Felix Salmon

Business Insider, over-aggregation, and the mad grab for traffic

Sep 22, 2011 22:11 UTC

By Ryan McCarthy

The news that Business Insider raised approximately $7 million should be great news for those who follow the world of web media. Henry Blodget’s got a flat-out growth story on his hands: his staff of 60 now attracts 12 million visitors a month, according to their internal stats.

But there’s reason to be concerned about what Blodget’s team has sacrificed along the way. It’s worth noting that venture-backed media companies can very much be in a race against time for growth. Investors want a return on their money and, given the economics of web news, that almost always requires exponential growth in uniques and pageviews. (Note: I worked at the Huffington Post from 2009 until mid-2011. The Huffington Post, like many others, has been guilty of “over-aggregating” from source material.)

Take this article, for example, which employs one of the site’s characteristically amusing headlines “IT’S OFFICIAL: The Recession Has Created A New Lost Generation.” The piece was, as of this morning, posted prominently near the top of Business Insider’s home page, but it’s a flat-out rehash of a strong piece by the AP. So far, Business Insider’s piece has attracted 4,600 views, per their stats.

The AP summarizes new Census data, which can be found here, talks to economists and provides very valuable analysis of what this new data says about our economy. Very little of this is readily apparent from the Census news releases, by the way. The AP reporter, Hope Yen, did the hard journalistic work of sussing out these figures.

What does Business Insider’s piece offer? By my count, the piece reprints seven datapoints from the AP’s article. It offers one link to the AP’s piece, and no link to the Census department’s latest release. Nor does it offer any original analysis, context or information It does, however, link to a Business Insider slideshow of “19 scary facts about getting a job in this economy” at the bottom of the page. I have no real idea if Business Insider pays for AP content — I can only assume that if it did they’d simply cut and paste the entire AP article onto their site.

Here’s another example, which got 12,000 views per the site’s stats. Business Insider wrote 112 words on a 182-word TMZ story on a former NFL running back who is now living with his parents. There are two quotes in the original piece, which TMZ says were obtained from court documents. Business Insider reprints both quotes wholesale, then lifts almost every other fact from the original article, including details on the player’s contract and information about his child support obligations.

This seems to go against the basic principles of fair use — it diminishes the source article, and neither piece is transformative or adds any new information. But both posts certainly bring up issues of fairness. A minimum of effort could have added links to related stories on these pieces. With a little bit more effort the writer could have made observations about the larger context of these stories.

There are, of course, other examples — this piece offers only one external link to a slideshow on greeting cards and this piece takes the choicest portions of Forbes‘ rich list. And, of course, Business Insider isn’t alone in the practice of repurposing content for no other reason then keeping pageviews. But surely, in each case, Business Insider is actually keeping us one click away from interesting, original coverage, not bringing us closer to it or informing us about it.

There are also a  number of sticky disclosure issues with Business Insider’s coverage of its investors. In this post, Henry Blodget discloses that Marc Andreessen is a Business Insider investor, but there’s no disclosure in many of the pieces on the site’s page dedicated to Andreessen. There’s also inconsistency with respect to disclosures on the site’s mentions of Ken Lerer, who also co-founded the Huffington Post.

None of this is intended to say Business Insider doesn’t do some very smart web journalism. Joe Weisenthal, in particular, appears to work inhuman hours and is one of the smartest and most prolific voices in business journalism. Joe’s crafted the site’s voice after his own. He regularly posts Wall Street analyst reports that others don’t get, and he’s able to provide the kind of quick context that works really well for Blodget’s readership. Blodget, for his part, can be a great blogger and has a particular knack for analyzing failures.

So why does Business Insider risk undermining all that highly original, distinctive content for what appear to be roughly 18,000 article views? When media companies are asked to grow at a meteoric pace — and Comscore indicates that Business Insider’s unique visitors have nearly doubled this year — the line between original content and borderline theft gets awful blurry. The editorial mission quickly transforms from “What can I link to?” to “How much can I take?”

