Felix Salmon

Ben Stein Watch, DSK edition

Felix Salmon
May 17, 2011 18:35 UTC

Without further ado, the top ten lines from Ben Stein’s article on Dominique Strauss-Kahn:

  1. If he is such a womanizer and violent guy with women, why didn’t he ever get charged until now?
  2. This is a case about the hatred of the have-nots for the haves, and that’s what it’s all about.
  3. So far, he’s innocent, and he’s being treated shamefully. If he’s found guilty, there will be plenty of time to criticize him.
  4. Can anyone tell me any economists who have been convicted of violent sex crimes?
  5. Maybe Mr. Strauss-Kahn is guilty but if so, he is one of a kind, and criminals are not usually one of a kind.
  6. He is one of the most recognizable people on the planet. Did he really have to be put in Riker’s Island?
  7. A man pays $3,000 a night for a hotel room? He’s got to be guilty of something. Bring out the guillotine.
  8. Was Riker’s Island really the place to put him on the allegations of one human being? Hadn’t he earned slightly better treatment than that?
  9. Can anyone tell me of any heads of nonprofit international economic entities who have ever been charged and convicted of violent sexual crimes?
  10. People accuse other people of crimes all of the time. What do we know about the complainant besides that she is a hotel maid?

I’m amazed how many of even the people criticizing Stein have overlooked these two Neanderthal statements:

“The prosecutors say that Mr. Strauss-Kahn “forced” the complainant to have oral and other sex with him. How? Did he have a gun? Did he have a knife?”

“if he was so intimidating, why did she immediately feel un-intimidated enough to alert the authorities as to her story?”

Has this prominent journalist read ANYTHING about rape in the last few decades?

Posted by BrettTonaille | Report as abusive

How will the new IMF head be chosen?

Felix Salmon
May 17, 2011 17:54 UTC

It takes Mohamed El-Erian until the very last paragraph of his FT op-ed to rule himself out of the running for managing director of the IMF: “I will not be part of this process,” he says, adding that “I already have a great job, here in California.”

But it’s clear what process he wants:

It is therefore critical that, in the coming weeks, the IMF Executive Board finalise and publicise a process that would be used, should Mr. Strauss-Kahn be forced to resign. Specifically, the post of Managing Director should be open to all nationalities, with candidates assessed on the basis of transparent job qualifications.

It should also involve an internationally balanced committee to evaluate applicants and put forward 2-3 finalists for Executive Board consideration, and the final choice should emerge from a fair vote of the Board.

The first problem with this is that Strauss-Kahn will and should resign much sooner than that. But that problem isn’t insurmountable: he should just say that Lipsky is the new interim managing director, and that one of Lipsky’s main jobs will be to put together a transparent, qualifications-based process for choosing his permanent successor.

More generally, the international community can no more ignore a candidate’s nationality when it comes to running the IMF than can FIFA when it comes to choosing a referee for the World Cup final. Since it’s the board and shareholders who are going to be choosing the IMF’s next managing director, it’s the board and shareholders who are going to be nominating candidates. And when a country nominates a candidate, that candidate is always going to be considered a partisan of that country.

Which is the main reason, in fact, why Christine Lagarde might not end up getting the job. Taimur Ahmad, the editor of Emerging Markets — the very magazine which helped cement Lagarde’s status as front-runner back in April — has an interesting theory on this front. Essentially, Lagarde is Sarkozy’s finance minister, and while she might make sense as IMF managing director with DSK as president, it seems a bit much to have her at the IMF when Sarkozy has a real chance of retaining the presidency.

If it’s not Lagarde, then, who will emerge as the consensus candidate of the EU? Lorenzo Bini Smaghi? It’s all, still, very murky.


lagarde was put under investigation recently,
not sure if this is well known outside france.

http://www.guardian.co.uk/world/2011/may  /11/christine-lagarde-invetigation-bern ard-tapie

Posted by -jswift | Report as abusive

The big, and little, mortgage-fraud news

Felix Salmon
May 17, 2011 14:30 UTC

Shahien Nasiripour had a very important scoop yesterday — a set of confidential federal audits has found a pattern of mortgage fraud at the nation’s five largest mortgage companies. The victim? Uncle Sam. The findings have been passed to the Justice department, which could prosecute the banks under the False Claims Act, which Shahien describes as “a Civil War-era law crafted as a weapon against firms that swindle the government”.

