Felix Salmon

John Cassidy Watch, externalities edition

Felix Salmon
Mar 10, 2011 23:21 UTC

I’m beginning to think that John Cassidy must have a serious masochistic streak: he’s now back for a third round of smack-downs, after having drawn unanimous scorn for his first two attempts to demonize bike lanes.

Cassidy purports to take seriously the question of his negative externalities when he drives his Jaguar. But he gets it embarrassingly wrong:

In the case of motor vehicles, there are several negative spillovers, the most obvious of which is pollution and the associated climate threat…

A second issue is congestion…

This gets things completely backwards. The amount of pollution emitted by today’s cars is actually pretty low, while the amount of congestion they cause is enormous. I’d be happy to introduce Cassidy to Charlie Komanoff one day, the guy who’s actually done all the hard empirical math on this question. The pollution-related negative externalities associated with Cassidy’s drives into Manhattan are tiny, while the congestion-related ones are enormous — well over $100 per trip.

And Cassidy’s proposals for tackling congestion are weird indeed: carpool lanes? I have no idea how that’s meant to work on 52nd Street. Meanwhile, the one thing which does work — congestion pricing — is conspicuously absent from Cassidy’s list.

All of this rhetoric allows Cassidy to set up a classic straw man:

Some would say that reducing New York’s carbon footprint is of such importance that we need to utilize bike lanes and other techniques to further inconvenience car drivers.

Actually, John, amid all the thousands of words which have been directed at you since you embarked upon this bizarre crusade, no one said anything like that at all. Big cities like New York are already by far the carbon-friendliest places in America, as Cassidy’s colleague David Owen would be happy to explain to him.

But Cassidy drives blithely on:

I haven’t seen any cost-benefit analysis backing this up, and, frankly, I don’t think such concerns are driving the debate. If global warming disappeared tomorrow, the bike lobby would still demand more bike lanes.

Well, John, here’s a cost-benefit analysis for you. It’s a massive Excel file, It has almost nothing to do with global warming, and it’s completely compelling. The bike lobby has a solidly-grounded empirical basis for the advantages of building bike lanes. You, on the other hand, have an XJ6, an 8pm reservation on Grove Street, and an overgrown sense of entitlement.

Cassidy claims that he wants

some sort of efficiency test beyond the rule of two wheels good, four wheels bad. Do the putative gains in convenience, safety, and fuel-economy from a particular bike lane outweigh the costs to motorists (and other parties, such as taxpayers and local businesses)?

At this point it’s clear that Cassidy has no idea what this kind of analysis — which actually does get done — is involved in these things. He gets the benefits largely right, although I think that he massively underestimates the value and importance of safety gains. If you significantly reduce pedestrian fatalities, as the Prospect Park West bike lane has done, that in and of itself is reason to build it. As for the costs, there’s really very little evidence that motorists and taxpayers and local businesses bear any costs at all.

Cassidy’s in such a bizarro world here that he even wonders out loud whether the Prospect Park West bike lane might endanger pedestrians, when in fact it protects them. And when he forays into the issue of pedestrian safety — an issue which the pro-bike-lane crowd would happily make the sole deciding issue for every single lane — he decides that what’s important here is “the growing problem of cyclists terrorizing pedestrians”. Again, without any empirical evidence to back up his assertion that this problem is growing at all, and certainly without any recognition of the fact that cars are much deadlier in collisions with pedestrians than bikes could ever be.

Cassidy reckons, in his conclusion, that the question of whether to build bike lanes is not a question of a public-interest transportation facility against private-interest parking spots. Instead, he says, “it comes down to one private user versus another” — presumably the bikers on the lane, versus the car drivers who would otherwise be able to park in those spots. Well, that’s an easy balance to strike. When Cassidy plonks his Jag down on a West Village street and disappears off to dinner, he’s just using up space: he’s not serving any public interest at all, and he’s blocking that part of the road for anybody else who might want to use it. When a bicyclist travels down a bike lane, by contrast, she’s there and she’s gone. She uses up almost no space, and she immediately frees up the lane for the next cyclist to come along behind her.

On top of that, every driver who decides to bicycle on one of the new lanes is one less driver for Cassidy to compete with in crosstown gridlock. By rights, he should be loving the way that bike lanes are reducing the number of cars on the road, rather than railing against them. But for all that he claims to be “wonky” in this post, it’s clear that he’s much more interested in coming up with any conceivable justification for his already-existing prejudices than he is in dispassionate analysis. The fact is, it’s the bicyclists who have all the data on their side. The car lobby just has inchoate rants.


