Felix Salmon

The road to cognition

Mark Dow
Sep 27, 2011 18:39 UTC

By Mark Dow
The opinions expressed are his own.

European policymakers came to the IMF meetings in Washington in a defensive mode; some defiant, some with their tails between their legs. Once in Washington, it only got worse. Policymakers from around the world and investors of all stripes lined up to administer verbal beatings. Warnings of cascading default, global depression and bank runs echoed throughout the meeting rooms. Thankfully, by the weekend’s end, the message sank in, and Europe emerged with the beginnings of an agreed plan.

The news is not so much the nature of the plan. The broad lines of a likely structure had been anticipated by various analysts and market participants in the run up to the meetings. What was new was the recognition on the part of the EU leaders that several specific steps — steps heretofore publicly dismissed by the broad swath of European leaders — were now necessary. The three elements are:

  • A serious and confidence-building European bank recapitalization process
  • A far deeper restructuring of Greek debt
  • A larger, leveraged war chest with which to finance the bank recap and build a firewall to protect Italy, Spain and France

This represents a significant step forward. It is good for markets, good for Europe, and, indeed, good for the rest of the world. It addresses many of the urgent issues, and would also allow Europe to focus on the important, longer-term ones.

However, a lot a work remains to be done, and this plan, even if perfectly carried out, does not solve several critical issues. Here are the risks:

Implementation risk. National governments have to pass the European Financial Stability Facility implementing legislation, and the Frankenstein of a financial structure that is being contemplated needs to avoid constitutional challenges, downgrades, and other logistical roadblocks. If it can be credibly argued that the plan stays within the confines of the Treaty, it will go a long way toward assuaging punctilious German concerns.

Size. The eventual leveraged fund has to been seen by the market as having a de facto unlimited balance sheet. Markets like finite numbers and will be quick to start the countdown of remaining resources as soon as the new entity starts buying Italian and Spanish bonds. The numbers being floated (~EUR 2 trillion) look on the low side. I think a number north of EUR 3 trillion would more likely achieve the famous “bazooka effect”. The more you have, the less you need. I may be underestimating EU creativity, but to do this I think IMF NAB resources may be needed as a second loss tranche, along the lines of what I suggested last week and Raghuram Rajan mooted yesterday in the Financial Times.

Optimal-degree-of-crisis syndrome. This is another form of implementation risk. The modus operandi in Europe has been minimalist, instrumentalist, and reactive. They have responded once their pain thresholds were reached, only to relax efforts once the sense of crisis subsides. This has led people to underestimate the fundamental resolve of EU leaders. But, the structural coordination issues in Europe are very serious, and policymakers will have to work very hard to avoid falling again into this trap in the coming months.

Portugal (and maybe Ireland). Two things that stood out from the weekend in Washington were (1) how clear the consensus was around a deeper restructuring for Greece and (2) how far policymakers were from considering a solvency solution for Portugal (or Ireland). The reasons are political, not economic. The implication for Europe is if Portugal — a country most careful analysts believe is insolvent and highly uncompetitive — ends up on the protected side of the firewall, markets will be skeptical that this is a definitive solution. And, if any part of the solution is deemed to lack credibility, the credibility of the entire plan will be called into question. The same can be said for Ireland, even though its insolvency is more ambiguous and its competitive position is much better than that of Portugal or Greece.

Fundamental design flaw. The biggest issue is one of design. Europe does not meet — and never has met — any of the main criteria for an optimal currency area. So, even if the urgent financial issues of the EU were to be solved by this latest initiative, it will not — for both structural and cyclical reasons — bring about growth. The single currency, for all its virtues, represents handcuffs for the peripheral countries. With nothing but fiscal adjustment and structural reform (which in the initial years is contractionary) on the horizon as far as the eye can see, the feedback into the debt sustainability equation is likely to be persistently negative. In the long term this will be a very serious problem — perhaps an unsustainable one — for not just Greece and Portugal, but also for Italy, Spain, and possibly France.

For now, however, the Europeans are coalescing around a financial plan. After much denial, they seem to have taken on board the psychological dimension of the battle they are in. It is important that the world now steps up to provide its full support. It may not be a growth plan, and it contains short term risks and longer term design flaws, but given the fragile state of the global economic landscape, once again, plan beats no plan.