Shahien also brings us up to speed on where negotiations are with between the banks and the federal government:

The five giant mortgage servicers, which collectively handle about three of every five home loans, offered during a contentious round of negotiations last Tuesday to pay $5 billion to set up a fund to help distressed borrowers and settle the allegations.

That offer — also floated by the Office of the Comptroller of the Currency in February — was deemed much too low by state and federal officials. Associate U.S. Attorney General Tom Perrelli, who has been leading the talks, last week threatened to show the banks the confidential audits so the firms knew the government side was not “playing around,” one official involved in the negotiations said. He ultimately did not follow through, persuaded that the reports ought to remain confidential, sources said.

This is big news, so it’s hardly a surprise to see the mortgage-fraud story splashed across the front page of today’s NYT. Except, Gretchen Morgenson’s piece barely mentions the federal investigation. Instead, she concentrates on a much less important piece of news: that New York AG Eric Schneiderman has started asking much the same questions of Wall Street banks that his predecessor Andrew Cuomo was asking earlier on in the financial crisis. Morgenson also fails to talk about the one possible reason the story might be important: that it could mark a break between Schneiderman and the other AGs, and thereby derail that settlement.

And to make matters worse, the NYT put a stunningly stupid headline on the story: “New York Investigates Banks’ Role in Fiscal Crisis”. What fiscal crisis? New York State’s? The US fiscal crisis? Is there even a fiscal crisis? The NYT doesn’t say — because in fact the story has nothing to do with any fiscal crisis at all. What the paper means is the financial crisis, or just the crisis, but presumably on the grounds that “financial” didn’t fit, some front-page editor decided that “fiscal” was a synonym. Which of course it isn’t.

It’s depressing to see the NYT and the WSJ give much bigger play to a small story hand-delivered to them by Schneiderman’s office than they do to the important story broken by HuffPo, which they completely ignore. It’s the downside of journalistic competitiveness: if someone else got the story first, the NYT and WSJ aren’t interested in it, no matter how newsworthy it might be. And of course they also probably have a strong desire to refuse to admit that HuffPo ever beats them on anything.

But Morgenson’s story appears right below the famous box saying “All the News That’s Fit to Print”. There’s news out there, broken by HuffPo, which is more than fit to print. And then there’s Morgenson’s story, all of which, after the first three paragraphs, is a rehashing of stuff we already know. If the NYT really wanted to do the best by its readers, it would tell them about the big news, as well as Morgenson’s non-exclusive scooplet.

Update: After this post appeared, the NYT changed its headline from “Fiscal” to “Financial”.


Either Huffpo or the NYT lifted part of a story from the other last night. In the oh-so-important story about Schwarzenegger and Shriver, the following paragraph appears on both websites:

“Shriver, 55, maintained her own identity when her husband entered politics, though she gave up her job at NBC. Their union was often tested in Sacramento, where the former action star contended with seven years of legislative gridlock, a budget crisis and lingering questions about his fidelity.”

http://www.nytimes.com/aponline/2011/05/ 17/arts/AP-US-Schwarzenegger-Shriver-Sep aration.html?_r=2&pagewanted=2&hp

http://www.huffingtonpost.com/2011/05/17  /arnold-schwarzenegger-fathered_n_86286 7.html

The NYT article is one long piece but the Huffpo blogger broke up the same information into several different stories. Whoever lifted that paragraph did manage to rewrite the rest of the story in their own words.

The children tweeting:
http://www.huffingtonpost.com/2011/05/17  /arnold-schwarzenegger-lov_n_863289.htm l

Maria Shriver responds:
http://www.huffingtonpost.com/2011/05/17  /maria-shriver-responds-to_n_863098.htm l

Posted by coralinemae | Report as abusive


Felix Salmon
May 17, 2011 04:46 UTC

BHL+DSK=BFF — TDB (original)

Confidential Federal Audits Accuse Five Biggest Mortgage Firms Of Defrauding Taxpayers — HuffPo

“Music for Dieter Rams” is a new album made entirely from the sounds of a Braun AB-30 alarm clock — Bandcamp

DSK gets the Taiwanese animation treatment — YouTube

I need to get out of the office and into a coffee shop — Atlantic

“The defendant engaged in oral sexual conduct and anal sexual conduct by forcible compulsion” — TBI

Is Portfolio Theory Harming Your Portfolio? — SSRN

As US Reaches Debt Limit, Geithner Implements Additional Extraordinary Measures — Treasury


BHL on DSK: In which a hyphenated-first-name-bearing philosopher inveighs against those he perceives to be unjustly vilifying his hyphenated-last-name-bearing economist friend; a veritably *double-barreled* invective.