Cars are unique among all common modes of *urban* transportation in that their sheer size — particularly in cities, which by definition have limited, expensive ground area for a large population to share — leads to a competitive, vicious circle of congestion when they’re overused. When more people drive, congestion gets worse for everyone, potentially destroying the positive economic effects of agglomeration, and as such the state has a vested interest in reducing congestion by discouraging driving.

Cycling, walking, and transit use are so much more space-efficient that, at typical urban densities, they are subject to a cooperative, virtuous circle of congestion that reinforces the positive externalities of urban agglomeration. More cyclists make for safer cycling conditions [P.L. Jacobsen, Inj Prev 2003;9:205-209], more foot traffic leads to lower crime rates, more transit riders creates demand for more frequent service. Looked at another way, each of these modes is subject to much higher thresholds where the virtuous circle turns vicious. The space occupied by three cars can easily fit 30 bicycles, one bus with 70 passengers, or hundreds of pedestrians.

Drivers tend to blindly bring their competitive outlook to all urban transportation, which is why Cassidy and others end up with such inane arguments.

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Why debit fees should be low

Felix Salmon
Mar 10, 2011 21:23 UTC

Antony Currie has a handy little FAQ on debit interchange. I agree with most of it, especially his final conclusion that the US should move to a secure chip-and-pin system. But I take issue with his idea that for the time being, the Durbin amendment is flawed and “needs a do-over.”

Indeed, Currie’s two conclusions are at odds with each other. The reason that interchange fees are so much higher in the US than they are elsewhere is precisely because they’re so profitable for the banks, which can use their fraud losses to justify some $16 billion in fees each year. If they moved to a safer, cheaper system, those profits would go away. If you allow banks to continue to wallow in a multi-billion-dollar revenue stream from debit interchange, they’ll have no incentive at all to move to a better system.

So what’s Currie’s reason to keep interchange fees high — or at least higher than they’re slated to go?

The more that customers have used them over the past 15 years, the more banks have been able to remove minimum balance requirements and transaction fees they used to charge to fund all the cash and checking transactions. These forms of payment cost 70 cents or more a pop, according to JPMorgan — at least 60 percent more than the average debit card fee.

Let me expand this a bit. Once upon a time, banks had to implement unpleasant things like minimum balance requirements and monthly fees and transaction fees, because checking accounts meant lots of cash and check transactions — both of which are labor-intensive things, for banks. Then, debit cards came along, and debit cards are much cheaper, for banks, than either cash or checks. As customers have moved to debit cards, banks have been able to get rid of some of those unpleasant fees. And at this point, debit cards are a significant profit center for banks, in stark contrast to cash and checks, which are both major loss centers.

The answer to this problem is not to continue the weird cross-subsidy of checks by debit. Instead, it’s to move away from checks, and towards a more European system where it’s easy to transfer money directly from any bank account to any other bank account. The less that people use cash and checks, the less cross-subsidy the banks will need from debt interchange and other fees, and the more efficient the whole system will be.

More generally, we have far too much opacity in banking as it is. Hidden fees are regressive: they generally hurt the poor and benefit the rich. (In the case of debit interchange, the rich tend to have those lovely rewards debit cards, while the poor have to pay higher prices at big-box merchants.) If banks want to charge fees, let them be transparent about it so that consumers can shop around. My guess is that for all the doom-mongering from the banks, most of them will somehow find a way of keeping hold of their customers, and keeping fees low. No bank ever likes to lose a customer, if only because today’s low-income, low-profit account can easily turn into tomorrow’s lucrative banking relationship once the customer starts getting rich.


no one wants FREE. That’s an overstatement.

People want non-obfuscated agreements: simplicity, transparency, appropriate fees.

But if lower fees are going to put bankers in the poor house, maybe we should all bite the bullet and accept with the current situation.

I wouldn’t want to send no bankers straight to the soup line.

Now excuse me while I make my deposit to Chase bank – i got a chance to get a DOUBLE DEPOSIT. I could WIN up to 5,000 dollars. I’m so excited

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Should you borrow against your house to buy stocks?

Felix Salmon
Mar 10, 2011 20:22 UTC

In the wake of my back and forth with Linda Stern, I took the advice of commenter Kid Dynamite and moved the discussion to email. Here’s how it went:

Felix: Why do you think it makes sense to borrow against your house to invest in the stock market? And if it makes sense for people buying houses, why doesn’t it make sense for people owning houses? If I own my home outright, should I take out a mortgage and invest the proceeds in a mutual fund? If not, why not?

