for president.

The NYT is pairing Baker’s story with a group of photographs by Alec Soth entitled “Portraits From a Job-Starved City”. Linkins is right that these people don’t much care about technocratic squabbles inside the Beltway. But they elected a pro-labor, pro-union president — and got from him an economic policy which recapitalized banks and did wonders for the stock market, but which has massively underperformed on the job and foreclosure fronts. The buck stops with the president: he’s already taken his electoral lumps, and will face tough questions in 2012. But Baker makes an important case that a lot of the blame should be shouldered by Larry Summers, who should have cared much more about unemployment than he did, and who was in large part responsible for the incoherence of the most important arm of the Obama administration.


Thanks for the update and information on Larry Summers Felix. There is not much news on him in the UK and until now all I had seen was a rather fawning and obsequious profile from the BBC’s economics editor Stephanie Flanders. That effort does not seem very accurate now. In fact it seems poor.

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Top tips from Davos spouses

Felix Salmon
Jan 19, 2011 21:31 UTC

Just as the most interesting sessions at Davos are the ones you know the least about beforehand, the most interesting people tend to turn out to be the ones you’ve never heard of. If you do happen to find yourself talking to Bill Clinton or Bono or Dmitry Medvedev, you’ll probably be part of a large crowd of people and the conversation is likely to be superficial at best. On the other hand, if you just sit down on a random couch in the Congress Center, there’s a really good chance that sitting next to you will be a fascinating and very useful person to know.

And of all the attendees at Davos, the very best to get to know are often the spouses. There’s a smattering of Davos Deville types, of course, swanning down the Promenade in their fur coats, but many of the spouses are very smart, very engaged, very interesting in their own right — and tend to feel a bit left out, given the rigid Davos class system. Log in to the exclusive in-house social network, for instance, and they don’t even turn up.

Many Davos spouses have been going for years, and know the ways of the town and the conference very well. They also tend to be able to keep things in perspective, and realize when it makes sense to blow off a session on the state of global manufacturing to enjoy the blessedly empty slopes.

So here are some top tips from a couple of Davos spouses who know what they’re talking about. Both are women, as you might expect, so their advice is particularly useful for female attendees. But, especially if you’ve never been to Davos before, they’re likely to come in very handy for everyone.

First, clothes:

  • Wear snow boots that come on and off easily or that are cute and comfy enough that you’ll be okay wearing them to events.
  • Carry a waterproof bag for (a) your other shoes if you want to change into them, plus (b) whatever other schwag you collect during your day (you can check this bag at the Congress Center and at most of the hotels where the events take place).
  • Bring your warmest coat. (It gets really, really cold at night).
  • Layer your outfits: you will freeze outside and then boil indoors.
  • Wear gear that can be easily removed: you will go through airport security checkpoints at most events, meaning that you will unload all your coats, gloves, hats, bags, etc. into the x-ray machines at least 5 times per day, generally more often.
  • Cute tops are more important than cute trousers or shoes. There’s no shoe snobbery in Davos, except for maybe reverse snobbery. You don’t want to end up like Henrique Meirelles, breaking your ankle in three places when you slip on the ice.
  • Plan outfits that will work with a large plastic card hanging right at boob height.
  • Choose your picture on the card with care, because it will flash up each time you have to scan the card, which is a lot.

Second, activities:

  • Be prepared to eat lots of fondant, zweigelt, veal, sausage and spaetzle. Expect to see no vegetables whatsoever.
  • Order the strudel.
  • Make sure to go to the Kirchner Museum.
  • Go ice driving if you can.
  • Take a sleigh ride to fondue at the Alte Post hotel in the mountains.
  • Get a coffee at the Kaffeeklatsch.
  • Book yourself in to a couple of the WEF’s afternoon tea sessions, which are often really lovely discussions.
  • People-watch in the Congress Center, where you can also load up on coffee, soda, water, and snacks. Strike up conversations while you’re at it.
  • Sign up early for any events you really want to go to.
  • Smile at the Swiss military who will be EVERYWHERE. Smiling at them makes them nervous, and that’s kind of funny.
  • Be prepared for people to look right through you as though you are invisible.
  • Eat out of town, if you can, at the Landhaus down the valley or at the gasthof at Frauenkirch.
  • If you’re staying at a reasonably upmarket hotel, the concierge is your friend.
  • Pace yourself on the drinking: the days are long long long.

