Felix Salmon

How the pros see the fixed-income market

Felix Salmon
Apr 6, 2011 16:18 UTC

Every year, the Loomis Sayles PR team drags its top fund managers down to New York for lunch with the wonkier end of the financial-journalism spectrum: there’s lots of talk of curve-flatteners in a rising interest-rate environment, that kind of thing. The main attraction for me is always David Rolley, the droll and super-smart fund manager on the global fixed-income side of things, and someone who’s always good at making you look at the world in new and interesting ways.

This year’s lunch took place yesterday, and kicked off with Loomis vice chairman Dan Fuss coming up with a very interesting macroeconomic point. Right now, he said, about 56% of Americans over the age of 16 are gainfully employed. If that percentage were to rise to 64%, Fuss reckons, then the budget deficit disappears entirely. We’re not going to get there. But theoretically it’s possible, if the unemployment rate comes down and if people retire later, as is happening in Japan. And more generally it’s an important reminder that unemployment is a fiscal issue, and that anybody who wants to take the budget deficit seriously should put a lot of effort into increasing the number of Americans with jobs.

Rolley then gave a short talk about QE2 and its effects, which he reckons have been large and global. It’s “the most important single factor that explains why markets are where they are now”, he said. And it was always intended to move markets: the idea wasn’t to move long-term interest rates, said Rolley, but rather to create jobs by sending stocks up and the dollar down. That way companies can boost employment through trade revenues, rather than from money made by selling goods and services to overstretched US consumers.

The result, said Rolley, is that “inflation tolerance globally is being recalibrated”: the Fed has succeeded in giving markets a bit more of an inflation appetite than they’ve had in recent years.

That was the good news. As for the biggest risk to the system, Rolley said that a huge amount of the liquidity pumped into global assets by QE2 was finding its way, in one form or another, into leveraged bets that China will continue to grow at roughly a 9% pace. Which is a reasonable assumption — nearly all forecasters believe it, and Rolley’s no exception. But in the unlikely event that China doesn’t continue to grow that fast, there could be serious repercussions, with a flight out of risk assets and into safer areas like Treasury bonds and JGBs.

Right now almost no one is betting that long rates in the US and Japan are going to go down rather than up, and as a result there’s a technical bias for government bond markets to rally. At the same time, however, as Dan Fuss pointed out, long-term rates are going to revert to the mean sooner or later, which means a significant rise in yields which could happen quite suddenly and dramatically.

All of which is very good reason for individual investors to shy away from investing in the bond market directly, and instead pick a big and sophisticated bond fund. Managing risks in this market is really hard at the best of times, and pretty much impossible if you have less than a few billion dollars to play with.

And one last thought from Rolley, who said that he was wary of single-name credit default swaps because managing the counterparty risk was so onerous. If such swaps became centrally cleared, he said, he’d write a lot more of them. And what’s more, such a move would be good for the banks as well, since his counterparty exposure to them would fall significantly, freeing him up to buy things like Coco bonds from them. I doubt many banks in the CDS market would buy that argument, though.


Yeah, I also remember that nearly all forecasters were predicting a slowdown not a crash in real estate. I wonder who investors will blame when they realise that all their money has been stolen by communist party insiders – rhetorical question, we all know who is to blame when people make stupid investment decisions…..

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Lessons from a retracted editorial

Felix Salmon
Apr 6, 2011 14:57 UTC

Lazar Greenfield, the former editor of Surgery News, would have been well advised to confer with Larry Summers before deciding to publish his editorial on semen in the trade mag’s February edition. Timed to coincide with Valentine’s Day, the piece reads like a quirky blog post. It starts with the effects of a starch diet on fruit flies, moves quickly on to rotifers (microscopic wheel animals), and finally moves on to humans:

