Felix Salmon


Nick Rizzo
Sep 30, 2011 21:54 UTC

ECRI says it’s a “done deal” that the US is going into a recession — WSJ Marketbeat

The CDS market views Morgan Stanley as being as risky as an Italian bank — Bloomberg

A guide to China CDS — FT Alphaville

Stephen Roach predicts a soft landing for China — Project Syndicate

Bank of America’s not the only one planning to charge for debit cards — Reuters

Find many more great links at Counterparties.com

Kodak shares fall 60% as its rumored to have hired restructuring lawyers — WSJ

Massive CEO severance packages are “rewarding failure” — NYT

S&P and Dow Jones are discussing merging their indices — FP (Reuters story)

And Michael Lewis rides bicycles around California with Arnold Schwarzenegger — Vanity Fair


How much will a capital surcharge hurt?

Felix Salmon
Sep 30, 2011 18:17 UTC

The Clearing House has a new study complaining about the idea that the world’s biggest banks — the Too Big To Fail institutions — should have higher levels of capital than other banks. (The study is meant to be here, but the website isn’t working very well, so I’ve mirrored it here.pdf.) The main conclusion is that “if the Basel Committee’s G-SIB capital surcharge is implemented in the U.S., these banks would have to either increase the borrowing costs to their customers by 60 basis points” — an outcome so self-evidently horrific that the study doesn’t even bother to explain how harmful it would be.

But of course a closer look at the study shows that borrowing costs wouldn’t actually need to rise at all. Here’s the key headline in the presentation:


NIM here, is Net Interest Margin, which is then used to compute borrowing costs. And “NIX ratio” is non-interest expenses, known to many as “bankers’ bonuses”.

The calculations here are not mathematically unconvincing. According to The Clearing House, the cost of bank equity will go down under the new regime — by about 70 basis points. That won’t make up for the hit to shareholders from being less leveraged.

So yes, it’s entirely possible that there is indeed a non-negligible cost to implementing this surcharge. That cost is going to have to be borne by three different groups: borrowers, bankers, and bank shareholders.

But if you look at the report, it’s predicated on the idea that shareholders don’t bear any of the cost at all all: we have to “maintain shareholder returns”, for some unknown reason. This is silly, for reasons convincingly explained by Martin Wolf — the returns that banks are offering to their shareholders are far too high. Back in the 50s and 60s, banks had a return on equity around 7%; now they require more than double that. There’s no reason why we shouldn’t go back to the old returns.

If banks’ return on equity fell from about 15% to about 7%, then there wouldn’t be any increase at all in borrowing costs, and bankers could even keep their bonuses. But more likely, some combination of the three will happen: lower return on equity, lower bonuses, and slightly higher borrowing costs, to the tune of maybe a couple of tenths of a percentage point.

This is all good. Bankers’ bonuses should be lower. And borrowing from a big bank should cost more: it helps to incentivize borrowers to move their business to smaller, less systemically-dangerous institutions.

Besides, the problem right now isn’t that banks are lending at exorbitant rates: it’s that banks aren’t lending at all. I think many small businesses, especially, would be perfectly happy to pay an extra 0.6% if that meant they could get a loan rather than not get a loan.

And it’s undoubtedly true that the more capital banks hold, the less of a risk they pose to the financial system as a whole.

Right now, there are two huge risks which could result in trillion-dollar writedowns at the world’s too-big-to-fail banks. The first is real estate: prices are still falling in the US and around the world, and at some point mortgages can and should have their principal written down. And the second, of course, is developed-world sovereigns, especially on the European periphery. If they default, then there will be a lot of writing down to go around.

Higher capital levels can’t protect us fully against either of those risks, let alone both of them. But they would help. And if banks build up their capital to a healthy point, then maybe we’ll be able to orchestrate a market-friendly set of global writedowns which doesn’t bring the entire financial system to its knees.

Maybe that’s what the big banks really fear, here: that if they’re asked to build up their capital, that only means they’re going to be asked to write down that capital later. I can see why they wouldn’t be happy about doing such a thing. But for the other 99%, the idea frankly looks rather attractive.


weiwentg, Dimon would also throw in that such a plan would be un-american or not in the interests of the U.S. and that it should therefore be dismissed.

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¿Hard Keynesianism Chileno? ¡Claro po!

Mark Dow
Sep 30, 2011 16:23 UTC

By Mark Dow

Matthew Yglesias has an interesting new post on Hard Keynesianism. It was succinct enough for me to be able to read the whole thing in between my tactical trades this morning and write a brief response.