Finally, inevitably, there’s live karaoke with Barry the piano man at the Piano Bar in the Tonic Hotel on the Promenade. At that point, the badges have disappeared, and everybody’s too drunk to care about status.


Why, by all the gods, would a guy bring his wife to a business conference? What’s she going to do, field his calls? Photocopy his papers? Shine his shoes? What? This is the dumbest, most irrelevant fluff article I’ve read in weeks, and that covers a lot of dumb territory.

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Goldman’s monster financial-crisis pay award

Felix Salmon
Jan 19, 2011 19:14 UTC

Dealbook and Footnoted — the very epitome of professional financial blogs — have collaborated in a big investigation of Goldman Sachs’s regulatory filings and partnership documents. The investigation seems to have turned up some pretty juicy stuff, but I’m not a fan of how the results were presented.

For one thing, the big NYT report coming out of the investigation contains zero substantive links to any of the documents they used. There are no links to SEC filings, no embeds of partnership documents, nothing. The post does say that the NYT and Footnoted “examined nearly 5,000 pages of regulatory filings,” but gives no help at all for anybody who would like a pointer to which filings exactly are the ones they’re writing about.

As a result, some great information gets missed, and is that much harder for the rest of us to find. For instance, the main news in the story is this:

Nearly 36 million stock options were granted to employees in December 2008 — 10 times the amount issued the previous year — when the stock was trading at $78.78. Since those uncertain days, Goldman’s business has roared back and its share price has more than doubled, closing on Tuesday at nearly $175.

The story goes on to detail the dates at which the options can be exercised. But there’s much more to be said on this matter. For one thing, the monster option grant took place during Goldman’s notorious orphan month, meaning that it would never appear in an annual report. And for another thing, it was very expensive even at the time.

The place to look, if you want a link to an SEC filing, is here, where Goldman discusses its Employee Incentive Plans.

The first thing you see is that between November 2008 and December 2008, Goldman granted 20,664,896 restricted stock units. And according to a footnote, the fair value of RSUs granted in the month of December 2008 was $67.60 apiece. Which means that in December 2008, Goldman gave out $1.4 billion in RSUs.

Then you get to the options. Goldman granted 35,988,192 options at a strike price of $78.78 between November and December 2008; the filing goes on to say (look at the top of page 200) that the fair value of those options was $14.08 apiece. Which means that on top of the RSUs, Goldman also gave out $500 million in options during its orphan month.

Those options are worth much more today, of course. I don’t have an option calculator handy, but they have to be worth at least $100 apiece, given that Goldman is trading $100 above the strike price. That means the the value today of the December 2008 options grant is somewhere over $3.6 billion.

And the RSUs have gone up in value too: 20.7 million RSUs all appreciating by $100 apiece means a gain of $2.1 billion.

Add it all up, and the various stock-related grants given in one month of 2008 (we’re not including annual bonuses here) were worth $1.9 billion at the time, and are worth somewhere in the neighborhood of $7.6 billion now.

Remember that December 2008, when Goldman made these grants, was the worst month in the company’s history: it lost $1.3 billion, and was mired in the depths of the financial crisis. Yet many partners will have received stock and options awards that month which are worth hefty eight-figure sums today. Not bad for a month’s work.

There’s much more in the Dealbook/Footnoted story, including the intriguing fact that 61% of Goldman partners are US citizens, excluding the ones with dual citizenship. I’d love to see where that information came from. Maybe at some point in the future, these two blogs will see fit to actually publish the information that they spent so much effort finding.


A comparison to show how scandalous it is (even if you can’t see felix’s point)

http://www.mybudget360.com/financial-eli te-dismantled-american-middle-class-aver age-banking-bonus-goldman-sachs-record-h omeless/

Making the connection … with a little irony …that this is trickle down economics in action

http://www.youtube.com/watch?v=Gl6sPabt9 Fw

trickle down …

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Unemployment datapoints of the day

Felix Salmon
Jan 19, 2011 15:19 UTC

The Gallup global employment data are out, and there’s a huge amount of meat here, including this unemployment map:


US unemployment, on this measure, is in the double-digit range — significantly above the global average of 7%. Meanwhile, Germany, with a much stronger social safety net, has unemployment of less than 5%. (Remember, these aren’t official national statistics, they’re Gallup’s attempt to apply the same yardstick to all countries.)