Linda: My advice, intended for first time homebuyers who are trying to save up for a down payment, was based on the belief that both mortgage interest rates and home prices will rise faster than they can accumulate big down payments. Using leverage like this allows them to lock in a historically low mortgage rate and a home price, and start building equity in a home. If you already own a home, you wouldn’t need to lock in the home, so, no, I don’t think it’s necessarily wise to remortgage it for investment cash. That being said, if you have an outstanding mortgage with a fixed interest rate of 4.8 percent or less, I think it would probably be the better bet to take any extra money you have and invest it in a diversified fund instead of using it to pay off your mortgage early. If you could do that through a tax-advantaged retirement vehicle, that would be even better.

Felix: OK, let me try again. It seems to me, just like it seems to my commenter Kid Dynamite, that you’re making two different claims in your posts. The first is that first-time homebuyers without much of a downpayment should buy now anyway. The second is that even if you do have a large downpayment, you shouldn’t put it all into your house, and instead you should invest that money in a diversified mutual fund. I’m trying to concentrate on the second claim here. So, let’s build four different scenarios here; let’s assume they’re all at an interest rate of 4.8%, and that in every case the homeowner can comfortably make her mortgage payments.

  1. Alison is buying a house for $250,000. She has $50,000 — 20% of the price — in savings which she can use as a downpayment. You suggest that she should not put all that money down, and instead should invest some of it in the stock market. “The less you put down,” you write, “the better off you are”. So if Alison can buy the house with just 3.5% down, or $8,750, should she be investing roughly $40,000 of her savings in the market rather than using that money as a downpayment?
  2. Brenda already owns her house, which is worth $250,000, and it carries a $200,000 mortgage which she wants to refinance. If the lender is willing to refinance for more than $200,000, should she accept the offer of a cash-out refinance and invest that new cash in the market?
  3. Christie is in the same boat as Brenda, except that her outstanding mortgage, which she wants to refinance, is much smaller — just $50,000. How much should she refinance for, in the knowledge that she will take any extra cash and invest it in a mutual fund?
  4. Debbie owns her house, worth $250,000, outright. Should she take out a mortgage of any size at all, and invest the proceeds in the market?

In each case, homeownership is a given: Alison, Brenda, Christie and Debbie are all going to own that house either way. I’m just trying to zero in here on the idea that you should borrow against your house and invest the proceeds in stocks. When is that a good idea, and when is that not a good idea? And if it’s a good idea for Alison to have less than $10,000 of equity in her home, why is that not also a good idea for Brenda, Christie, and Debbie?

Linda: Sorry, Felix, you’re not going to get me to give individual advice about who should and who shouldn’t use home equity to invest in the stock market. That depends on many variables that you don’t go into here: How much do you already have saved for retirement or invested elsewhere? How intelligently do you invest? What’s your ability to withstand risk? When will you need the money? How comfortable is your income stream? Etc. etc. etc. My main point is that a homeowner who can comfortable make their mortgage payments on a fixed 4.8 percent home loan could probably find better places to put extra cash, rather than buying down the loan. For someone, that might be an emergency fund. For someone else, that could be a Roth IRA invested in a balanced mutual fund. I’m not going to tell any of your readers or mine to remortgage their paid-off homes and put all the cash in stocks. But I’m sure there are some folks out there — well-heeled and well-capitalized folks — who would do that, and would end up happy for it.

Now let me answer your question another way: I, personally, have taken cash out of my paid-off home to pay for home repairs while at the same time contributed money to my IRA. Isn’t that the same thing?

Felix: Linda, of course I wasn’t asking for individual advice any more than you were giving individual advice when you wrote your initial posts. But back then you seemed quite happy to generalize and say that the less you put down, the better off you are.

My point is that your advice seems to be, shall we say, path-dependent. If you start off with no house, then you’re advising putting as little money down as possible. If you start off with lots of house, on the other hand, you’re shying away from making the same advice to lever up, even if it brings the homeowner to the exact same place.

Economics is full of cases where people will make different choices depending on how the choices are presented. Here’s a good example. But as personal-finance columnists, it’s incumbent upon us to point out those areas of irrationality and to to say that if you have the choice between A and B, then you should plump for the outcome which makes the most sense, regardless of how you get there. The choice facing Alison is the same as the choice facing Brenda. Your original column was quite clear about what Alison should do, but now you’re backtracking on what Brenda should do. And that’s why it seems to me that what you’re advising is irrational.