Helmut Kohl is dead?

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How macroeconomic statistics failed the US

Felix Salmon
Sep 27, 2011 15:51 UTC

There’s one big reason why the current economic weakness in the US has come as such a shock. It’s not the only reason, but it’s an important one, and it hasn’t gotten nearly the attention it deserves: the state of macroeconomic data-gathering in the US is pretty weak.

In particular, the data coming out of the Bureau of Economic Analysis at the beginning of 2009 was way off. Here’s Cardiff Garcia, introducing an interview with Fed economist Jeremy Nalewaik:

The initial GDP estimate for the fourth quarter of 2008 showed that the economy contracted by 3.8 per cent. It was released on January 30, 2009 — about three weeks before Obama’s first stimulus bill passed. That number was continually adjust down in later revisions, and in July of this year the BEA revised it all the way down to a contraction of 8.9 per cent.

The BEA is happy to try to explain what happened here — but whatever the explanation, the original 3.8% figure was a massive and extremely expensive fail. It was bad enough to be able to get a $700 billion stimulus plan through Congress, but if Congress and the Obama Administration had known the gruesome truth — that the economy was contracting at a rate of well over $1 trillion per year — then more could and would have been done, both at the time and over subsequent months and years. Larry Summers warned at the time that the risks of doing too little were much greater than the risks of doing too much; only now do we know just how right he was on that front. (And even he didn’t push for a stimulus of more than $700 billion.)

So what’s being done to beef up the state of America’s macroeconomic statistics so that this kind of monster error doesn’t happen again? The BEA is doing the best it can, but it’s constrained both in terms of its budget and in terms of the quality of economists it can attract.

Here’s how Cardiff ended his interview:

FT Alphaville was recently having a broader discussion about the status of macroeconomic data-gathering in the US with a fellow blogger, Felix Salmon, and he made the point to us that it’s been in secular decline for the last few decades. Do you agree? Is this something that’s come up in your work on output measures?

Some evidence suggests that the measurement errors in GDP growth have become worse in recent years. This may have to do with the increasing importance of services in the economy in recent decades, a sector where the GDP source data has historically been spotty. This is because, historically, the U.S. Census bureau has not collected spending data for many types of services on a regular basis.

Despite budget constraints, the statistical agencies have mounted a major effort to improve their measurement of services GDP. However, even as they make progress, it is important to keep in mind that there will always be measurement errors of some kind or another in the GDP and GDI source data, so taking some sort of weighted average, as I proposed in the Brookings paper, would be the soundest approach.

Frankly, this just isn’t good enough. Moving to a weighted average of GDP and GDI doesn’t improve the quality of our statistics one bit; it’s just an attempt to cope with the fact that neither of them is particularly reliable. As the economy becomes increasingly complex and service-based rather than goods-based, it’s crucial that our statistical architecture keeps pace — and it clearly isn’t doing so.

When I told Cardiff that the status of macroeconomic data-gathering has been declining for decades, I was making two separate statements — first that the quality of statistics has been declining, and secondly that the status of economists collating such statistics has been declining as well. Once upon a time, extremely well-regarded statisticians put lots of effort into building a system which could measure the economy in real time. Today, I can tell you exactly how many hot young economists dream of working for the BEA on tweaks to the GDP-measurement apparatus: zero.

I’m pessimistic that this is going to change. Putting together macroeconomic statistics is not a prestigious part of the economics profession any more, and government payscales are pretty meager compared to what good economists earn elsewhere.

Increasingly the economists in the government who craft the policy responses to macroeconomic developments are working on a GIGO (garbage in, garbage out) basis. That, in turn, means more bad responses, more bubbles, more recessions, and in general more macroeconomic volatility. The world is getting messier — and we don’t even have a good basis for measuring just how messy it is, any more.


The same thing applies to gross domestic purchases, which I have written about a few times. It has been closer to the pulse of how the American economy feels.

http://alephblog.com/2011/03/27/things-a re-not-as-good-as-they-look/

I’ll have another post on this soon.

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Is Alessio Rastani a Yes Man?