Posted by TriffinParadox | Report as abusive

Felix TV: The next head of the IMF

Felix Salmon
May 17, 2011 02:43 UTC

Most of this video is reasonably serious: I genuinely do think that Christine Lagarde is going to be the next managing director of the IMF. And it probably won’t take long before she gets the job, either.

At the end, I throw out a very left-field name which almost nobody outside the world of sovereign-debt geeks has ever heard of. But there’s a serious point there: the single biggest job of the IMF managing director is going to be navigating and architecting a round of pretty much unprecedented sovereign-debt restructuring deals. Can Lagarde do that? I don’t know that she can. But there’s one man who undoubtedly can.


Well, Lagarde is also a former lawyer – so should help her, should she want and get the job. Her English is impeccable and she’s very well respected. And the IMF can of course hire Cleary and others to advise on the technical/legal aspects – the head of the IMF though needs to be able to hang with world leaders on an equal footing – that clearly reduces the pool of candidates. And at this particularly moment, my guess is that it makes sense for a European to get the job – but that’s not to say that an Asian one wouldn’t be helpful too as much of the rebalancing of the global economy will depend on how Asia and of course India/China manage their economy over the next few years. My sense is that having a European at the IMF might help on the EZ sovereign situation – but in global terms (and despite the risk of contagion) these are fairly small matters compared to the effect of addressing global imbalances…

Posted by fxtrader14 | Report as abusive

Chart of the day: When emerging markets trade through the G7

Felix Salmon
May 16, 2011 21:04 UTC


Thanks to Mohamed El-Erian for pointing this out in his latest Secular Outlook: the market risk spread on advanced economies now exceeds that on emerging economies.

Here’s Pimco’s explanation for what we’re seeing in this chart:

The difference in spreads shows the 5 year Markit CDX.EM.15 index minus the 5 year Markit iTraxx SovX G7 Index Spread. A positive number implies that Emerging Markets sovereign spreads are greater than Advanced Economy sovereign spreads. A negative number implies that Emerging Markets sovereign spreads are less than Advanced Economy sovereign spreads and therefore, the market implied credit risk for EM is lower when the spread is negative.

This is a very big deal, because the names in the EM.15 index are not exactly paragons of creditworthiness. Here’s the list: it starts with Argentina and Venezuela, and goes on from there, including countries like Panama, Russia, and Ukraine.

Meanwhile, the SovX G7 list is short and powerful: Germany, France, Japan, Italy, UK, and USA.

There are probably technical reasons why a group of AAA-rated sovereigns is trading wide of a group of much less creditworthy emerging markets in the CDS market. But the big message here is clear: the world is being turned upside-down. And most investors have yet to even start adjusting to these new realities.

Update: Turns out that the chart wasn’t measuring the G7 spread after all, but rather the Western Europe spread, which includes all the PIIGS.


Maybe bond investors realize the U.S. is really a banana republic like all the other listed countries.

Posted by PhilPerspective | Report as abusive

Why DSK’s arrest is bad for the IMF, France, and Greece

Felix Salmon
May 16, 2011 18:44 UTC

With Dominique Strauss-Kahn being denied bail this morning, it’s clear he can no longer run the IMF, let alone run for president of France. No matter how the trial turns out — even if he’s fully exonerated of all charges — this arrest has effectively ended DSK’s career.

So when Mohamed El-Erian writes about the effect of the arrest if DSK’s career is over, we can take him as describing the state of the world as it is today: this news is bad for the IMF, bad for France, and bad for any Greek hopes of battling through without a debt restructuring.

The IMF first:

This would erode the confidence of an institution that, under the personal authority of DSK, has taken significant financial and reputational risk in making loans to countries whose medium-term debt viability is far from robust. It would undermine its effectiveness in responding to new challenges. And it would pull the rug from under initiatives aimed at enabling it to play a more effective role in global policy coordination and, more generally, in improving global economic governance and filling a damaging vacuum at the center of the international monetary system.