For me, the choice in all cases is clear: it’s pretty much always a bad idea to borrow money and invest it in the stock market — and it’s an even worse idea to borrow money against your house and invest it in the stock market. Because that way you not only risk losing money in the market, you also risk losing your house. I’m sure you can come up with an extreme example of “well-heeled and well-capitalized folks” for whom your idea might make sense, but even there I’m having difficulty working out why people who are so well-heeled (and who therefore have diminishing marginal utility of future returns) would feel the need to leverage their investments in such a manner.

I’m quite happy saying that my advice applies to at least 95% of the homeowners in the country. Yes, individual risk appetites vary, as do total savings and the like. Individuals are unique. But this is one area I feel very comfortable generalizing. Leveraging your stock-market investments with unsecured debt is dangerous; leveraging stock-market investments with secured debt is downright foolish.

Does that mean you’re foolish to borrow money against your home while still contributing to your 401(k)? Maybe not — 401(k)s are special, in terms of tax treatment, and if your employer is matching your 401(k) contributions then of course it makes sense to maximize them first. On the other hand, I do find it revealing that you borrowed specifically “for home repairs”, which are a very prudent expense, rather than for stock-market speculation.

Let’s say that you, Linda, didn’t have any home repairs this year, and that you had maxed out your 401(k). In that case, would you still have borrowed against your house, and put the proceeds in the market? I suspect not. On the other hand, let’s say you were buying your house. In that case, would you follow your own advice and put as little money down as possible, leaving the rest for investment in the market? If so, then I’m detecting an irrational inconsistency here. No?

Linda: As I’ve already said, I think the two examples — (1) someone buying a house for the first time and (2) someone refinancing a home to take money out isn’t the same thing. Alison and Brenda are two very different people! I think the person buying a home is using the leverage afforded by the low down payment to get the house in the first place. (Locking in loan, home price, beginning to build equity, saying goodbye to rent.) The person refinancing a home they already own is putting more at risk — the home — and spending money on closing costs etc. to get that investment money.

Now let me ask you a question. What about Alison, the homebuyer who has that $50,000? She could put it all down on the house, building 20 percent of equity immediately. Or she could put $8750 down, and have $41,250 left. Wouldn’t that money, invested cautiously or saved in a liquid account, better protect her from bad financial times (job loss, housing price decline, etc. etc.), than having it all tied up in the house? Again: from the homeowner’s point of view and not the bank’s.

I do think there is value, and not irrationality, in making “path-dependent” decisions, and in gradations of behavior. Taking some affordable amount of money out of home equity and investing it might make sense in some situations — such as putting it in that retirement account and that balanced mutual fund, even in the absence of home repairs. Cashing in the place where your kids sleep at night to make a big bet on Apple doubling one more time? Not so much. I didn’t recommend that kind of speculation in either of my posts.

Felix: OK, thanks Linda, I think we’ve probably wrung this one dry — although I’d point out that $41,250, if “saved in a liquid account,” is very unlikely to yield more than 4.8%.

I did promise you the last word — so, anything else you want to add before I publish this?

Linda: This has been fun and I look forward to doing it some day with wine. I think I’m done.


All I can say is, “Salmon…..You ‘Nin-Com-Poop!” You have swam in the pool of artificial intelligence too long. Your mind, eyes, and heart are covered with scales and barnacles. Once those scales become so thick a fungus sets in. This causes the underneath to weep, turn red, and itch. A deep cleansing dip in the common sense pool will ease and may even cure you.
This group scrambling to be in the elitist intelligencia (this includes journalists, Republicans, Democrats and anyone else who struggles to be in the ‘high brow’ society) are infected and it is time for them to be quarantined!
My money, earned the hard way and not printed, will go to Salvation Army and Samaritan’s Purse to help the Japanese people.

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The NYT’s meter starts ticking

Felix Salmon
Mar 10, 2011 16:27 UTC

The NYT’s paywall isn’t live yet, but the meter’s already ticking. Go to the site’s new recommendations page, and you’ll see a sidebar which looks a bit like this:

meter.tiff I’m clearly a heavy user of nytimes.com: I’ve read 155 articles over the past month, according to the system they’ve built at a reported cost of more than $40 million. I’m not at all sure that’s money well spent: my suspicion is that the paywall’s total revenues from the paywall won’t reach that level.