Felix Salmon
Sep 27, 2011 13:51 UTC

If you look at his blog, his Twitter account, and his interview with Forbes, not to mention his notorious BBC interview, it’s pretty clear that Alessio Rastani is, at least in part, who he says he is. The Yes Men do set up elaborate hoaxes, but they do so with respect to large institutions: they wouldn’t put this much effort into inventing “Alessio Rastani” out of whole cloth. Mostly because there are lots of genuine traders like Alessio Rastani floating around the internet already. They trade their own money, they sometimes win and they sometimes lose, and they aspire to getting famous on the internet and selling their own trading advice.

That said, however, the resemblance to “Jude Finisterra” from the Yes Men is startling. Which raises the question: is it possible that Rastani is both a trader and a member of the Yes Men? And the answer there, I think, is absolutely yes.

Independent traders are, well, independent — and you don’t need to spend very much time hanging around the comments section (or even many of the posts) at Zero Hedge to discern a strong nihilistic and even anti-capitalist strain to much of the thinking in that community. Independent traders are often men in their 20s and 30s who inherited a substantial sum of money and who for whatever reason don’t have a more attractive opportunity in the regular workforce. They work from home, they tend to have a strong contrarian streak, and they have a lot of time on their hands.

All of which is entirely consistent with the profile of the kind of people who might join or become the Yes Men.

If you look at the two videos side by side (here, for instance), two things are pretty clear. One is that Rastani and Finisterra look and sound very similar to each other. But the other is that Finisterra is much less convincing, while Rastani is much more genuine: he seems to know what he’s talking about — stumbling over his words as he tries to explain trading to a broad audience — and believe what he’s saying.

I have no idea, then, whether Alessio Rastani is his real name, or whether he’s a member of the Yes Men. But here’s the thing: even if Rastani were a member of the Yes Men, that wouldn’t necessarily make his interview a hoax. Indeed, a trader who is hoping for a big stock-market crash is exactly the kind of person who might well put time and effort into undermining large corporations like Dow Chemical. Remember that the authors at Zero Hedge call themselves Tyler Durden, after the anarcho-nihilist character in Fight Club who wants to blow up the world.

It’s a common misconception that all traders are die-hard capitalists. But in fact many of them are quite the opposite. They still want to make money, of course. But that doesn’t mean they want the stock market to go up.


Listen I know Alessio Rastani personally and professionally. I was the lead stock market trainer at a London based seminar company in 2006-2008 and let me give the real scoop. This stock market seminar company got a call from the BBC that they needed a trader to go LIVE NOW…Alessio who is a seminar pitch man fielded the call and ran down to the studio to do the gig.

Alessio sells 2K seminars for this company in London, he has learned the terminology in trading over the last 5 years however I have a pretty good idea as an insider he has not made any real money trading. A recession being prayed for is STUPID, first as a trader you don’t want that you want a good bull market, sorry when more win it is best for ALL!. Listen I spent well over 100K on learning to trade and over 16 years and really trade it is NOT easy and can make money but also can lose you money. I do teach seminars for the BIG companies but unlike the majority of speakers I actually trade options.

Alessio is a nice guy and I am sure his statements were more ego and wanting attention as the Telegraph reported, but listen he is a young guy that saw opportunity that is all. His statements were off base and some was right on other parts way off base. He is not a real trader but plays one for money and I am sure many SHEEPLE will sign up for his now Rock Star mentorship and learn how to make no money. He would be on the street if not for selling seminars. For more info see my blog http://vincedowd.com/news/alessio-rastan i-trader-or-pitchman-you-decide/

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Nick Rizzo
Sep 26, 2011 23:47 UTC

Treasuries due in 10 years or more have returned 28% this year — Bloomberg

China’s economy is still growing, but social unrest is way up — WSJ

Meanwhile, in the U.S., property crime has decreased in proportion to GDP losses — Economist

A booming North Dakota town has 3,000 unfilled jobs and parking spots that go for $1,200 — NPR

Dan Ariely says to be as vague as possible when hiring people — BusinessWeek

Alphaville has UBS’s Gruebel’s goodbye memo — FT Alphaville

Tumblr lands $85 million in new funding — NYT Bits

Netflix cuts a streaming deal with Dreamworks, but it doesn’t come cheap — NYT

Berkshire Hathaway is buying back shares, paying a premium of up to 110% — Bloomberg

And five banks account for 96% of the $250 trillion in outstanding derivative exposure — ZeroHedge

Notes on Groupon

Felix Salmon
Sep 26, 2011 22:34 UTC

I’m in Sofia today, where I gave a talk on Groupon at the DigitalK conference. This post isn’t the speech that I gave, which was much shorter and more conversational; the slides I used are here.pdf. There’s not much new in this post, for those who have been following what I’ve written on Groupon over the past few months; I basically wrote it to get a feel for how I wanted my speech to flow. But here you go anyway.