As far as humans are concerned, you may think you know all about sexual signals, but you’d be surprised by new findings. It’s been known since the 1990s that heterosexual women living together synchronize their menstrual cycles because of pheromones, but when a study of lesbians showed that they do not synchronize, the researchers suspected that semen played a role. In fact, they found ingredients in semen that include mood enhancers like estrone, cortisol, prolactin, oxytocin, and serotonin; a sleep enhancer, melatonin; and of course, sperm, which makes up only 1%-5%. Delivering these compounds into the richly vascularized vagina also turns out to have major salutary effects for the recipient. Female college students having unprotected sex were significantly less depressed than were those whose partners used condoms (Arch. Sex. Behav. 2002;31:289-93). Their better moods were not just a feature of promiscuity, because women using condoms were just as depressed as those practicing total abstinence. The benefits of semen contact also were seen in fewer suicide attempts and better performance on cognition tests.

So there’s a deeper bond between men and women than St. Valentine would have suspected, and now we know there’s a better gift for that day than chocolates.

These “wacky musings,” in the words of Retraction Watch’s Ivan Oransky Adam Marcus, have resulted in Greenfield’s resignation from his post as editor of the magazine; his appointment as incoming president of the American College of Surgeons being put under review; and the entire February issue of the magazine being removed from the web while the ACS “prepares the issue” for reposting — presumably sans the offending editorial.

There are three lessons here. Firstly, the more important you are, the less leeway you have to do something silly or lighthearted — or, for that matter, to make mistakes. Secondly, if something is going to appear under the imprimatur of a venerable institution like the World Bank or the American College of Surgeons, it should be written in a tone of high seriousness, without a hint of irony or playfulness. And finally, even surgeons turn out to be rather more squeamish when it comes to the mechanisms of sexual reproduction than you might imagine.

The flipside of all this is that science blogs will continue to gain in popularity, and more generally that large and serious organizations are always going to find it difficult to communicate in a human manner, with voice and humor. Which is ultimately a shame, since in principle most of these organizations do actually want to communicate effectively. They’re just too conservative to do so.

Update: Figleaf, in the comments, suggests that the issue might be with the quality of the research being cited, rather than the tone of the editorial. It does seem reasonable to expect Surgery News to hold scientific papers to a higher standard than the titillated mainstream press.


Another problem might be, that other media might quote Surgery News, obviously without including the caveats a scientist would know about. It’s the sort of titillating nonsense newspapers love to print, and I can imagine they don’t want their name attached to a frivolous bit of speculation.

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Felix Salmon
Apr 6, 2011 04:53 UTC

Krugman vs Weisberg on Paul Ryan’s budget ideas — NYT, Slate

Why are CDs 74 minutes long? ‘cos that’s the length of the 1951 Furtwängler/Bayreuther Festspiele’s Beethoven 9 — MR

WSJ gets its hands on an important Berkshire Hathaway memo, then infuriatingly refuses to publish it — WSJ (Update: They’ve put it up now.)

NYT gets its hands on an important Nuclear Regulatory Commission memo, then infuriatingly refuses to publish it — NYT

“This article has been corrected. The car statistics initially gave the 0-62 mph time as 3.7 inches instead of 3.7 seconds.” — WSJ

Serif Gotham is not a change I can believe in. — Hoefler & Frere-Jones

Wherein @moorehn starts her new blog with an admonition: “Don’t call it a blog” — Marketplace



No — they are in fact of strong rhetorical skills, but poor logical skills.


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The tragedy of Milwaukee’s bus service

Felix Salmon
Apr 6, 2011 04:33 UTC

You’re probably not going to read all 3,700 words of William Alden’s huge article about the vicious financial circle in Milwaukee, Wisconsin, where local-government cutbacks are hitting the bus service, with the knock-on effect that a lot of jobs are literally out of reach for people without cars. But it’s a great article, and a fine example of the kind of in-depth original reporting being done by HuffPo.