He makes the basic points that (1) symmetric countercyclical fiscal policy is at heart of true Keynesian thinking (as opposed to much of the faux and pseudo Keynesian characterizations that pass for public discourse these days) and (2) it is hard to do.

He also insinuates by way of the case of Chile that the courage to do this comes from the center-left (in this case, the Concertación coalition) that governed over the surplus years, only to fall apart in 2010 when the center right took over.

I don’t myself want to insinuate that Matthew Yglesias isn’t serious or smart. In my view, he is both. And I sympathize very much with the two basic points. But, as I like to say, the most dangerous place to be is in between someone and what they want to believe. And I think his desire to confer virtue onto the center left and vice on the center right misses two important idiosyncratic, Chilean features that have more to do with outcomes there than do politics.

First, Chile is a small open economy dominated by trade. Copper is its most prominent export. Its Copper Stabilization Fund, established in 1985, makes it much tougher to spend windfall proceeds from copper sales. And copper prices quadrupled in the 2004-2008 period. In fact, given this structure and that kind of rise in copper, it would have been next to impossible not to generate big surpluses in Chile.

Fine. Well than why the big fiscal deficit in 2010? Yes, center-right Sebastián Piñera was elected that year. But it was not Chile’s biggest event. The tragic 8.8 earthquake in February that hit Chile’s central coast was. The deficit corresponded to the massive amount of spending the government trotted out to counter its effects. It was not reflective of the difficulties of time-consistent fiscal policy.

Now, back to trading….


It’s an interesting idea, but I think that Chile in 2009 is a poor example. The prior Concertacion president – Michelle Bachelet, who was not running for re-election as the Chilean constitution does not permit consecutive terms for Presidents – was unpopular for most of her term. One of the biggest issues was a botched overhaul of the Santiago public transit system, as well as other charges of mismanagement or corruption directed at her cabinet. I would submit that the Concertacion loss in 2009 was largely due to the public’s view of management/execution failures – as well as a sense that 19 consecutive years in power for the party was long enough – and was not a vote against their macroeconomic policies.

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Nick Rizzo
Sep 30, 2011 14:18 UTC

Ron Suskind thinks that equity holders are secured creditors — Economics of Contempt

Bernanke said that long-term unemployment is a “national crisis” — AP

Can a weakened Volcker rule stop rogue traders? — Pro Publica

Europe extends the short-selling ban, crushing the dreams of some tradersFT Alphaville

Charles Kenny takes a hammer to the icon that is small business as job engine — Businessweek

And CalPERS admits that it probably won’t meet its 7.75% return goal this year — Bloomberg


I misread the third line as, “Can a weakened Volcker stop rogue traders?” Much more evocative, I think.

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The “success” of workfare when jobs are scarce

Sep 29, 2011 16:51 UTC

This year marks the 15th anniversary of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), the Bill-Clinton- and Newt-Gingrich-led overhaul of cash assistance to poor families with children.* One of the major changes of that law was adding work requirements so that most cash assistance applicants (generally single mothers) couldn’t receive help without heading into the world of market-based work.** When the bill passed, and unemployment was below 5%, there was some concern about what would happen when the economy slowed and jobs weren’t as easy to come by.

We are now finding out. As this graph from the Center for Budget and Policy Priorities shows, as unemployment has sky-rocketed, and other social safety net program like SNAP (a.k.a. food stamps) have seen a surge in participation, Temporary Assistance for Needy Families (TANF) has barely budged.

Some policymakers see this as a sign of “success.” At least that was the word Robert Doar, the commissioner of New York City’s Human Resources Administration, used on Wednesday at this New York University event. Between December 2007 and December 2009, as the number of unemployed people in the state of New York increased by 91%, TANF cases increased by just 4%. Doar is proud of this.

Now, if we’d somehow solved the problem of poor children—the people for whom cash assistance is ultimately intended—then I might agree. But that’s hardly the case. According to the Census Bureau, in 2010, 22.0% of Americans under the age of 18 lived in poverty. In New York City, the figure is 30%.

That works against Doar’s hypothesis that one of the reasons TANF cases haven’t risen is that would-be recipients are getting along by tapping other social welfare programs, such as unemployment insurance. It also illustrates a major misconception about unemployment insurance, which only half of all unemployed workers get, and those coming from low-wage jobs—like the ones cash assistance recipients tend to move into—typically don’t.

A more likely explanation is that eligible people aren’t joining the program. In fact, that’s what the data shows, both in New York and nationally. Before PRWORA, more than 80% of eligible families participated. Today, about 40% do.  In many states, benefits have become much stingier, which might help account for the decreased interest—except that the same drop is also seen in states like New York, where the dollar-value of benefits has remained essentially the same since 1996.