It’s almost universally known, among people who live or work anywhere near the intersection of technology and finance, that Groupon is the fastest-growing company the world has ever seen. Technology companies are often fast-growing, of course, but Groupon’s growth rate is astonishing even by tech standards. Check out this chart:

groupon growth compared.jpg

Starting at zero, Groupon got within shouting distance of $1 billion in revenues within a single year. It took Zynga two years to get to that point, it took Amazon three years, and it took Facebook four years. eBay hadn’t even got there after five years. This isn’t entirely or even mostly a function of Groupon’s business model; much more important is the massively increased willingness of people to buy things online now than when the likes of eBay, Yahoo, and Amazon launched in the 1990s.

And it’s possible to quibble over terminology here, too: in its latest filing, Groupon now calls this number “billings”, with “revenues” being about half of what we see here. But whatever you call it, it’s a monster stream of cash which is flowing into the company, and you can add to these revenues some $1.1 billion in new equity capital, which is also helping to fuel expansion. Groupon isn’t just growing fast: it’s also raising money at a rate that no other company has ever dreamed of.

Importantly, the stream of cash flowing out of the company is even bigger. Half of Groupon’s billings go to merchants, usually small local businesses. Much of the rest goes towards Groupon’s rapidly-growing payroll, and to fund expansion into new cities and countries. And then there’s more than $900 million which has been used to cash out early investors in the company, including CEO Andrew Mason — a man who is now extremely wealthy even if Groupon stock goes to zero tomorrow.

Groupon is a very innovative company, and this is one of its most important innovations — the idea that the founder can and even should be able to cash out to the tune of millions of dollars very early on in the company’s lifecycle, while it is still raising new VC funds.

The argument here makes a certain amount of theoretical sense. VC investors are looking for home runs, and they’re willing to see a reasonably large percentage of their portfolio investments fail to achieve that end. Essentially, they want the CEOs they’re backing to take on as much risk as possible.

But there’s a problem with this model: CEOs are human, and humans are naturally risk-averse. When Andrew Mason first saw that he’d built Groupon into an inherently highly-profitable Chicago company, he could have decided to fund further expansion only out of the company’s profits, while keeping some portion of those profits for himself and his investors. Groupon would have grown at a much more normal pace, and would certainly never have generated eye-popping charts like this one.

yay_groupon 1.gif

Over the course of one year, from the first quarter of 2010 to the first quarter of 2011, Groupon’s subscriber base increased 24-fold; its revenue increased 14-fold; its sales rate increased 15-fold; and it swung from a profit of $8 million to a loss of $146 million.

These are the kind of figures which make eyes go wide — with greed, if you’re a VC, and with fear, if you’re an businessman trying to build a company which can deliver a reliable long-term profit stream. By cashing out a significant portion of the CEO’s stock, his backers essentially turned him from businessman to VC — they aligned his incentives with theirs. He won’t want for money ever again, so he’s no longer the type of person who would look at a company making $8 million a quarter and think that was pretty good. Instead, he wants to take risks, grow at a breakneck pace, and create a company which is likely to go public, later this year, at a valuation somewhere in the neighborhood of $15 billion. He wants to change the world.

That’s the idea, anyway; we’ll see how it works out. Historically, VC rounds have been about providing capital to companies which need it; in Groupon’s case, they’re more about finding a way to cash out early investors. And so a lot of people who own Groupon stock today didn’t really put money into the company, so much as they simply bought pre-IPO stock on the secondary market. If they end up making a fortune in the IPO, then other companies will certainly start looking at the Groupon model as something maybe worth emulating.