Alden’s story centers on Petty Schulz, a 53-year-old woman out of work for almost two years who doesn’t own a car. That was fine during the halcyon days of, say, 1999, when the American Public Transportation Association bestowed its Outstanding Achievement Award on Milwaukee County transit. But already the seeds of disaster were being sown: in 2000, when the county Board of Supervisors increased the pension multiplier which determines the percentage of final salary that an employee gets upon retirement, it made a contribution of just $600,000 to the pension fund — down from over $20 million five years earlier.

Today, the cutbacks in bus service have been so severe that even a job at the Milwaukee County Transit System required that Schulz have a car. And the cutbacks don’t just prevent the unemployed from getting new jobs, either: they also force the employed to give up good jobs and become unemployed when they can no longer make it to work.

Of course, the fewer people with work in Milwaukee, the less the city earns in taxes, the more depressed the local economy becomes, and the more the government has to cut back. This is why you can’t cut your way to growth. In the meantime, locals are left to calculate whether they can possibly afford a $25 cab ride each way to get to and from a job which pays $13 per hour. And to wonder how on earth their city can get out of its current predicament.


I’m curious as to how they make the decision to cut service rather than raise fares. If it affects people’s ability to get to work, they would pay higher fares; while I’m sure they would complain that they “can’t afford” them, they would find them quite affordable compared to this outcome.

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Charlie Munger’s BYD conflicts

Felix Salmon
Apr 5, 2011 21:37 UTC

In April 2009, Marc Gunther wrote a glowing cover story for Fortune profiling hot Chinese automaker BYD, the recipient of hundreds of millions of dollars of Berkshire Hathaway’s money. The headline was “Warren Buffett takes charge” (charge, electric cars, geddit?), and two things were abundantly clear. The first is that Berkshire’s stake had catapulted BYD into the international spotlight and given the company invaluable credibility. And the second is that Charlie Munger was BYD’s biggest cheerleader, both before and after the stake was bought.

Buffett’s friend and longtime partner in Berkshire Hathaway, Charlie Munger, suggested early last year that they invest in BYD…

Buffett, who is 78, was intrigued by Munger’s description of the entrepreneur behind BYD, a man named Wang Chuan-Fu, whom he had met through a mutual friend. “This guy,” Munger tells Fortune, “is a combination of Thomas Edison and Jack Welch – something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.”

Coming from Munger, that meant a lot. Munger, the 85-year-old vice chairman of Berkshire Hathaway, is a curmudgeon who frowns on most investment ideas. “When I call Charlie with an idea,” Buffett tells me, “and he says, ‘That is really a dumb idea,’ that means we should put 100% of our net worth into it. If he says, ‘That is the dumbest thing I’ve ever heard,’ then you should put 50% of your net worth into it. Only if he says, ‘I’m going to have you committed,’ does it mean he really doesn’t like the idea.” …

In acquiring a stake in BYD, Buffett broke a couple of his own rules. “I don’t know a thing about cellphones or batteries,” he admits. “And I don’t know how cars work.” But, he adds, “Charlie Munger and Dave Sokol are smart guys, and they do understand it.”

Nowhere in the article was there any indication that Munger owned a large stake in BYD before bringing it to Buffett.* And all over the article is the idea that Buffett bought his stake in BYD precisely because Munger was such a strong proponent of the company and its CEO.

But now, in the wake of l’affaire Sokol, Munger’s changing his story:

Munger, 87, said his family invested with money manager Li Lu in BYD through a partnership that has a stake of about 3 percent and that he urged Sokol, then the leader of Berkshire’s energy business, to scout the business.

“I had Dave look at it, because I knew I couldn’t talk Warren into buying into the damn thing by myself,” Munger said…

Munger said his family holds a “little more” than half of the fund with the BYD investment, and that he didn’t participate in Berkshire’s discussions on its deal.

“I recused myself,” Munger said. “But there’s no question about it, that I caused Dave’s original interest.”