And even at this late date, it seems, the system is doing silly things like make a distinction between “Business,” on the one hand, and “Business Day,” on the other. No, me neither.

As for the Topics, like the wonderfully-named “Blogs and Blogging (Internet),” they take you to barren and unhelpful pages like this one. If the paywall is really a navigation fee, then you’d hope that the NYT would spend a bit more effort making its website in general, and its topic pages in particular, a lot more navigable, with lots of attractive exit points. Instead, there’s nothing — not even a navbar at the top.

It seems to me that the redesigned paywall-focused site — which is feeling decidedly delayed at this point — is still decidedly on the glitchy side. If you’re going to be sending out press releases about your recommendations engine, shouldn’t those recommendations be “Presented by” Thomson Reuters, the launch sponsor, rather than a blank green box?

Still, I’m impressed that my silhouette actually looks a little bit like me. Albeit me on a bad hair day.


You’re not reading enough arts, Salmon.

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How Foursquare improves on coupons

Felix Salmon
Mar 10, 2011 14:05 UTC

There is nothing shameful or embarrassing about saving money, and restaurants wouldn’t pay Groupon lots of money for the privilege of using its service if they didn’t want lots of people to come in and claim a discount. But still, it’s undeniable: there’s a faint whiff of cheap associated with any coupon, to the point at which some restaurants are implementing built-in gratuities to try to stop people from tipping on the discounted amount. And I have friends who are adamant that they’ll never use a groupon or anything like it, for fear of the perceived stigma involved.

Enter Foursquare. The thing I like most about the Foursquare partnership with Amex, as explained by Dan Frommer, is that it’s completely invisible to your server and to your guests — in that respect it’s a bit like iDine, only even easier.

The obvious partner here, of course, is not Amex so much as Groupon itself. You buy your groupon online, and you don’t even need to print it out — the next time you check in to the merchant and pay the full amount for your meal or other service, you automagically find the amount of the refund on your credit card statement.

Technically, this whole system could probably work fine even without Foursquare’s cooperation: so long as you add Groupon as a friend on Foursquare, it’ll be able to see your checkin and take care of the rest of the process itself. But it’s always nice to see a little button come up on Foursquare saying you’ve activated a deal.

Between this and the other new features that Foursquare just announced in time for SXSW, I’m beginning to see how Foursquare could become the vital hyperlocal app. Now we just need them to change the search-results display, so that it shows results in order of distance rather than in order of popularity. That annoys me every time.


Do coupons result in sticky consumer behavior in a system where another coupon is always coming, and for a similar place nearby?
There already are specific discounts for specific consumer purchases. Chase, Bank of America, Visa, any of these might offer an increase to 5% rewards for drug store purchases, gas, etc. Or their online rewards portals might offer an additional 8% for barnes&noble, sears, etc. I like this form of coupon better because it gives me much greater freedom. $5 back on any $100 worth of goods at a supermarket is more valuable (to me) than $10 off a $40 meal at jimmy joe’s bbq shack.

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Felix Salmon
Mar 10, 2011 08:21 UTC

What is the ratio of true statements to false statements in the official Spider-Man announcement? — Spider-Man

Preemie baby drug goes from $15 to $1,500 — MoJo

I love Salman Khan, even if I also have serious pangs of regret that I never had this when I was a kid — TED

Choire and Shah on splitting the check — Awl, ibid

Adam Levitin explains why arguments against the fraudclosure settlement are incoherent — Credit Slips

More pushback against Cassidy — Atrios, Bike Snob, Free Exchange, NYT

Why the future of journalism is entirely bright — Tumblr

David Broder’s remarkable life and career — WaPo

I thoroughly approve of the $10 Felix-the-Cat-opt-out charge — Onion

Tom Vanderbilt delivers the best article ever on car-bike relations — Outside

Pimco’s Treasury holdings drop to zero, cash hits all-time high — Zero Hedge

On decoupling NPR from government funding — Economist

“I mumbled something and backed slowly out of the office, thinking that if I made an abrupt move, he might change his mind” — Trillin

Matt Seaton on the NYT’s mysterious partisanship in the bike-lane wars — Guardian

An Egyptian song for all — Reuters


This important post is one people might not wish to miss. Peeing can be deadly folks… but don’t fret, this is for your safety…

http://www.click2houston.com/news/271372 02/detail.html

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Sleazy for-profit educator of the day, Bridgepoint edition

Felix Salmon
Mar 10, 2011 02:58 UTC

Chris Kirkham has a fantastic story at HuffPo today about Ashford University, a small college in Iowa which was acquired for its accreditation in 2005 and is now the face of the billion-dollar for-profit education company Bridgepoint Education.