What’s sure, however, is that the kind of growth and ambition exhibited by Groupon is catnip to journalists looking to puncture something which looks very much like a bubble. Going public before you’ve achieved sustainable profitability? Using seemingly made-up measures like Adjusted Consolidated Segment Operating Income instead of generally-accepted accounting principles? Becoming a billionaire before the age of 30, while refusing to play according to the spoken and unspoken rules of both Wall Street and Fleet Street? It’s a recipe for getting the press to turn on you.

But in fact the conventional wisdom on Groupon is narrow-minded, a little bit silly, and largely based on journalists kidding themselves that “everybody” thinks Groupon is a huge success, and that therefore it falls to them to debunk the myth. In reality, the huge-success meme was extremely short-lived, and stems largely from the fact that Google attempted to buy Groupon for $6 billion at the end of 2010. Ever since Groupon turned Google down, there’s been a steady drip of stories saying that they were idiotic to do so and that valuations of Groupon in the $15 billion to $25 billion range are utterly ridiculous.

Now, I’m not going to take a position on how much Groupon is worth; I’m neither an investment banker nor an equity analyst. But what I’d like to do is run down a few reasons why a stratospheric valuation could conceivably be justified, and then look at a few of the potential potholes which face Groupon in its attempt to justify that valuation.

First of all, Groupon has cracked local, in a way that pretty much nobody else has been able to do. We spend most of our disposable income at merchants located within easy striking distance of where we live — but until Groupon came along, those merchants had no good way to reach us online. Everybody’s interested in what’s going on locally, and Groupon worked out that a steady stream of daily emails, each one touting a great local deal, would be hugely attractive to millions of people. This is advertising you want to get.

Second, Groupon has created advertising that is guaranteed to work. By setting a minimum number of people who need to sign up for a deal before it’s activated, merchants can be sure that the needle will be moved and their effort won’t be wasted. This is something of a holy grail in advertising and marketing circles, and it absolutely helps to explain Groupon’s spectacular growth. Merchants hate to spend money on marketing because they fear they’re being swindled by fast-talking sales reps. With Groupon, they know exactly what they’re signing up for, and they won’t end up spending huge amounts of money on nothing.

Indeed, those merchants are not spending any money at all: they’re being paid. This is another great Groupon innovation: create a form of advertising which merchants not only pay nothing for up front, but which they actually get paid. Yes, there’s a cost to providing their goods or services, and in many cases that cost is greater than the amount of money they’re getting from Groupon. Merchants who get too greedy for a big up-front paycheck can end up ruining themselves when those coupons get redeemed. But anybody who’s ever run a small business knows that the promise of money in hand is always going to be incredibly attractive when compared to advertising or marketing which has to be paid for.

In fact, Groupon gives advertising away for free. It has an astonishingly valuable email list, and many merchants would pay good money to be able to send out wittily-written ads to local Groupon subscribers. But they don’t need to do that. Groupon makes its money from the tiny minority of customers who actually pay for a deal. But that leaves millions of people every day who read ad copy which is targeted directly at them. That targeted advertising is extremely valuable, and Groupon isn’t charging a penny for it. Because it has an alternative source of income, Groupon doesn’t need to charge merchants for the privilege of being included in its emails. And so a merchant who values that exposure is well ahead of the game as soon as the email goes out.

But another Groupon innovation goes one further than that — it’s the Groupon commitment device. A commitment device is the way the people force themselves to do something which they know they want to do, for fear that for some reason or other human weakness might otherwise mean they wouldn’t do it. The classic commitment device is marriage: it helps people stay together when otherwise they might drift apart. A mortgage is also a commitment device, which forces you to spend a large sum of money every month slowly building equity in your home, until after 30 years you own it outright. A Groupon, of course, is nowhere near as important as marriage or a mortgage. But it has a similar effect. I see a Groupon in my email — let’s say it gives me $50 off a meal at a restaurant I’ve been meaning to try down the street. By buying the Groupon with a click of my mouse, I force myself to go to that restaurant — something I might well never have got around to, otherwise.

Groupon forces its customers to buy its products using something which isn’t very innovative at all — the hurry-it-won’t-last-long sales pitch. By making sure that offers can only be bought for a day or two, Groupon forces people to make a decision now as to whether they want to do this thing. And that non-innovative part of the Groupon model is one of its big potential weaknesses, as I’ll come to in a minute. But first of all there are some potential strengths to Groupon.