What seems clear here is that Munger wanted to “talk Warren into buying into the damn thing”; that he got Sokol to visit BYD with that very end in mind; that Buffett would never have bought his stake in BYD without Munger’s active participation; and that in the wake of Berkshire’s investment, Munger’s stake skyrocketed in value.

Munger’s recusal, on the other hand, seems pretty weak tea. As BYD’s chief cheerleader and Warren Buffett’s right-hand man, it’s pretty much impossible to see how he could effectively recuse himself from discussions: his input had already been made and clearly understood by the time that any formal investment decision took place.

Which brings me back to the question of why Munger feels the need to trade for his personal account in the first place. Why create an unnecessary opportunity for what seems in hindsight to have been a huge conflict of interest? And why was Munger’s personal stake in BYD never disclosed until Sokol blurted it out on CNBC Thursday? It certainly looks as though he felt that he had something to hide.

*Update: Fortune’s Gunther, in the comments, says that there was a sidebar in the print issue of the magazine which never made it online. And that sidebar said this:

Warren Buffet may be BYD’s most famous investor, but Li Lu, whose company LL Investment Partners owns 2% of BYD, has quite a story of his own. Born in China in 1966, Li Lu was raised by foster parents after his were forced into labor camps during the Cultural Revolution. As a 10-year-old, he barely survived an earthquake that killed 250,000 in the city of Tangshan. Then things got really interesting: Li Lu became a leader of the pro-democracy movement that organized protests in Tiananmen Square in 1989, appeared on China’s Twenty-One Most-Wanted List, and escaped to New York, where he was embraced by the human-rights community and earned three degrees from Columbia. After stints at Allen & Co. and DLJ, he met Charlie Munger through friends and started his own investment fund; Munger, the Berkshire vice chairman, is his largest investor. Li Lu, who is not allowed to travel freely in China, politely declined to be interviewed by Fortune. When asked about Li Lu’s story, BYD CEO Wang Chuan-Fu says: “That’s past history. Today, Mr. Li and I share the belief that the best way to help China move forward is to make BYD a world-class company.”

A close reading here would seem to show that Munger did have a stake in BYD, via LL Investment Partners — although it’s far from clear, and certainly there’s no indication when Munger invested. But this is even more subtle than Sokol’s passing mention to Buffett that he owned shares in Lubrizol.

Update 2: The WSJ’s Susan Pulliam had more detail in July 2010, saying that Munger invested some $50 million with Li Lu in early 2004, who rapidly invested a lot of that money in BYD. She continues:

In 2008, Mr. Munger persuaded Mr. Sokol to investigate BYD for Berkshire as well. Mr. Sokol went to China and when he returned, he and Mr. Munger convinced Mr. Buffett to load up on BYD.

There’s no mention of Munger recusing himself from that decision in any meaningful way; the WSJ now says that Berkshire policies bar “trading in shares of companies in which Berkshire might invest”, without publishing the memo, giving the exact language, or saying whether Munger is covered by it.


A pretty significant difference in the facts relating Munger’s investment in BYD is that he had invested in BYD “for years” before mentioning it as a potential acquisition for Berkshire and then recused himself from Berkshire’s consideration. At the time Munger invested in BYD, it likely wasn’t large enough to be a feasible investment for Berkshire Hathaway.

http://www.bloomberg.com/news/2011-04-05  /munger-says-he-told-buffett-of-byd-sta ke-stayed-out-of-berkshire-s-talks.html

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The unexpected T-bill rally

Felix Salmon
Apr 5, 2011 14:52 UTC

With time rapidly running out before the debt ceiling is reached, and doom-mongering rampant about the disastrous possible consequences of the US Treasury being unable to repay its debts, just look what’s happened to the market in short-term Treasury bills!

The lack of supply was so severe on Monday, and some investors so desperate for Treasurys, that they accepted negative yields. That is something that has rarely been seen since the financial crisis.