To be fair, Business Insider’s more prominent pieces are often its most original. But journalists and readers should be very worried when fast-growth media companies determine the standards for distinguishing between citation and theft.

One would hope readers and advertisers would eventually catch on to the kind of lazy lifting that would earn middle school students an F. But that hasn’t happened yet.

Update: Marco Arment concurs, from the point of view of someone regularly aggregated by TBI: “Business Insider’s mass replication of my writing is the only downside that has ever made me reconsider my Creative Commons license,” he writes.


“In an advertising supported business, a pageview is a pageview, original or not.”

That’s why journalists like Ryan should write for user-paid publications. There are plenty to chose from and they need good quality writing

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More lessons from paying people to be less poor

Sep 22, 2011 18:40 UTC

By Barbara Kiviat

Back in 2007, New York City began paying members of some 2,400 poor families to do things like get dental check-ups, open savings accounts, hold down jobs, show up for school, and carry health insurance. Cash incentives were meant to get people with complicated, resource-constrained lives to invest in themselves and their children in ways that would ultimately break the inter-generational cycle of poverty.

The effort, which was inspired by “conditional cash transfer” programs abroad, was the first of its kind in the U.S. Now the program is expanding to Memphis, Tenn., as the mayor there announced yesterday.

Conditional cash transfers (CCTs) have a remarkable ability to bring people together—members of both the left and the right hate the idea. Depending on where you stand, CCTs are offensive because 1) policymakers shouldn’t presume to know what people ought to do, or 2) government shouldn’t pay people to do things they should be doing anyway. I find both sides of that debate disingenuous, unless it’s paired with an argument to end preferential tax treatment of things like home ownership, retirement savings, and student loans—middle- and upper-class equivalents, except for the fact that they are hidden in the tax code and thus distort perceptions of government spending.

I’m much more interested in knowing how CCTs actually change the lives of the poor. The original New York City experiment—and it was an experiment, with thousands of families in a comparison group—saw mixed results. More visits to the dentist, but no change in middle schoolers going to class. A reduction in the use of expensive financial services like check cashing, but a minimal budge in families having health insurance.

The Memphis experiment builds on what was learned in New York City. In Tennessee, the structure of payments is simplified, families may turn to staffers for advice on making plans to earn the payments, and money tied to educational outcomes focuses on high schoolers and adults going back for their GED.

But these are changes to program design, not theory. The same two ideas about how CCTs might transform lives are at play. The first notion—that transfers can reduce material hardship and instability—was clearly demonstrated in New York City, where families earned, on average, $3,000 per year. From a report on program results:

Program group members were less likely to be evicted (2.7 percent versus 4.3 percent for control group members), to have utilities shut off (5.6 percent versus 8.7 percent), and to have their phone disconnected (20 percent versus 25 percent). Program group members reported less food insecurity (not having enough food to eat) and were less likely to report having “insufficient food” at the end of the month (15 percent versus 22 percent). They were also less likely to forgo medical care or fill prescription drugs because they did not have enough money (by 3.9 percentage points and 2.1 percentage points, respectively).

The second notion—that increased stability and resources lead to better long-term planning and goal attainment—is still an open question.

Over the summer, MDRC, the evaluation shop in charge of analyzing the New York City experiment, put out a fascinating report based on interviews with 75 families that participated in the program. The report specifically focused on the education component of the program.

While families often spent program money in ways that directly supported education goals—paying for school supplies, extracurricular activities, even a foreign language trip and a home computer—both adult and high-school-aged participants didn’t often draw a link between these activities and an ability to reach long-term goals. Make no mistake, the goals were there—and long before CCTs came along. Reading the MDRC report makes quite clear that even parents whose families live paycheck to paycheck want their kids to go to college and get good jobs, and that those kids typically share those aspirations.

So then why didn’t families make a connection between their behavior and their ability to reach those goals?