What we’ve seen up until now is the way that Groupon has worked and grown to date. But looking forwards, optimists see lots of other great promise in the company. I don’t want to dwell on these, because forecasting the future of any tech company is always a mug’s game. Some of them are likely to work, others will probably fail. There’s Groupon Now, and the mobile applications which are nascent but growing fast. There’s the move from services into products. There’s the Getaways travel product. And there’s targeting — the crucial way in which Groupon promises to be able to target customers according to their purchasing preferences and a myriad of other factors, rather than just going on what city they live in. It hasn’t happened yet, but I suspect that over the medium term, Groupon will succeed or fail based on whether it manages to crack the targeting nut. Having a huge subscriber base is a necessary condition for targeting, but it’s far from sufficient.

I have no idea what any of these businesses might be worth, or what kind of probability to apply to them succeeding. But looking down this list, and looking at the kind of money which Groupon is bringing in without these businesses, it’s definitely possible to see how this could be a $20 billion company, potentially.


There are also risks to the Groupon model, and we’re already seeing some of them materialize.

One risk is that merchants stop wanting to play ball. Maybe they move their business to to a Groupon clone which offers them a bigger cut of the proceeds. Maybe they don’t return to Groupon because it turns out that too many Groupon buyers are only coming because they bought the Groupon, and don’t become valuable repeat customers. Or, conversely, maybe it turns out that too many Groupon buyers are people who would have come anyway, and so the merchant is simply taking a big haircut on their normal revenues. Or perhaps — as we’ve seen happen a few times, according to press anecdote — merchants simply get overwhelmed by Groupon traffic, and thereby alienate their existing customers.


If you look at the established market of Boston, the trend here is not good. As markets mature, they won’t be as white-hot as they were in their youth. But one big problem for investors is that none of them really have a clue what kind of revenue per merchant is necessary for profitability.

The other big risk is that consumers stop wanting to play ball. The novelty wears off, they find too many Groupons sitting unused in their desk drawer, they get burned one too many times by a deal which seemed really good in the email but which turned out in real life to be disappointing.

Already we’re seeing signs that this is happening: according to a guy called Sam Hamadeh, Groupon’s revenue per customer has fallen from $15 per month to $3 per month. Now the number of customers is still growing fast, but clearly profits are going to be hurt if those customers don’t spend nearly as much as they used to. Here are the numbers for Boston, again:


And there are other risks, too, including big possible legal risks. There are lots of laws governing coupons, in all 50 states and around the world, and Groupon seems to be happily violating dozens of them, while doing its utmost to fob legal responsibility off onto merchants who can’t possibly know what the law says.

But the biggest risk of all, which pretty much encompasses all of the other ones, is simply that Groupon will develop a bad reputation. If people don’t trust Groupon, then it’s all over.

In the beginning, Groupon got away with a lot, thanks partly to how innovative it was and partly because of the jocular tone to its emails. But at this point everybody knows what the model is, and the humor is hardy surprising any more. And increasingly consumers and merchants are asking just how good Groupon’s deals are, really. Not in terms of save $X if you spend $Y, but in terms of the intrinsic quality of the merchants being featured.

It seems to me that if Groupon wants the Yipit charts to start going up and to the right, if it wants to delight consumers, and if it doesn’t want to become shorthand for desperate-and-crappy merchants resorting to a last-ditch effort to get people into their otherwise-empty stores, then it’s going to have to start imposing more editorial control over its sales team.

In the long run, people will buy coupons only from those sites they trust to send them to great merchants. Groupon has first-mover advantage, but consumers are fickle, and will happily switch their allegiance to smaller companies they think are cooler, if Groupon makes them feel a bit unwashed every time they buy into an offer.

How can Groupon ensure that it features only merchants its email list will love? I haven’t a clue. But that’s the single biggest task facing the company. If it wins at that, it’ll be fine. If it fails, I fear it will slowly wither away.


Groupon is only site which brings the buyers together to purchase goods in bulk. Groupon restated that their revenues, net of the amounts related to merchant fees. As per the report mentioned in several sites, Groupon’s revenue has decreased 4 percent from june. . Groupon generated twice the amount of living social. Groupon revenue is declined due to formation of groupon clones. Groupon clones are much more like Groupon, so these sites start earning the most revenue. Hence there is a decrease in Groupon’s revenues.