What has changed considerably is the process for applying for cash assistance. As policy analyst and TANF expert Bich Ha Pham detailed at the NYU event, an applicant in New York City must now attend 45 days of a 9-to-5 job-search workshop before having an application considered. Aside from the fact that the best way to look for a job is probably not to sit in a room with a bunch of other unemployed people for a month-and-a-half, this structure completely ignores the chaotic reality of being a single mother in financial crisis. (As the Community Service Society has shown, it also ignores the needs of high-school drop-outs, who would probably get a lot more out of a GED program than resume advice.) Indeed, a large proportion of applicants wind up being “non-compliant” during this initial 45-day job search.

The point here is not to bash Doar or his agency.*** The point is to illustrate that we can’t really have a conversation about whether or not linking cash assistance to market-based employment is problematic in a time of high unemployment, because program structure itself is distorting the behavior of would-be cash assistance recipients.

Although, in a way, maybe that is an answer to the question.  As sociologist Kathryn Edin and social anthropologist Laura Lein illustrated in their 1997 book Making Ends Meet (and in this shorter paper), the problem never really was that cash assistance recipients didn’t want to work. Indeed, interviews with hundreds of women showed that, depending on the city, between a third and half were working, just not in the formal economy. (Other data show that many cash-assistance recipients face problems that make mainstream employment difficult—more than a quarter have work-limiting physical, mental, or emotional  problems, compared with less than 5% of the general population.)

So maybe what we’re learning—should we be able to put aside the overly simplified view of the “deserving” and “undeserving” poor—is that it’s time for another round of welfare reform. But this time what needs to be reformed is how the system goes about understanding the needs and limitations of single working mothers. As Edin and Lein documented, barriers to formal employment include not just balancing work schedules with lone parenting and the added costs of having a job outside of the home (such as day care), but also the realities of low-wage work. Those realities include income volatility, the lack of unemployment insurance should a job be lost, and the lack of benefits that middle-class parents often depend on—such as sick days and the ability to make phone calls from work to check on children.

At the NYU event, even political scientist and PRWORA booster Larry Mead agreed that there is a lot of room for improvement in how work requirements are implemented. Much low-wage work is high-turnover and dead-end. The system, he said, would be much better if it focused not just on job placement, but also on job retention and job progression.

In other words, on reality.


*We typically call this law “welfare reform,” although that’s a bit misleading, since it didn’t address other social welfare programs, such as disability and unemployment insurance, workers’ compensation, Medicare, food stamps, and disaster relief.

**This is a fantastic bit of historical turnabout, since, as Theda Skocpol documents in this book, cash assistance to single mothers originally required women to stay at home to raise their children and not work outside of the home.

***While Doar-bashing isn’t the point, it is tough to avoid, especially when he says things like he finds it “troubling” that an increasing number of food-stamp recipients are working. Troubling, that is, because it indicates people are bilking the system, not because it reflects fundamental breakdowns in the labor market such as the decoupling of productivity gains from wage growth and rampant underemployment.


In some states, such as Colorado, you are expected to enter “workfare” the moment any person living in your residence applies for SNAP (not cash assistance). I learned this lesson the hard way when a member of my household applied for food stamps.

I learned that the county demands that anyone in the household who is not employed 30+ hours a week at a traditional job attend an orientation in which they spend their time working for the county social work office (to earn “your” food stamps) whether or not they personally receive or qualify for benefits.

I went to an orientation with the promise of help finding a traditional job and it was an eye-opening experience. I spent those hours “volunteering” for the county (collating papers) to earn benefits that I never received. I demanded that the person living under my roof rescind the application as I couldn’t afford to comply with the county’s request.

I can’t see how it is legal to force someone to work for the government, for free, especially if he or she does not qualify for the program.

This has only led me to question the wisdom of our government.

How in the world does workfare help the poorest of the poor? People need money to get daycare and transportation. These resources are not supplied.

The cost to taxpayers to monitor food stamp recipients people must be insane.

Worse, I can only imagine that replacing government and quasi-governmental employees with unpaid workfare workers is driving down wages for the rest of us.

Maybe it’s time to overhaul welfare entirely or, at least, make it easier for people to start private charities. Private charities are the only way we will be able to help those who truly need it.

Something has got to change.

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Business Insider and over-aggregation

Felix Salmon
Sep 29, 2011 10:47 UTC

Henry Blodget has a long and detailed response to Marco Arment, which is fascinating to anybody interested in the nuts and bolts behind a modern for-profit blog.

If you boil Blodget’s 4,000 words down to a single idea, it’s basically this: over-aggregation.