In other words, the market simply isn’t worried about short-term US debt at all. Instead, Treasuries are rallying on what the FT describes as “the collapse of a profitable arbitrage opportunity that financial groups have used to rebuild their balance sheets after the financial crisis.”

Since late 2008 banks have made about $200 million by borrowing very cheaply in the repo markets and investing the proceeds at the Fed. But now the FDIC is levying its insurance fee on repo liabilities as well as on deposits — and that fee means the free-money machine has printed its last greenback for the banks.

With the banks no longer borrowing money in the repo markets, the people on the other side of the trade — lenders to the repo market, which are often money-market funds — have found themselves with nowhere to safely park their short-term cash. Hence the rally in Treasury bonds: it’s a product of increased demand (from money-market funds) combined with decreased supply (as the Treasury tries to borrow more at the long end and less at the short end of the curve, and as QE2 mops up much of what is being issued).

All the same, I can promise you that if short-term Treasury yields were going up rather than down, the financial press would be talking incessantly about the debt ceiling, even if the reasons were entirely technical, as they are here. So this is a good reminder that moves in the Treasury market are generally not a referendum on government policy or Congressional grandstanding. Even when they do fit the daily news narrative.


Agreed with DanHess, rising interest rates push investors to the short end. I’ve been making that conscious decision myself, not particularly motivated by fear of default (I hold some long-duration TIPS) but by fear of having inflation eat my principal.

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The case of Paul Brodeur vs the NYPL

Felix Salmon
Apr 5, 2011 14:04 UTC

I’m intrigued by the back-and-forth between former New Yorker writer Paul Brodeur, on the one hand, and the New York Public Library, on the other.

Brodeur’s original article for the Authors Guild bulletin can be found here. He’s upset at the NYPL, because 18 years after he donated his papers to the library, the library has now decided it wants to return about 80% of the material to him — or otherwise dispose of it. Brodeur would rather see the collection remain intact, but that’s not an option: the NYPL refuses to return the 20% of his material that it wants to keep.

The NYPL’s official response is here:

The collection includes the primary source material that, in the estimation of our curatorial and archival staff, will be of greatest interest to researchers and scholars studying Brodeur’s career and his work. This includes most of Mr. Brodeur’s manuscripts, notes, and correspondence. The rest of the material consists largely of secondary source items, including copies of and from magazines and newspapers, that are available elsewhere; these are the items the Library decided could be returned to Mr. Brodeur. In doing so it was following the standards regarded by librarians and archivists as the best professional practices.

Brodeur feels misled, and has replied to the NYPL quoting emails from the curator who originally accepted his papers, saying that she “considered them fully processed.” And Angela Montefinise, the PR head at the NYPL, also sent me this statement:

“The picture Mr. Brodeur paints of The New York Public Library in his article is inaccurate. Numerous important details were left out, including several unreturned attempts by our President Paul LeClerc to meet with Mr. Brodeur. We processed this collection in accordance with the best professional standards and made necessary and proper decisions in the best interest of the Library and its users. Our deed of gift, which Mr. Brodeur signed, was clear.”

Clearly this spat isn’t going to get resolved any time soon. Brodeur, by his own admission, can be hard to deal with:

That same day, I sent an e-mail to LeClerc thanking him for his invitation and telling him I would be pleased to meet with him either on Cape Cod if he was planning to visit during the summer or when I next came down to New York City. He replied that he was not planning to visit the Cape but would make a spe­cial trip if I so desired. During the next few days, I considered LeClerc’s offer in two lights. On the one hand, I had no doubt of its sincerity. On the other hand, it seemed strange to me that high officials-in this case, LeClerc and Steele-of an institution es­teemed throughout the world as a repository for the written word should be so loathe to use it, and would seek to resolve the issue at hand through talk and con­versation instead. For this reason, I decided to pursue the matter the way it had begun-in the epistolary form.