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Cracking down on job-candidate credit checks

Sep 26, 2011 14:44 UTC

Last week, the California legislature sent the governor a bill that would ban most employers from running credit checks on job applicants. If the governor signs the bill into law (which this web site tells us he’s likely to), California will become the biggest get yet for those pushing for such laws around the nation. Is this just what a country full of unemployed people with wrecked credit needs? Or is it, as HR managers have been hollering, a way of hindering them from finding good, upstanding workers?

The back story is as follows. A decade ago, about a third of employers ran credit checks on job applicants; today, some 60% do. HR types (and, of course, the Big Three credit bureaus) argue that credit checks help firms find reliable employees who are unlikely to steal from company coffers. Civil liberties types argue that pre-employment credit checks have a disparate impact on groups that tend to have lower credit scores, like minorities.

The Great Recession is what makes this back-and-forth particularly interesting. Losing a job is one of the fastest ways to wreck your credit. Now, it seems, that same bad credit may hinder you from regaining a steady paycheck and mending your finances. Quite the vicious cycle.

But you’ve also got to feel a little bad for firms. The labor market is full of asymmetric information and while employers often have the upper hand (they know how much other workers get paid, what employees actually contribute to the bottom line, etc.), it can be a very scary thing to go out into the world and pick a person to let into your business.

So who should win the debate? Should firms be banned from using credit checks in the hiring process?

Let’s look at the evidence.

There is a lot of reason to believe that using credit reports to judge candidates will lead to unfair outcomes. Consider, for instance, a case the Department of Labor won against Bank of America which revealed that by using credit checks in its application process for entry-level jobs, Bank of America excluded 11.5% of African-American applicants, but only 6.6% of white applicants. Who else might reliance on credit reports work to exclude? Well, the major causes of bad credit are things like divorce, large medical bills, and unemployment. So, maybe divorcees, the uninsured, and the currently jobless?

Now, one might argue that while such a situation is unfortunate, it is nonetheless part of a bigger picture. By judging job candidates on debt-to-income ratio, accounts in collection, foreclosures, bankruptcies, and education and medical debt (all things firms report will make them less likely to hire a candidate), employers are helping to ensure that they wind up with good workers.

The only problem is, there isn’t any evidence that credit is an indicator of how reliable a worker will be, or the likelihood that he will embezzle or otherwise steal. As a lobbyist for TransUnion testified in front of Oregon legislators last year: “At this point we don’t have any research to show any statistical correlation between what’s in somebody’s credit report and their job performance or their likelihood to commit fraud.” The state of Oregon has since banned job candidate credit checks.

So have Connecticut, Maryland, and Illinois, joining first-movers Washington and Hawaii. It looks like California will be next. And that’s almost certainly a good thing.


This is a breath of fresh air. This is wonderful initiative. Many folks with great credit have bad character and vice versa.

Years ago, folks could make investment mistakes or become ill or have a house fire or what have you and it was not the end of their credit worthiness but a life experience that can actually build good character,and better knowledge base…

now the rich rule our nation with an iron rod of a million and one forms of debters’ prisons– we all know the uber class has such wonderful moral values.

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Nick Rizzo
Sep 23, 2011 21:52 UTC

Gold and silver had a “historically awful” week — WSJ Marketbeat

Bank of America seeks to slice $800 million in pizza assets — Bloomberg

Fannie Mae’s own law firms were robo-signing, according to a new FHFA report — AP

Why monetary policy is almost helpless against consumer deleveraging — Macro Resilience

The Eurozone crisis is a systemic failure — Streetlightblog

Robert Shiller: The debt debate destroyed any exuberance the American consumer might have possessed — Reuters

Older workers who lose their jobs are twice as likely to become long-term unemployed — HuffPo

One day on a Chicago city payroll earns man a $158K pension — Chicago Tribune

AOL is now requiring some Patch editors to generate sales leads as well — Business Insider

And Jacob Weisberg just eviscerates Ron Suskind — Slate





Naked Capitalism wonders:
“Arkansas police want to talk to man about toe sucking http://www.reuters.com/article/2011/09/2 3/us-toesucking-arkansas-idUSTRE78M7AS20 110923 (hat tip Buzz Potamkin). Is Reuters experimenting with the HuffPo strategy?”