Zoom in on Europe, and the you can see where all the current tensions are coming from, especially in the stark contrast between Germany and Spain, and in general the difference between a relatively prosperous north and a struggling south which is also much closer to the hardships of north Africa.


David Leonhardt has a smart take on this data: essentially, the US is doing well by its corporates and its full-time employees (Caroline Baum notes that fourth-quarter withheld income tax receipts rose 17 percent from a year earlier), and is letting the unemployed fall through the cracks; Europe and Canada, by contrast, have attempted to spread the pain more widely.

I fear, however, that even if the US adopts the kind of job-boosting policies Leonhardt is extolling, ultimately Tyler Cowen and Jayme Lemke are right, and it’s going to take years of hard-won economic growth before we make a significant dent in the US unemployment rate. In the interim, it’s important for society to look after the unhappy minority which has found itself to all intents and purposes unemployable. When the median period of unemployment exceeds the maximum duration of unemployment checks, that’s a sign of a country which has simply given up on its neediest.


I am a recently retired Field Representative for a 20,000 member construction union that is currently experiencing in excess of 20% unemployment. 4 years ago, most of these members were averaging 15 – 1600 hours work per year, and were hardworking providors for their families. Since the recession came full blown in 2008, the average worked hours per member have dropped to 900 -1000. These men and women are clamoring to the union for work. There are fewer than 1 – 2 % who can or are willing to accept a future of half time employment supplemented by unemployment insurance. They are people who just 5 – 6 years ago were working full time and often additional overtime. These are far from the lazy and leisurely folk that so many conservative lawmakers describe. These are people who are highly skilled craftsmen, many of whom have plied this trade for 10 and more years. They want to continue to work in the trade they take so much pride in, but many are being forced by circumstances and the unemployment laws to accept jobs that pay far less than they were earning just a few years ago, and could continue to earn if the lawmakers would provide sufficient necessary funding for more public works and infrastructure projects. I get really tired of hearing these workers being characterized as lazy worthless individuals who would rather lay about and collect unemployment that amounts to about 25% of their most recent wages, than go look for work. These industrious people are being forced to take jobs that are at or near minimum wage which is even less than the unemployment they have been receiving. I don’t write very well, but I hope I’ve gotten my point across that there are many many, perhaps even, the vast majority, of the unemployed who would far rather have a decent paying job than to accept the indignity of a continued future on the dole.

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Felix Salmon
Jan 19, 2011 04:26 UTC

The origin of white Zinfandel: “Oh, my God, it’s got a pink tinge to it, and it’s too sweet.” — Dr Vino

Buy Starbucks coffee using your cell phone — NYT

Foundations Fail at Failing — GlassPockets

Why is Minyanville advertising on the subway? — Twitpic

Jerry York was some kind of rabid vector of off-the-record Apple rumormongering. Why? — CJR

The daughter of Amy Chua speaks out — NYP

First thing that Freakonomics will do when it leaves the NYT: move back to a full RSS feed. Good for them — NYT

Goldman, Facebook, solicitation rules and how it all comes back to media attention — Fortune

Wherein Matthew Bishop and Michael Green accuse me of “chuntering” — Philanthrocapitalism

“In this version, the blogger and the laptop are facing away from each other. They’ve parted ways, see.” — Mohney

Looks like the iPhone 5 will have a combined CDMA/GSM/UTMS chipset – meaning international roaming on Verizon phones — RWW

JPM admits it overcharged thousands of military families for their mortgages, and improperly foreclosed on 14 — MSNBC


Thanks for pointing us to that letter from the Little Tiger. Chua’s book, or at least the published excerpts, was a little “over the top”. But perhaps that is necessary to force us to confront our assumptions? If her writing had been more nuanced, less stridently stereotypical, would anybody have listened?

High expectations are GOOD, especially when the parent has equally high expectations for herself and her own involvement.

Be honest with yourself. Are you letting your 10 year old son watch television all afternoon because you believe it is good for him? Or because you are fearful of what he might say if you tell him to put more effort into his homework? Perhaps you are so absorbed with your own activities that you can’t be bothered to help him manage his own life?