I think this is right. There’s a tension, at the IMF, between the staffers, who don’t want to make loans which might not ever get repaid, and the shareholders, who want the IMF to be the lender of last resort and to bail them out whenever they run into difficulty. DSK’s job was to walk that fine line, and to imbue the Fund’s decisions with his own gravitas, authority, and consensus-building abilities. Here’s Wolfgang Münchau:

Mr Strauss-Kahn was respected by both Angela Merkel (whom he had planned to visit on the weekend when he was arraigned) and by George Papandreou, the Greek prime minister. He supported the view, also held by the European Central Bank, that a eurozone member should not rush into default. The eurozone clearly needed the IMF’s technical competences in dealing with its sovereign debt crises – a set of skills largely absent in the European institutions. It also needed the IMF’s co-financing. But the IMF’s single most important influence in eurozone crisis resolution has been political. In a situation marked by a lack of political leadership, the IMF filled a vacuum.

The problems for France are big, too:

France now faces the possibility of an even more complex, and a more polarizing presidential campaign. This would come at a time when the country heads both the G-8 and G-20, and when it plays a stabilizing role at the center of Europe now that the Merkel-led government in Germany, the other large economy at the core of the region, is facing growing political strains.

It’s never optimal to try to play a global leadership role in the middle of a presidential election campaign, and with this particular campaign now being thrown wide open, domestic politics are certain to trump international statesmanship for the foreseeable future. If politically difficult decisions need to be made with respect to Greece or anything else, don’t expect France to be brokering them.

And then there’s Greece:

Desperate to avoid a debt restructuring, Greece is heavily dependent on exceptional official assistance. Up to now, a DSK-led IMF has shown little hesitation in aligning itself with a controversial European approach that uses liquidity to address a solvency problem — essentially, piling new debt on top of Greece’s already excessive debt.

A possible DSK departure from the IMF would make the institution less enthusiastic for an approach that has already shown signs of slippage, ineffectiveness and overall fatigue.

Whether this is a good thing or not depends on whether you think that it behooves the IMF to help Greece kick the can down the road indefinitely. But if there is to be a Greek restructuring, it certainly helps to have a powerful IMF head shepherding it along. And frankly none of DSK’s possible successors have his degree of power and influence in the all-important European political circles.

The honorable thing for DSK to do, I think, is to announce his resignation now, saying that his arrest is an unhelpful distraction to the IMF, which will be ably run by John Lipsky until a permanent replacement can be found. He must surely realize that he can never return to the Fund. And if he’s going to leave, best he do so sooner rather than later.



On Greece, it seems we Europeans remember why the Great Depression lasted so long – the Central Bankers withdrew liquidity by increasing interest rates at a time when they needed to be reduced. Reducing liquidity now will hurt more than it fixes. It’s like trying to halt a runaway vehicle by driving it into a brick wall. Better to apply the brakes gently.

Today the neocons are singing from the same song sheet that ruined the world economy in the late ’20s and through the ’30s and caused the Second World War. The Europeans suffered greatly then, while the US gained Treasure, the Russians gained Territory and the Neocons gained a bogeyman to control the American people in such a tight grip it is still there today.

Posted by FifthDecade | Report as abusive

Taxing the rich

Felix Salmon
May 16, 2011 16:15 UTC

Andrew Ross Sorkin gives credence — but doesn’t directly link to — Karen Hube’s rather offensive analysis of what it means to be “down and out on $250,000 a year.” Hube’s article comes up with a hypothetical two-earner family — Mr and Mrs Jones — who between them earn $250,000 a year, and who “end up in the red” at the end of the year.

How do they do this? Well, for one thing, they put $41,000 a year into savings; they also pay $9,069 per year on out-of-pocket medical expenses and going to the dentist. And check out those two cars, which add up to as much as $16,277 per year between them. Are these normal and reasonable expenses for the average family of four? Of course not: the average family of four earns roughly that much money ($66,346) in a year pre-tax — and then, first and foremost, has to buy or rent a house of some description.

In any case, the Jones’s lifestyle ($19,000 a year for daycare and after-school activities; $1,571 a year for the dog) is hardly that of a “down and out” family.