And the fact is that although Brodeur’s full papers have indeed been sitting in the library for the past 18 years or so, they were never fully catalogued and were therefore to all intents and purposes useless. There’s no point in a library storing a writer’s papers if no one knows that they’re there, or can find any of their contents. Much better to have the best 20% of a collection fully indexed than to have 100% of it collecting dust in 300 boxes.

But equally I have a lot of sympathy with Brodeur, here — he thought he had donated all of his papers to the NYPL, only to find most of them being rejected. Decades of work were in those 300 boxes — work which everybody at the NYPL claims to hold in the highest regard — and now the collection will be torn apart forever.

A huge part of the difference in opinion between Brodeur and the NYPL comes down, I think, to the distinction I like to make between reading and writing in journalism. Brodeur’s an old-school investigative reporter, who spent 20 years (!) investigating the asbestos health hazard and its cover-up by the asbestos industry. Most of those years weren’t spent in a garrett writing: they were spent out in the field, reading and researching and reporting. Brodeur’s 300-box archive was a record of that work, and could have been an extremely valuable resource for anybody wanting an in-depth look at asbestos.

From Brodeur’s perspective, he’s a reader as much as a writer, and his work aggregating and curating a huge amount of material on asbestos and the like is a central part of what one might pompously call his praxis. From the NYPL’s perspective, on the other hand, the value in his archive lies in his “manuscripts, notes, and correspondence” — the stuff that he wrote. The huge amount of work that went in to putting together an archive of asbestos-related material from other sources is simply not particularly important: if Brodeur photocopied an obscure newspaper article, for instance, then that doesn’t have value for the NYPL so long as that newspaper article is available somewhere else in the library, or even in some other library.

But finding that article is really hard. Brodeur put a lot of work into doing so, and if the article is removed from Brodeur’s asbestos collection, there’s a good chance that never again will anybody interested in asbestos ever find or read it. In indexing Brodeur’s files, the NYPL did not catalogue all the secondary sources that Brodeur photocopied: it didn’t replace that newspaper clipping with a detailed reference to the newspaper article in question. Instead, it simply decided to discard it altogether.

The NYPL is treating Brodeur as it would an imaginative novelist, which seems to me to be something of a category error. All writers are not the same, and if you’re going to go to the trouble of archiving a journalist’s work, you should take the subject matter of the journalism seriously and also preserve the record of how that writer wrote, on top of what that writer wrote.

If the NYPL is right that junking journalistic research constitutes “best professional practice” in the world of libraries, then maybe it’s time to revisit those standards. I do appreciate that there are always space constraints. But Brodeur believes — with good reason — that some other library would have found the space to house his archive in full. If the NYPL didn’t intend to do that in 1992, it should have told him so explicitly. And if it’s changed its mind on such matters, as “best professional practices” have evolved over the years, it should be a bit more up-front and apologetic about that fact.

Update: Brodeur emails to say that “you are correct in surmising that the value of my collection of papers resides in that part of it–no doubt the part NYPL culled–which shows my methods as an investigative reporter. This is why I wish now that I had donated the collection to a School of Journalism.”

Update 2, 2/12/2014: A happy ending! The NYPL has now transferred the entire Brodeur collection to the Howard Gotlieb Archival Research Center at Boston University.


This article fails to mention the declarations of Mimi Bowling, former curator of manuscripts at NYPL, that the collection was fully processed years earlier. NYPL executives have disputed her claims and according to Mr. Brodeur have even attempted to defame her.

I find it hard to believe that a curator of such stature would “lie” about a collection. If it was indeed processed, then what right does the library have to edit the content years later?

So many concerns are raised here. There must be a declaration of why the content was thrown out and by whom. Remaining faithful to the provenance of a collection is the reason archives are invaluable resources.

Democratic information retrieval requires those who combat against document tampering whether its for space or for some sinister reason.