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Adventures in market reporting, part 492

Felix Salmon
Jan 19, 2011 00:36 UTC

European stocks went up today, and European bonds went down. That happens, sometimes. But there was lots of news floating around about a possible eurozone rescue fund, which resulted in stock-market reports saying that stocks went up “as euro zone finance ministers inched towards improving a rescue fund”, while the bond-market reports said that bonds fell “after the Dutch finance minister said the Eurogroup had rejected enlarging a rescue fund for the region’s more indebted states”.

All of the market reports did this: I’m just linking to the Reuters reports because they’re the first ones I have to hand, and because that way no one can accuse me of bashing my competitors. The point here is not about the reporting, it’s about how silly it is to read and write market reports in the first place. They all basically follow the same rubric: first you say what the market did, then you mention some piece of news which happened that day, and then, depending on how bold you are, you either assert or else you try to back away from the necessary implication that there’s a causal relationship between the two.

Only on special occasions do you find reports contradicting themselves like this: if bonds and stocks had moved in the same direction, then they both would have cited the same piece of news — even if, and this is the important reason why market reports are so dangerous, the big news was actually the other one. So if the big news of the day was the move towards improving a rescue fund, but all market reports concentrated on the Dutch finance minister because what he said was bearish and markets fell, then that would give far too much weight to the Dutch finance minister (who, similarly, would have been ignored if markets had risen).

In reality, the chances that there’s any causal relationship between the actions of euro zone finance ministers on the one hand, and intraday market movements on the other, are pretty slim. The markets moved, and as is the case 95% of the time, we have no idea why they moved, or even whether there’s a reason for the move. (There doesn’t need to be a reason: left to their own devices, with no news at all, markets will follow a random walk, they won’t stay flat.)

What’s more, the emphasis given on how much markets moved today serves to distract attention from much more important moves over a period of months or years. No real person can or should ever care what markets did over the course of a typical day, yet every major business-news outlet seem compelled to tell them anyway. It only serves to cheapen the news on the rare occasion when a single day’s market action is newsworthy.

Today is Heidi Moore’s first day at Marketplace, the best daily business and finance franchise in US radio. She joins the excellent Kai Ryssdal, and is going to be spending the next month with him and the Marketplace team in Los Angeles. My challenge to Kai and Heidi: somehow, over the course of the next four weeks, put your heads together and come up with some way of getting rid of the market report which takes up precious time in your broadcast, to no good end. If anybody can smash this particular sacred cow, it’s you guys, broadcasting to a mass audience which has no business being recited such pointless factoids. Go on, just do it. You know you want to. It’ll feel great!


Heidi should feel quite at home at Marketplace, she has been a frequent guest on that show.

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Should Seeking Alpha’s authors start getting paid?

Felix Salmon
Jan 18, 2011 23:11 UTC

Kid Dynamite emails with a question about whether he should sign up for Seeking Alpha’s new premium program:

Here’s my problem – I put tons of effort and agita into my blog – both on my blogspot site and responding to moronic incorrect comments on the Seeking Alpha versions of my posts. I can’t stand when a troll posts incorrect stuff in the comments – I can’t help but correct it. But it’s about the least rewarding activity I know of.

Anyway, I make nothing from my blog. I get about 1500 hits a day on my site, although the SA version of my recent JP Morgan silver post got 22k hits total. My point is that if I’ve been doing this blog thing for a while, I feel like I’m “known” in the blog community, and yet I still can’t monetize it… So if I could make $200 a month on SA, I almost feel like that would be worth it – since I’m already doing it for free! On the other hand, that means I don’t publish it on “my” blog, etc etc.

KD here has put his finger on one of the more invidious aspects of the Seeking Alpha program: something is always attractive, relative to nothing, and for that reason a lot of SA’s contributors will sign up. But before doing so, they should stop and think, a while, about what exactly they’re doing and why.

For one thing, KD won’t be able to “park his financial identity on SA”, as Seeking Alpha’s Eli Hoffmann wants him to do. Or if he does, his identity is going to change dramatically. He’s managed 11 posts on his blog so far this year; of those, just two have made it on to Seeking Alpha. Some of the posts which didn’t make it are clearly not financial at all; others, like this one on what counts as insider trading, clearly are financial in nature. Either way, the KD that we know and love from his blog is a much less fleshed-out, and much less interesting, person on Seeking Alpha. Remember Josh Brown on eclecticism:

Your audience will connect with you more when you become a human being with interests outside financial matters. My blog, for example, has a nice following amongst hip hop fans, people with good senses of humor and pop culture junkies. Ritholtz gets a lot of engineering/science/technology/auto enthusiasts on The Big Picture. Paul Kedrosky’s readers are weather man groupies and amateur cartographers at Infectious Greed. Felix Salmon probably has an audience that skews toward those who are interested in finance and also the way the press covers finance. And also etiquette. Tyler Durden’s readership is made up of highly inquisitive and intelligent market participants, and a little overlap with the anarchy hobbyist demo. You get the idea.