I’m reminded a bit of how Chris Flowers is buying banks for their national banking charter, except for that the situation with Bridgepoint is sleazier than anything Flowers could ever dream of doing.

The goal, employees say, is getting “starts”: students who fill out the paperwork for student loans and make it through at least four weeks of their first five-week course. That is the point at which the university is able to keep the student’s federal aid money, regardless of whether they continue their studies. After that, according to the Ashford employees, any form of counseling drastically drops off.

“There were numerous times when I enrolled students and thought, ‘All I’ve got to do is babysit them for four weeks,’” said a former leader in the admissions department, who spoke on the condition that he not be identified because he is still employed at another for-profit university. “I’d be thinking, ‘Come on, this person is clearly not ready to go to school.’ But I’d call you, pump you up, keep you confident for four weeks, and once I knew you completed, you were forgotten. It’s easy when I’m counting the money.” …

According to the Ashford employees, the pressure drives recruiters to enroll students who they know have little chance of success: people who openly say they have no regular access to a computer or the Internet, despite the exclusively online course offerings, and even those who acknowledge they have difficulty reading.

Bridgepoint has among the highest withdrawal rates of any publicly traded school in the industry, according to a Senate report last year. Based on a pool of students examined between 2008 and 2009, more than 80 percent of those in an associate’s degree program had exited within two years of enrollment, and nearly 65 percent of bachelor’s degree students had left the company’s schools in the same timeframe.

Last year, Bridgepoint posted its best year ever: netting income of more than $127 million, almost triple the year before. The company spends about 37 percent of operating costs related to education; the rest goes to marketing, corporate compensation and overhead.

Kirkham gets former recruiters on the record about Bridgepoint’s practices: Kristy Smith recruited one 22-year-old with a learning disability, holding his hand through the first five-week term and making sure he got Cs and Ds before leaving him to his own devices. And Brent Park recruited one woman for an online course who didn’t know how to type in a URL, and who needed an hour of coaching just to fill out the online application.

Kirkham’s report comes on the eve of a Senate committee hearing into Bridgepoint, which with any luck will help convince lawmakers that something drastic needs to be done to fix the broken for-profit education system. Online learning is all well and good. But as a general rule just about anybody enrolling in one of these shops would be better off watching a bunch of Khan Academy videos for free. It’s weird, but the more you pay for an online education, the worse that education seems to become.


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McKinsey’s corrupted culture

Felix Salmon
Mar 10, 2011 02:25 UTC

John Gapper makes a good point: management consultants in general, and McKinsey consultants in particular, have made their entire business out of exploiting the moral grey zone surrounding confidential information.

The reason you hire McKinsey is that its consultants have seen strategic business issues like yours before, and therefore might have developed good insights into how to approach them. But the reason they’re familiar with those issues is that they’ve been given highly confidential information about your competitors. So when you hire McKinsey you’re essentially trying to acquire, for a very high hourly fee, the kind of corporate intelligence that can only be built up through long exposure to highly-sensitive commercial information.

Here’s Gapper on McKinsey:

The accumulation and sharing of privileged knowledge is integral to how it works…

The calculation every client makes is, in the words of Christopher McKenna, a professor at the Oxford university’s Saïd Business School who studies professional services firms, that “consultants will carry information in and information out. The client has to decide which of those flows is worth more.”

Indeed, one of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised “best practices”. The consultant is a broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels.

In this sense, a management consultant is a bit like an art dealer, or anybody else who traffics in valuable information asymmetries. The consultant knows more than the client, when it comes to strategic issues within the industry in question. If the client wants access to that knowledge, he has to open his own kimono to get it, thereby putting the consultant at yet more of an information advantage.

For pretty much Rajat Gupta’s entire career, then, he was trading in information that he obtained in confidence by dint of his position. When it comes to corporate intelligence, management consultants are pretty much unique in this regard: while other professionals like lawyers and accountants certainly encounter a great deal of confidential corporate information, they don’t trade in it in the same way — no one ever feels the need to hire Ernst & Young just because they audit a major competitor. The only profession which might come close to consultants, in this regard, is M&A bankers, and maybe a handful of extremely senior lawyers like Rodge Cohen.