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Felix Salmon
Apr 5, 2011 04:57 UTC

In which I talk to Chrystia Freeland about what Bob Zoellick should do in the middle east — YouTube

Libyan Hipster: The Williamsburg Warrior — Seb Meyer

Disturbing eyewitness account of a bike arrest in NY — Eric Martin

Hilarious write-up of Gorbachev’s glitzy and super-creepy 80th birthday bash by Miram Elder — Atlantic Wire

Carver Federal Savings on the brink — Crain’s NY

Scalia, in a dress shirt, with an unknotted bowtie hanging around his neck, in a 10am car crash — WaPo

That’s no traffic snarl-up! It’s a “strangely beautiful confluence of auto lights”! — NYP

Best blog post of the weekend from Libya (and much the funniest) — Revolutionology

Nasdaq’s clever stupid bid for NYSE

Felix Salmon
Apr 4, 2011 19:56 UTC

In the immortal words of David St Hubbins, it’s such a fine line between stupid and clever, and Nasdaq’s Robert Greifeld is walking that very line with his $11.3 billion bid, with ICE, for NYSE Euronext.

Why is the bid stupid? For one thing, it will be very hard to get past antitrust regulators. Even in a world where it looks as though AT&T is going to be allowed to buy T-Mobile USA, regulators are likely to look askance at a single exchange controlling substantially the entire market in US stock listings. And if Greifeld is denied his merger, the setback will be enormous. On top of that, as Antony Currie notes, the bid dilutes the Nasdaq’s current shareholders, and involves taking on a lot more debt to boot.

Aaron Elstein adds a few more reasons to the mix today. For one thing, there’s the touchy subject of the NYSE trading floor, which has stubbornly survived a series of CEOs philosophically inclined to abolish it. Greifeld seems to be doomed to be the latest name on that list: an electronic-trading enthusiast who’s lumbered with an enormous building on the corner of Wall and Broad for the sake of a huge trading floor he neither wants nor needs.

Greifeld’s also, of course, getting the commoditized, low-margin part of the NYSE Euronext business: the stock exchanges. The really profitable bit, the derivatives exchanges, is going to ICE. Here’s Elstein:

The stock exchange business, simply put, is lousy stuff these days. Profits have been squeezed for years, due to technological and competitive pressures, and the reason NYSE wanted to merge with Deutsche Börse in the first place was to turbo-boost its options-trading business.

And politically it’s far from clear that a Nasdaq takeover of NYSE is significantly better than a German takeover. Deutsche Börse promises $400 million in synergies, largely in Europe, while Nasdaq sees $610 million — and for “synergies”, here, read “layoffs”: Elstein thinks that a good 25% of the combined US employees of Nasdaq and NYSE could end up losing their jobs.

But in the final analysis, Greifeld had no choice here. Even a bad merger with the NYSE is better than being left out in the cold, a small, low-margin, marginalized exchange in a world of giants. His best-case outcome now is to become a large, low-margin utility — and that’s not a bad business to be in. Because the only thing dumber than overpaying for an acquisition is losing your relevance and market power altogether.


You need to US Equities exchanges from other businesses.

Maybe the former are truly becoming “large, low-margin utilities” but if you are going to be the leader in such, is it bad? As a hypothetical shareholder, why is this so obviously, unacceptably, worse than having the CEO undertake (your words) “bad mergers”. It’s not _me_ that gets invited to White House dinners after all – the glamor does not pay my retirement – so why do I care? US equity exchanges may or may not be an interesting business, a profitable business, but if things turn out well it’s clearly NASDAQ in the lead at this point. Why is it rational for a shareholder to ask NASDAQ to risk it all for (media?) prominence in other areas?

With respect to the “world of giants” claim: NYSE is dying in the equities business and it’s unclear how that could change. To fix NYSE would be to gut it from to bottom while somehow retaining – its only live equity-related asset – the brand equity and its consequent listings … but this would be hugely expensive. You comment around the status of the NYSE trading floor shows you have some recognition of this. And there are no other likely U.S. equity exchange giants beyond this zombie and NASDAQ. Yay, competition! :-)

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