This kind of thing gets lost when you’re shuffled in among the 4,000 other contributors at Seeking Alpha. And in any case it’s not easy to follow individuals on SA the way you can in the blogosphere, not least because SA insists on truncating its RSS feeds.

Hoffman says that Seeking Alpha wants to “make sure we’re raising the bar on quality and not lowering it” when it comes to editorial quality — which necessarily will mean a large number of contributions which end up not getting published. If your natural home on the internet is your own blog, then that’s no problem. But if your main identity is your Seeking Alpha identity, then that means you’re constantly at the mercy of a group of anonymous editors with rules and guidelines you may well disagree with. Your blog stops being your blog and starts being their blog; you, in turn, become a paid contractor, and you don’t get paid unless and until you meet their standards. This is not blogging, as it’s commonly understood. It’s freelance journalism, and the pay rate, looked at that way, is peanuts. (Freelance journalists are certainly badly paid, but they should still get more than $200 a month.)

In other words, when a Seeking Alpha contributor ponders whether or not to take the company up on its offer, they should do more than compare something with nothing: they should compare life as a freelance journalist to their current life, with their own blog, where they can say whatever they like. The first time that a contributor writes a time-sensitive article about a stock, and the article gets rejected, and then it’s too late to publish it elsewhere — well, that’s the point at which it starts to become a lot more obvious what the downside to the new deal really is.

As for the money, well, if blogging for free wasn’t worth it, then you wouldn’t be doing it. People get a lot of value out of blogging, and that value appears in a multitude of different ways. Investors, in particular, tend to value the discipline involved in thinking through their thoughts clearly, and then writing them down and having a permanent record of exactly what they thought when. It’s a great way to stop deluding yourself about why you did what you did — and it’s much less valuable if you’re subconsciously trying to write a post which lots of Seeking Alpha readers will click on and comment on. Most of my readers, I think, could quite easily make a couple of hundred dollars by writing a blog entitled “10 Reasons Why GLD is Going to $50 This Year” and giving it exclusively to Seeking Alpha. Pretty soon, it becomes a game: how many pageviews can I get? And the honesty inherent in blogging is lost.

Hoffmann, like Henry Blodget, purports to believe that a pay-per-pageview system is a meritocracy, where the best posts get the most money. I think that’s trivially false, and in fact I’m quite sure that if you ask any SA contributor whether their best post is the one at the top of their most-read league table, they’ll say it isn’t. By blogging for money, you automatically introduce a conflict of interest: unless your only aim in blogging is to be clicked on by lots of Seeking Alpha readers, you’re going to have duelling incentives whenever you write anything for the site.

There are lots of ways for Seeking Alpha readers to monetize their blogs which don’t involve selling ads against their posts. Some are looking for the kind of exposure which will get them a job offer. Others money managers looking for investors willing to entrust money to them. Others are working out ideas for a forthcoming book in real time, while also building up a good reputation. Bruce Krasting is a good example, and left a comment on my blog:

I wrote a piece on 12/28 about my thoughts for 2011. It got 2,100 reads at SA, so it would have been worth about 20 bucks. Better than a sharp stick in they eye, but not a paycheck that changes much. Would it be worth it to me to consider the SA deal? Absolutely not. The other numbers:

Zero Hedge ran the piece. I got 20,200 reads and 237 comments. As a wanna be writer this is very nice to see. That this many made a comment means to me that I hit a nerve or two. Exactly what I hope with every piece I write.

Several other re bloggers/emags copied it/stole it or just used it without permission. Another 8k reads from that. This pisses me off, but there is not much that can be done about it. If it’s “out there” it will be copied.