Now the concept of over-aggregation is not well defined, and means different things to different people. To Ryan McCarthy, who used to work at the Huffington Post and is acutely attuned to such things, over-aggregation is what happens when Outlet A writes a story and then Outlet B basically rewrites or copies the story so that there’s no reason to click through to A any more. HuffPo and Business Insider have both been accused of this, as have sites like Newser.

But that’s clearly not what was happening with Marco’s posts, so let’s put that kind of over-aggregation to one side for the moment. The dispute between Marco and Business Insider relates to something different — which is what happens when TBI links out directly to other people’s blog posts.

Now I’m a great believer in linking out directly to other people’s blog posts: I’ve built an entire website which does nothing else. And Counterparties.com doesn’t just have external links, either: each link also comes with a dedicated permalink, like this one.

But here’s the thing: we build Counterparties.com by hand, we write every headline on the site, we add a tag to it, and so on. What you see on Counterparties is our unique content. It links to other sites, but it doesn’t copy anything from those sites. And we link out maybe 20 or 30 times a day, tops. This is not some kind of copy-and-linking robot algorithm, it’s a hand-built list of artfully curated links.

At TBI, by contrast, the areas of the site with nothing but external links work very differently. There are two such areas: one’s a column called “Read Me” which appears on the right hand side of the page if you scroll down a bit, and the other is a dedicated section called “The Tape“. For readers navigating the site, both of them work as they should: you see the headline, you click on the link, you go straight to the other website.

But behind each of those links is a huge CMS (content management system) architecture, whereby every external link is generated from a dedicated permalink page which people navigating the website are never supposed to see.

If you go to Yahoo Site Explorer, it’ll tell you that TBI has — get this — 465,825 separate pages. Now the likes of Henry Blodget and Joe Weisenthal are undeniably prolific, but there’s no way you get to 465,825 pages manually. TBI is about four years old, if you go back to its first incarnation as Silicon Valley Alley Insider; 465,825 stories over four years works out at well over 300 stories per day.

So most of those pages, it turns out, were generated by robots without any human input at all: they look like this, or like this, and they’re just pages which copy-and-paste the headline, the author, and some of the content from third-party websites.

According to Blodget, this huge mass of robo-pages at TBI has an entirely innocent explanation. “To put something into the ReadMe box,” says Blodget, “we need to have a page with the headline and sub-head and author on our site, even if the page will never be seen by our readers.” It’s just a technical necessity! Nothing nefarious about it!

To be honest, it’s not a technical necessity. Other sites which link out a lot — Drudge, say — don’t have millions of hidden permalink pages generating every link on the home page. And Blodget protests a bit too much, I think, when he says he gets no googlejuice from these pages:

In the past, these pages have been indexed by Google, but because they include a link back to the originating site and page, they do not generate much (if any) SEO value for us. They exist only because it was easier for our developers to use the existing post-headline-author metaphor in our publishing system than to create the Tape entirely from scratch…

We always include a link to the original post on this stub page, so Google won’t conclude that we produced the original story.

I don’t think that Blodget is trying to get Google to link prominently to his stub permalink pages; nor is he trying to fool Google that those pages constitute original TBI content.

But those pages can do wonders for his googlejuice even if Google never links to them at all. The main reason is that because those pages are being created every minute of the day, Google is forced to spider TBI on a real-time basis, just to keep up with all that new content. Google likes those kind of sites, because it considers them to have lots of very fresh content — the more frequently you update your site, the higher your PageRank.

And of course since Google is spidering TBI on a real-time basis, it picks up TBI’s home-made stories the minute they appear. So if TBI writes a story about Fred Bloggs, and then someone searches Google for Fred Bloggs one minute later, the TBI story will come up at the top of the search results. Conversely, if I put a story about Fred Bloggs up on felixsalmon.com, which is almost never updated, it could take days to appear on Google. Having lots of robo-pages, then, helps boost the search prominence of TBI’s non-robo-pages.

Blodget does seem to have taken this criticism to heart:

We’re going to see if we can add “no follow” links to the stub pages to make sure that Google doesn’t index them. If we can’t do that, we’ll eventually redesign The Tape, so it doesn’t create stub pages at all.

I suspect that “no follow” links aren’t the best way to do this: I’d suggest instead that Henry put all the stub permalinks on a separate subdomain like articles.businessinsider.com, and then use the robots.txt file to tell Google not to index anything on that subdomain.

But more conceptually, the TBI over-aggregation problem will still exist, in the form of The Tape running huge numbers of other site’s headlines on an indiscriminate basis. (I think that ReadMe, at least, is more curated, although I’m not sure about that.) Henry says that “we created the Tape because we didn’t want to bother with RSS readers anymore”, but the fact is that The Tape is a really bad RSS reader. Building a good web-based RSS reader is hard: just ask Nick Denton, who put a huge amount of effort into building Kinja before abandoning it as a consumer product.