None of this remotely explains or excuses what Gupta is accused of doing, of course. But as Gapper notes, there’s a long history of management consultants violating the spirit of the confidentiality agreements they enter into — he tells the tale of Booz Allen Hamilton’s John Burns taking lots of IBM knowledge with him when he took a job as president of the computer maker’s fiercest rival.

In any case, McKinsey can and should find itself in serious reputational jeopardy here. Gapper concludes his column portentiously, saying that “McKinsey must devoutly hope that there is no third man” in addition to Gupta and Anil Kumar, the McKinsey partner who has already admitted giving confidential information to Raj Rajaratnam.

And, predictably, it now looks as though there is just such a third man after all. Three McKinsey consultants all channeling confidential information to a single hedge-fund manager who wasn’t even a client? That’s not bad apples, it’s a culture of corruption. At this point it’s unimaginable that it wasn’t happening elsewhere as well.


First, FrancineMcKenna is most definitely correct, regarding the concentration of available audit firms, and the consequences both good and bad.

More recently, jwu217′s comments are consistent with my impressions. I worked as a consultant, not quite a “management” consultant, rather, as an engineering consultant for several years, after earning a specialized degree. The era of management consultancy seems to have passed, other than for the big firms like McKinsey, who were the first in the field to begin with.

My recollection of my consulting work was of producing very specifically designed models for our client, under terms of strict confidentiality and non-compete agreements. The models could not be easily adapted for other companies in the same industry anyway. I recall that the group of us, as consultants, were kept sequestered in our own work area, with strictly enforced security protocols. Our access to online data was limited to need-to-know, and the same was true for access to client work areas and interactions. It was rather dreary, difficult work, and once our engagement was completed, I did wonder how well the regular staff were able to maintain our deliverables (production software).

This was utterly different from my later experience in finance, often investment bankers and corporate counsel. I worked with the same people on many deals, with broad access to all sorts of potentially valuable information. But that didn’t mean that fraud and abuse was rampant. The small upside gain of acting unethically wasn’t even worth considering, when balanced the certainty of a good job, done honestly.

Additional research would have been a good idea for the journalist who wrote this post.

Posted by EllieK | Report as abusive

BofA doesn’t believe in treating borrowers fairly

Felix Salmon
Mar 9, 2011 21:38 UTC

Bank of America is setting up a bad bank, which will be run by Terry Laughlin. Roughly half of its 14 million mortgages are going to be carved off and put into the bad bank, in an attempt, according to FBR analyst Paul Miller, “to get investors focus on the good” and as “a way to talk about good things and ignore the bad.” The presentation which Laughlin handed out talks about how his new group will work on loan modifications for delinquent customers: “as borrowers default,” he said, “we’ll evaluate them for a loan modification.”

Essentially BofA is doing two things here. One is to try to sweep its bad loans under the carpet by creating the new Legacy Asset Servicing unit; the other is to step up its pushback against the proposed mortgage-servicing settlement, which quite explicitly does include loan modifications for borrowers who aren’t in default. Check out part II.K.8:

Servicer’s employees shall not instruct, advise or recommend that borrowers go into default in order to qualify for loss mitigation relief.

This is something BofA hates — because it opens the door to underwater borrowers who are making timely payments being able to get a loan modification and thereby reduce the value of the loan. And BofA CEO Brian Moynihan is on the warpath against it, saying that such a system would be unfair to borrowers who don’t get their loans modified.

As Adam Levitin points out, Moynihan’s line of argument is pretty disingenuous. There’s nothing in the proposed settlement which forces BofA or anybody else to do anything unfair: indeed, BofA is encouraged to draw up its own set of standards and then apply them to all of its borrowers in a consistent manner. The real reason that BofA is fighting back is simple: if it behaved according to the settlement’s guidelines, it would lose some of that $35 billion to $40 billion a year that Moynihan reckons it should be able to make going forwards.

I’m pretty sure that no bank in the history of the world has ever made $40 billion in one year, and that no bank ever should, with the unique exception of the Federal Reserve. Bank of America is far too big to fail, and as such it benefits greatly from an implicit government guarantee. The least it can do in return is treat its borrowers fairly.



I’m coming in late to this conversation and you may never read this, but for those who come after, I want to reply to your statement:

“How to undo a big mistake… that’s the core question.”