The E-edition of the Wall Street Journal picked up the piece and lumped it with 12 other “must reads”. This has not happened to me before. The exposure is great, and to be honest, every once in a while an ego boost is not such a bad thing…

The WSJ linked to my blogspot address. So I broke some records at my own site. A total of 12,400 reads (prior high 5,700). I have AdSense on my page and this one story generated $31 in revenue.

As a result of the article (and the link from the WSJ) I have been invited on two radio talk shows. This is what I hope for every time a write. The chance for some kind out “breakout”.

SA pays me $20 or I get:

-40k readers that I would not have gotten.

-250 comments that I thrive on.

-$31 in my pocket.

-An opportunity of getting a link in the WSJ. (Admittedly small)

-A shot with the radio shows that I would not have had without the WSJ link.

Not a hard choice for me.

Your mileage will certainly vary, of course. Some people, like Krasting, love getting lots of comments; others, like KD, are much more conflicted about them. Personally, I read all the comments here on Reuters.com, but I don’t read my comments on Seeking Alpha because I find the signal-to-noise ratio far too low. But in any case, if you give a piece exclusively to Seeking Alpha, then the chances of a “breakout” are significantly reduced. Seeking Alpha has a lot of readers who are investors, or executives; it has many fewer who are in the media industry and can offer things like book deals or radio interviews.

KD is certainly well respected in the blogosphere: that’s why he got to spend an hour on the phone with a senior Treasury official, discussing the finer points of Treasury’s exit from AIG. Would that conversation have happened had KD published his AIG analysis only on SA? It’s entirely possible. On the other hand, it might well not have happened, since Treasury was happy talking to him, the blogger who was known to them, rather than to whoever-it-was that wrote a certain post on SA.

Here’s KD’s bio on Seeking Alpha:

Kid Dynamite (pseudonym) spent 8 years as a trader at a major Wall Street investment bank. from June 1999 thru April 2005 he specialized in portfolio trading, and from May 2005 thru November 2007 he was the head trader for an internal hedge fund on the buy side of the same firm. Kid Dynamite managed a multi-billion dollar merger arbitrage portfolio, and continued to implement portfolio trading related strategies as well.

His blog has a fair amount of poker content, often revolving around how he lost a few hundred dollars gambling in Vegas. (Hence the name of the blog.) This is not someone for which a couple of hundred dollars a month will make any difference to his lifestyle at all. On the other hand, this is someone who loves his freedom — to write and travel and think what he wants. I can’t imagine that signing up for SA’s premium program would be a good idea for him. And in general I find it hard to think of someone for whom it would be a good idea. Maybe an impoverished finance student, or someone in India for whom $200 is real money.

Not everybody has turned SA down: Roger Nusbaum has decided to give them a couple of exclusive posts per week. “My primary job pays a fine wage,” he writes, “but the idea of a second source of income, in my case the writing, being sufficient to pay the bills is very appealing as a fallback should something unforeseeable ever happen.”

I’ll take this opportunity to ask Roger to publish, at some point when it becomes clear, just how much he’s making from SA. He’s their top contributor, and he’ll surely be their biggest earner too. If it turns out that Roger really is able to pay his bills off his SA income, then I’ll be impressed (or maybe he just has much smaller bills than I do). But for the time being, I think the base-case expectation is that SA will provide little more than pocket money, and that if you don’t need the money, there are good reasons not to take it.


How does Mike Konczal make a living? What do they pay over at that New Deal 2.0 Soros think-tank thingamajig?

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Don’t buy index annuities

Felix Salmon
Jan 18, 2011 18:39 UTC

Lisa Gibbs has a great article on index annuities in Money magazine (HT: TFF). The short version: don’t buy them, and don’t let your parents buy them.

There are at least three scandalous aspects to the index annuity racket. First up is the commissions, of as much as 9%. Incentives matter, of course, and when financial products carry these enormous commissions, the people selling them will never have their clients’ best interest at heart.

That problem is exacerbated by the fact that not only don’t the salespeople have any fiduciary duty to their clients, they don’t even have to have securities licenses. Index annuities are technically an insurance product, which means that you can sell them with nothing but an insurance license — even if FINRA has torn up your securities license. That’s no mere theoretical problem: more than a third of all brokers of insurance annuities in Florida and Massachusetts have had their securities licenses revoked.