Instead, I think that the driving impetus behind The Tape was the more-is-more approach to web publishing: it has been clearly demonstrated again and again that the more content you put up, and the more frequently you update, the more pageviews and unique visitors you end up getting. That explains not only The Tape, of course, but also the large number of one- and two-paragraph stories on TBI. It’s good for business, but it’s not necessarily good for readers who want less sensationalism and more insight.


Great insight, Felix.

Imo both HuffPo and Business Insider are tabloid-like. Their front page invariably has some semi-dressed female for no apparent reason other than to attract male viewers… again, relegating women to the status of sex objects. I love Reuters for not sinking to that level.

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Nick Rizzo
Sep 28, 2011 22:46 UTC

The EU is proposing a $77 billion financial transaction (quasi-Tobin) tax — AP

The German Finance Minister think the U.S. rescue fund plan is “stupid” — Telegraph

Martin Feldstein on why Germany and France are trying to delay the inevitable Greek default — Project Syndicate

Health insurance premiums jumped 9% last year — Kaiser Family Foundation

What slowing productivity says about our economic growth — NY Fed

Junk bond returns have turned negative — IFR

The vultures are circling Paulson’s assets — WSJ

The CDS market: actually pretty important — FT Alphaville

The SEC is suing NIR’s Corey Ribotsky for allegedly bilking a chintzy $1 million from clients — Bloomberg

Zynga’s virtual farms and tractors are depreciating faster — WSJ



Nick Rizzo
Sep 28, 2011 13:19 UTC

Does Peter Orszag really want less democracy? Daily, he grows more Hamiltonian — TNR

Case-Shiller: Last month’s home prices are down 4.1% year-over-year — S&P

Goldman’s $1.2 billion in cuts includes smaller drinking cups — Dealbook

SEC charges RBC with selling shoddy CDOs to Wisconsin schools — SEC

Zynga profits are down 95% — Gamepro

The Wall Street protesters have a striking diversity of complaints — NY Observer

Perhaps out of boredom, Google made some ridiculous bids for the Nortel patents — Reuters

Martin Wolf: Banks are over-promising, and will fail to deliver –  Blogs.ft.com

Annals of management consultancy advice, overdraft-fee edition

Felix Salmon
Sep 27, 2011 22:23 UTC

It’s one of the oldest tricks in the retail-banking book: if you order your customers’ transactions from biggest to smallest, rather than in the order they’re received, then you’ll maximize your overdraft income. Every banker in the country knows this — to get the most overdraft fees, you have to push your customers into the overdraft zone as quickly as possible, by prioritizing their largest payments.

This truism is so blindingly obvious that it’s known even to management consultants like CAST, who were giving advice to Union Bank of California. In an insight typical of their kind, CAST told Union Bank that its fee income would rise if it ordered transactions from biggest to smallest.

But CAST didn’t stop there. To become a really successful management consultant, you need chutzpah:

Bank documents turned over to plaintiff attorneys during discovery indicate Union Bank agreed that CAST would receive 20% of any extra overdraft charges generated under its high-to-low system.

I can see why Union Bank would implement this system. I can even see why they might hire CAST to tell them to do it, so that they could blame The Consultants rather than take responsibility for their own actions. But paying CAST 20% of the extra fee income? That’s completely insane. And it’s a lot of money, too:

A system of putting through the transactions in whatever order maximized fees would in the first year boost Union Bank’s overdraft revenue by $18 million, or nearly 25%, CAST estimated…

In the summer of 2003, Union Bank established a “High to Low Implementation Team” in cooperation with CAST. In the first year, overdraft revenue jumped far more than expected — by $33 million to a total of $125 million.

So, CAST didn’t even get its math right! But at least it was lavishly rewarded for being wrong: 20% of $33 million is a very nice fee to pocket for telling a bank what it already knows. And the system stayed in place for six years — so that’s a good $40 million or so that CAST stands to have made from this advice. Nice work if you can get it!

If I were a Union Bank shareholder, I’d be angry about the horrible overdraft system. But I’d be furious that a large chunk of the extra fees were going to CAST for no good reason. Who agreed to this on behalf of Union Bank? And why? It makes no sense to me at all.


well it could well be because of some sort of results based billing situation between the bank and the consulting company. Why the bank would agree to that for basic advice is a mystery but really the arrangement to pay a consulting company a share of the additional revenue generated by their idea isnt that unusual. It can actually work pretty well for both the consultant and the bank if the advice is good.

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