Posted by walt9316 | Report as abusive

The HP board fiasco continues

Felix Salmon
Sep 22, 2011 23:26 UTC

In case Joe Nocera didn’t persuade you that HP’s board was pretty much the worst in corporate America, his replacement as Saturday business columnist, James Stewart, will probably manage to do the job:

Interviews with several current and former directors and people close to them involved in the search that resulted in the hiring of Mr. Apotheker reveal a board that, while composed of many accomplished individuals, as a group was rife with animosities, suspicion, distrust, personal ambitions and jockeying for power that rendered it nearly dysfunctional…

Still grappling with Mr. Hurd’s messy departure (H.P. sued him after he joined the rival Oracle as its president, later dropping the case), the company began a search for his successor. Four directors — Lawrence Babbio, John Hammergren, Marc Andreessen and Mr. Hyatt — volunteered to form the search committee.

Some other directors were immediately distrustful. They suspected that some colleagues hoped to advance their own ambitions, including in at least one case to be the next chairman. Others were so angry over Mr. Hyatt’s support for Mr. Hurd that they declined to participate in any committee he was on.

Now, Hurd’s successor, Léo Apotheker, is out, and HP has a new executive chairman as well as a new CEO. And how did the HP board choose Apotheker’s successors? Easy! Both of them — Ray Lane and Meg Whitman — were on the board already. Rather than appoint the best-qualified person for the job, two of HP’s board members managed to snaffle the prime positions for themselves.

Every once in a while, it can make sense for a board member to step in as the new CEO. But not in this case, when HP’s board is being used as a case study in what not to do in boardrooms around the country and the world. HP’s board has failed miserably in its job of governing HP effectively, and no member of that board should be rewarded for that failure by being given the job of running the company on a day-to-day basis.

The HP press release quotes board member Ray Lane, the new executive chairman, talking about Meg Whitman in the most content-free terms imaginable:

“We are fortunate to have someone of Meg Whitman’s caliber and experience step up to lead HP,” said Lane. “We are at a critical moment and we need renewed leadership to successfully implement our strategy and take advantage of the market opportunities ahead… The board believes that the job of the HP CEO now requires additional attributes to successfully execute on the company’s strategy. Meg Whitman has the right operational and communication skills and leadership abilities to deliver improved execution and financial performance.”

HP is, I think, beyond redemption at this point. No wonder shareholders have been dumping their stock: the only thing worse than the company’s management has been the performance of the shareholders’ own representatives on the board. It’s a sad and ignominious end for a company which was once the very soul of Silicon Valley. The best that shareholders can hope for, at this point, is that Whitman sells HP to someone who knows how to run a company with passion and integrity. Maybe Walter Hewlett can get a group together.


“the shareholders’ own representatives on the board.”

I hope one of the outcomes from this ficasco is that shareholders actually get more imput into the makeup of their boards.

Yes boards are elected… but the elections are uncontested. I’m pretty sure I could get elected president if I was the only one on the ballet. Hopefully in few years we’ll have a system where the nominating committee will put forth a slate of 12 – 15 canidates for 8 – 10 annually elected board spots.

Posted by y2kurtus | Report as abusive


Nick Rizzo
Sep 22, 2011 23:19 UTC

Employment for those under 30 is at its lowest levels since World War II — AP

Jeremy Grantham won’t be hiring them for GMO. “This is no market for young men,” he says. — MarketWatch

Inside the mind of a rogue trader — QFinance

Goldman Sachs will probably report a third-quarter loss — Bloomberg

Kara Swisher called Meg Whitman as HP CEO hours early — AllThingsD

Apple iPhones have an 89% retention rate. No other hardware is above 39% — AppleInsider

Countrywide Financial actively worked to silence its whistleblowers — iWatchNews.org

And Mohammed El-Erian says it’s going to get much worse before it gets better — Bloomberg



Regarding the iPhone retention rate question, that’s not even remotely surprising considering it’s an apples to oranges comparison. To stay on the iOS platform, you have no other choice but to buy another iPhone. To upgrade on Android you have a wealth of different hardware to choose from.

A more useful comparison would be OS retention rate.

Posted by spectre855 | Report as abusive