Gibbs explains how this egregious loophole survived Dodd-Frank. It’s exactly what you thought:

When details of last year’s massive financial reform bill were being hammered out, Democratic Sen. Tom Harkin slipped in an amendment affirming that index annuities are not securities — and therefore are out of the SEC’s reach. Harkin is from Iowa, home of five big index annuity sellers.

Gibbs singles out one company, Pinnacle Investment Advisers, which persuaded elderly investors to surrender old annuities, paying $208,000 in surrender fees in the process, and for its troubles earned both $126,000 in commissions and a lawsuit from Illinois’s securities division. But it turns out that the only reason that the securities division has standing to bring the suit is because Pinnacle was a registered investment adviser. If it was just an insurance broker, it would be out of their reach.

And on top of all that, index annuities are very bad at their main job, which is being annuities. To back up a bit: in old-fashioned defined-benefit pension plans, there was always a significant insurance component. The pensioners who needed the most money — the ones who lived the longest — would receive the most money. Meanwhile, those who didn’t need as much — people who died relatively young — would effectively subsidize the longer-lived. That’s a great idea: living people need money much more than dead people do.

Nowadays, however, with the move to defined-contribution pensions, all that has gone out the window. You have a certain amount of money, and it needs to last you the rest of your life, but you have no idea how long that life will actually be.

Annuities are the obvious way of solving this problem. You hand over a lump sum, and an insurance company promises to pay you an income so long as you’re alive. If you die early, you lose out (but don’t need the money any more); if you live long, you win, and do need the money.

The problem is that many annuities, and pretty much all index annuities, are sold as investment products:

Insurers say that index annuities are meant to be held over the long term. However, in the wake of complaints like Passanisi’s, they have added provisions to most new index annuities that allow you to take out up to 100% of your money penalty-free if you are diagnosed with a terminal illness or enter a nursing home.

This, of course, does a great job of undercutting the main reason why annuities ever make sense. The reason for me to buy an annuity is that I want to be subsidized by the short-lived if I turn out to be one of the long-lived. What I don’t want is for the short-lived to be able to get their money back in full, because then my subsidy goes away, and there’s no point in buying an annuity at all.

At the end of her piece, Gibbs manages to replicate an index annuity at much lower cost and with much more upside. Put 85% of your money into FDIC-insured bank CDs, and 15% into a low-cost S&P 500 index fund. Then, when you retire and are ready to start getting that lifelong income, buy a plain-vanilla immediate annuity designed to cover all or most of your basic living expenses; the rest should be kept invested according to your risk appetite.

What Gibbs doesn’t do is raise any hope that the Consumer Financial Protection Bureau or anybody else will start regulating and cracking down on the index annuity racket. Insurance regulators are reasonably good at regulating the sale of genuine insurance products. But index annuities are not insurance products, they’re financial investments. And they should be regulated as such, by a federal regulator.


I read this article which is linked in when you click on LISA GIBBS hyperlink name at the beginning of the article. Funny how she has comments disabled so that no one can call her out for being a registered securities advisor who has a vested interest in keeping your money under management. Of course she will have nothing but negative things to say about Index Annuities. Lisa and Felix… millions of Americans are tired of being told to keep their money invested in the stock market, only to lose it during a financial collapse like we saw in 2001 and 2007. Lives have been devastated and security advisors like Lisa have been hiding products like the Index Annuity which is the ONLY product that allows the investor to still earn money based on the performance of the stock market, while at the same time guaranteeing they will not lose a penny due to the negative performance of the stock market. People are tired of being told that the market will bounce back, or spend less money… we are not sure when your money will come back, but everyone lost money during 01′ and 07′. There is nothing wrong with diversifying someones portfolio using Index Annuity and stock market investment products together, but you sound ignorant saying that everyone should stay away from Index Annuities. Why aren’t they regulated by FNRA? Hmmm, could it be because it guarantees that they WON’T LOSE A PENNY TO MARKET PERFORMANCE? All you make an investor do with market investments is sign a piece of paper saying that they could possibly lose all of their money. Whelp, I guess you are covered then. When my mother lost half of her life savings in 2007 her advisor told her… “well you knew the risk, you just need to spend less money for now until you earn it back, and you are going to have to post pone your retirement.” Give me a break. Crooks. She should have moved her money to an Index Annuity a decade ago.