Like you, we bought a house at the wrong time. We wanted a loan for 30 year fixed, but all the brokers and lenders told us we didn’t qualify (credit ratings just at 700), they convinced us that we would do better with an option ARM at 7.25%, this way we would have an option if we ran into some unforeseen circumstance along the way.

The first lender kept losing our paperwork, so we were relieved when Countrywide came on the scene. The biggest lender in the country wouldn’t cheat us? Right? My only condition was that there be no prepayment penalty and since the man helping us was the General Manager of 2 offices, we felt we could trust him. No problem.

Countrywide preapproved us, but it took longer than they said to get approval. We had to get an extension and three days before closing (on the extension) they produced the paperwork for us to sign…after 5 pm….in a restaurant…with a notary, and no sign of the professionals that wrote the loan.

This was not our 1st home. This was the 4th home we had purchased, We wanted this to be our retirement home, but it had never been like this before. People losing paperwork, not returning calls, contracts with strange small prints and confusing codicils. We had to ask them to explain so many things along the way.

The level of professionalism…and integrity had seriously deteriorated over the years. We were soon to find out just how much.

Their was no notation on the front pages of our mortgage contract as to the amount of our payment with principle and interest. The only thing on the front of the contract was the “option” payment. We were not new to buying a home, we asked about the full principle and interest payment. That is what we were planning on paying.

The notary had to find it for us, buried deep within the 375 page contract. The interest had increased from the time we originally applied for the loan and the time we signed. It was now 7.5% and we had to calculate, at the table, at 7 o’clock at night, three days before closing, if we could truly afford the difference.

We discussed it and we agreed that it would only be about $50 to $75 more per month and we would be okay. My husband was expecting a raise in about two months. It would be a little tighter than we had planned, but it was doable. We planned on getting another loan as soon as we could “qualify” for a 30 year fixed.

Then we saw the 3-year prepayment addendum and I was livid. We immediately got the General Manager on the phone to complain. This was a deal-breaker. This felt like entrapment. He talked to us awhile and asked us to at least agree to one year, because he couldn’t get it through without a prepay and we probably wouldn’t go through the whole process again before a year anyway. “Just sign it, and I will adjust it to a one year prepay.”

We changed the paperwork at the table and wrote his name as the authorization before signing and notarizing. We were reluctant to agree to one year, but it was the eleventh hour and we felt the pressure.

We put 10% down and we underreported our income. We could afford this.

After our 30 day escape clause was up our loan amount increased from 7.5 to 8.5%. Our second increased from 7.75 to 13%, and the trap I feared snapped closed on our dream.

We were ashamed and embarrassed that we could fall for such a trap and we were astounded that the professionals were okay with doing this to people without compulsion. But, hey, at least we weren’t locked in for 3 years, right? We could undo this mistake, right?

Before the year was up, we qualified and were prepared to leave that horrible predatory loan behind and move on to another loan….and if you didn’t guess or see it coming….Countrywide would not release us from the 3 year prepayment penalty.

Our house still had value then, but the additional amount they tacked on increased our liability to 90% and no lender wanted to take that on. I wrote and complained. Countrywide sent us back a copy of our adjusted prepayment penalty (hand-changed to one year) along with a letter telling us we knew what we were signing.

I faxed it back to them circling the changes and the notary mark and they still would not release us. Meanwhile, months passed and our debts increased and the loans we lined up fell by the wayside.

As grownups, who were not hurting financially, at that time, we felt we had recourses. We sought out an attorney and a jury trial. It has been four years and we have yet to see the inside of a court room. In addition the opposing counsel has petitioned the court to remove our evidence and the court has expressed that they are considering complying….even though the paper is a signed notarized part of our contract.

My answer to your question: Does it sound like a good plan to anyone?

My answer is “Yes.” Yes it does. I think that everyone who got a loan from 2006 on, should be able to have a lowered interest rate and a shared proportionate reduction in principle. I do not think that banks should be able to cheat people and get away with it. If we did it we would be penalized into the next century.

I do not think it is right that a bank can cheat people like this, then foreclose on their home and turn around and sell it for about $200,000 less, when if they had just reduced it for the current owner by a fraction of that amount, they would have a grateful customer and future business. They would have lost far less money than they are losing now in legal fees and foreclosed homes and the increase of people who are afraid to purchase anything at this rate.

It would have been good business, and their loss would have been far less than it is going to be now. We have not yet begun to see the extent of this corruption.

http://www.youtube.com/watch?v=kx7HDTDDo pA&feature=player_embedded

Posted by Renoira | Report as abusive