Meanwhile, Sorkin quotes Roberton Williams as saying that when it comes to the $250,00-a-year cut-off, “the very round nature of it suggests that it’s arbitrary.” Which is about as sensible as criticizing a 14% cut-off on pinot noir alcohol levels on the grounds that it’s arbitrary. Any cut-off is going to be arbitrary, but $250,000 seems like a good one to me: it’s low enough that tax hikes above that level can move the needle in terms of fiscal revenues, while being high enough as to affect only a tiny percentage of taxpayers.

And while $250,000 a year certainly isn’t don’t-need-to-ever-worry-about-money rich, both Sorkin and Hube completely miss the point about marginal tax rates, which is that they’re marginal. If the tax bracket over $250,000 a year were raised to 99% tomorrow, the effect on the Jones family would be zero: no one’s suggesting raising federal income taxes on the Joneses by a penny.

And in fact Hube’s analysis shows that federal income taxes are a very small part of the total Jones tax burden. Let’s say that they both got 15% raises, so that their household income rose to $287,500. And let’s say that the tax rate on income over $250,000 a year is raised to 39.6% from the current 33%.

Right now, the Jones family pays somewhere between $29,909 and $34,317 in federal income taxes, depending on where they live. Let’s split the difference and call it $32,113. That’s just 12.8% of their total income. With their pay rise, they’d pay an extra $14,850, bringing their total federal income tax burden to 16.3% of their total income. (Update: As several commenters point out, that’s the gross extra tax they’d pay. Even if taxes didn’t go up at all, they’d still pay an extra $12,375 in taxes.) They would probably pay extra state income tax too, depending on where they lived — but they would still end up with an extra $20,000 a year or so in post-tax income to spend on fancy vacations or flashier cars. That kind of money is a real windfall for the vast majority of families in America; for the Joneses it would be a nice benefit at the margin.

The thing which really annoys me about all these pieces is that they seem to be based on the idea that a sensible fiscal policy would only raise taxes on people who are so rich that they never need to worry about money. Which of course is ridiculous. And when Sorkin says that “tax brackets could be added for the wealthiest,” he starts talking about tax brackets at the very highest levels of the income distribution — which look more punitive than useful. Instead, why not implement a wealth tax? Ask anybody with a net worth north of, say, $5 million to pay 1% of it per year in taxes. Then you’re certainly taxing the rich. Even Karen Hube would have to admit that people with $5 million in the bank count as rich. Wouldn’t she?


You used the word punitive when you described ‘wealth taxes’. I don’t think it is about punishing anyone. – Wealth taxes are setting limits – as in framing – saying none shall exist outside of this frame set. Punitive implies something more personal. There is an obvious problem when 1 percent control 40 percent of the natural resources of a nation. Such consolidation is out of line with any paradigm which matches the value of work, innovation, and risk with personal value and reward – essentially nobody can work 1000x harder, or be 1000x smarter than an average person. A set of extents and limits should be set as a way of controlling unhealthy resource consolidation. I offer a plan here: http://99percent-economic-revolution.blo gspot.com/ and maybe it is laughable at this point – yet the conversation must begin. What exactly will the occupy WS movement demand if not a re-balancing of resources.

Posted by polarsouth | Report as abusive

Chart of the day: Commodity flows

Felix Salmon
May 16, 2011 13:35 UTC

This chart comes from a presentation on commodity ETFs by my Reuters colleague Andy Home:


QE, of course, only happens when interest rates hit the zero bound, so it’s impossible to disentangle the effects of QE from the effects of G3 interest rates all coming down to 1% or lower. But the effect of all these investment flows is clear: if you look at commodities as an asset class, total commodity assets under management have risen from just over $150 billion at the end of 2008 to over $400 billion today.

The impossible-to-answer question is how much of that investment is leveraged, in one way or another. The lesson of the commodities crash is ultimately a hopeful one: it didn’t set off any panic, and Main Street didn’t suffer much in the way of visible losses. And I don’t think that Wall Street has a leveraged long position in commodities in the same way that it had a leveraged long position in subprime in 2008. So the systemic risks posed by any commodities bubble are probably small.

Still, this is clearly now a speculators’ market, and that’s bad news for commodity-reliant industries. They’re up against finance types, now, which is never a pleasant position to be in. The crash will come — but only after real-world end-users have hedged their needs at very high prices.