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Why Europe’s periphery should restructure their bonds

Felix Salmon
Jan 18, 2011 15:29 UTC

The drumbeat for debt restructurings on Europe’s periphery is becoming too loud to ignore. The Economist has now come out strongly in favor; its leader gives the strongest case for biting the bullet now. And Mohamed El-Erian has now officially signed on:

You do not solve a debt problem by adding new debt on top of old debt. Yet it seems that European officials are fixated on this approach…

More people are recognising that the time has come for another approach – what this week’s Economist magazine calls “Plan B”. This involves the orderly restructuring of some European sovereign debt on terms that allow a meaningful chance of re-accessing markets in future at sustainable rates. This would be accompanied by measures to enhance growth prospects in highly indebted European countries; ring fence the other, fundamentally sound economies; and push banks and other institutional holders of restructurable debt to raise prudential capital.

The FT article El-Erian links to quotes all manner of other private-sector actors, including Citigroup chief economist Willem Buiter, saying that there will inevitably be several euro area sovereign debt restructurings over the next few years. And if there’s one thing that everybody can agree on, it’s that if you’re going to restructure your debt, it’s always better to do it sooner rather than later. And, as the inimitable Lee Buchheit says, the European Stability Mechanism, if enacted, will make any future restructuring much worse for private-sector creditors:

In a euro area restructuring, ESM loans, junior only to those from the IMF, would enjoy preferred status as well, leaving bondholders to shoulder more of the losses from mid-2013 onwards.

That has scared some investors. “It’s like telling a fellow that you won’t shoot him until after lunch. He was never going to enjoy the shooting, but now you have also spoiled his lunch,” says Lee Buchheit, a sovereign debt restructuring specialist at law firm Cleary Gottlieb Steen & Hamilton.

All of which makes Paul Krugman’s big NYT piece on Europe very well timed. He clearly lays out how we got to where we are, and what the four different paths are that the Eurozone could follow from here: along with the debt-restructuring approach, there’s also “toughing it out”, which basically entails painful deflation, recession, and fiscal austerity in much of the eurozone periphery; and the two extreme corner solutions in Europe — either the peripheral countries leave the euro entirely, and probably devalue too, or else the currency union becomes a fiscal union, and the debts of any one country get covered by all member states.

Liz Alderman has a good report in the NYT about the serious problems with the “toughing it out” approach, which Europe is attempting to follow at the moment. And so some economists, like Dean Baker, are pushing Krugman’s “Revived Europeanism” approach — fiscal union, essentially — saying that it “would essentially be costless right now”.

Politically, however, it’s a much harder sell, especially in Germany. And it would also require a level of confidence about Europe’s economic future which I don’t think anybody has right now. And as the Economist leader notes, even the debt-restructuring path will involve a serious fiscal hit for Europe’s wealthiest countries:

All creditors, including governments and the European Central Bank, will have to chip in. New rescue money will also be needed: to fund defaulting countries’ budget deficits; to help recapitalise these countries’ local banks (which will suffer losses on their holdings of government bonds); and, if necessary, to recapitalise any hard-hit banks in Europe’s core economies. The ECB and others should stand ready to defend Belgium, Italy and Spain if need be.

To use a US analogy, the choice facing Europe right now is whether to deal with its peripheral nations like Frannie, like AIG, or like General Motors.

The Frannie approach means a fiscal union: their debts are our debts. The AIG approach is the current “tough it out” one, where the hoped-for outcome is that a solvency crisis can be solved with liberal applications of government liquidity. But that only happens when you have strong growth — share-price growth in the case of AIG, with lots of expected future profitability, or economic growth in the case of countries like Greece, Portugal, and Ireland. And right now it’s impossible to see how a country like Greece can possibly grow its way out of its debt trap.

Finally, there’s the GM approach: restructure the debt, and get back onto a long-term sustainable footing. It’s harder for countries than it is for companies. But it might well be the least-bad option, by some large margin.


Ireland Wields Stick to Wound Bank Bondholders

Irish Finance Minister Brian Lenihan is about to inflict more pain on bank investors. Unless they take it, analysts say worse may follow.

Junior bondholders in Dublin-based Allied Irish Banks Plc will decide this week on an offer to buy back more than $5 billion of subordinated debt at 30 percent of face value. Analysts at BNP Paribas SA recommend investors accept the package or risk getting “the stick” after the government passed laws allowing it to reduce payments to bondholders.

http://bit.ly/hsktnX (Bloomberg)

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