The MDRC report floats a number of possibilities, but the most compelling one is this: families knew they shouldn’t come to count on the money they were earning through the program. The New York City experiment was designed to last three years, and the families participating knew that. In other words, the program inadvertently replicated some of the very instability it was designed to overcome. The result, from the MDRC report, was that:

[T]he program did not tend to inspire hope that families who were experiencing severe poverty would be able to escape from it. This finding is evident in the way that parents and children described their feelings about the end of the program. The desire to maintain a job in a volatile economy, illness or disability, or a desire to stay home with children made changes in work a difficult prospect for parents. As a result, families did not feel that they were able to replace rewards income with work or with a better-paying job after the program ended, and instead talked about the program as an unusual and lucky period in their lives — one in which they would have extra help in making ends meet and would be able to enjoy some greater comforts. (Several parents, in fact, called the program a “blessing.”)

Does that mean a conditional cash transfer program can’t work in the U.S.? Not at all. But it may mean that we’re not going to prove that it can with short-term experiments.


Unfortunately for our “poor”, the govt has lavished enough benefits such that they will “loose” if they get a minimum wage job. Unfortunately, the only incentive for the uneducated to do the right things, like get an education, is the prospect for a life of minimum wage jobs that would be suitable for the uneducated and uninterested. That incentive has been taken away by our govt with food stamps, health care, housing, and welfare payments, all of which would be lost if these folks get a job, or an education.

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Europe, here comes your pitch

Mark Dow
Sep 22, 2011 17:07 UTC

By Mark Dow

As I write, financial leaders from around the world have assembled in Washington DC for a long weekend of hard thought. The initial signs are not encouraging. Many top European policymakers, especially in Germany, still appear to be in denial about the gravity of the situation and the need for a holistic solution. There seems to be too much attention paid to Greece and Italy, too much adherence to hidebound rules and compacts, too great a desire to punish the misbehavers and combat market forces.

Germany is the lynchpin. Germany, understandably, objects to two things: committing more fiscal resources and further compromising the integrity of the ECB. Yet, any pitch needs to find a way to mobilize sufficient resources to:

  • A. Recapitalize the banking system
  • B. Provide ample liquidity to ensure financing of core countries (e.g. Italy, Spain and France)
  • C. Keep enough ammunition on hand to enforce the credibility of Europe’s commitment to the core

Against the backdrop of these challenges, the rest of the world at present is very, very concerned. If Europe goes down hard—and on current trajectory, it will—we all suffer. I can’t remember the stakes ever having been this high. This weekend may represent the last good chance for the ROW to come together and engage Europe in a forceful, coordinated solution, before global deterioration—which has already accelerated sharply—goes non-linear.

This is the pitch I think the IMF and the ROW should be making this weekend.

  1. Combine the resources of the EFSF (approx. € 445b) with those of the IMF’s NAB (New Arrangements to Borrow, roughly $500b)
  2. Use the ECB (perhaps with the support of other Central Banks) to leverage the EFSF and NAB funds. This will give Europe a de facto unlimited balance sheet with which to achieve A, B, and C above.
  3. Coordinate a deep restructuring of Greek, Portuguese and Irish debt.
  4. Do NOT kick Greece, Portugal and Ireland out of the single currency, at least for now

This would get Germany most of the way around its two objections, and could be embraced by most—if not all—of the EU. A deep restructuring of Greece, Portugal and Ireland would indicate that the EU “gets it” and finally has the resolve to take the pain and cut its losses.

Points 1 through 3 are relatively self-explanatory. The interesting element is number 4. Good economics would suggest that Greece, Portugal and Ireland need to regain a competitive position as soon as possible, and structural reforms, productivity gains and deflation is not a realistic game plan. And, in fact, I would imagine many EU citizens wouldn’t mind “kicking out the misbehavers”. However, the practical reality is that building a ring fence around Greece, Portugal, and Ireland would be much more expensive and challenging if these countries were to be forced out of the single currency. It would significantly increase the likelihood of bank runs in Italy and Spain. Martin Wolf in a recent article makes this point very well.

Unfortunately, this would extend the horizon of bleak growth prospects for the “mauvaises élèves” (Greece, Portugal, and Ireland). It is therefore ironic that these countries, in the aggregate, are strongly inclined to stay in the euro. But they associate the euro with a prosperity and stability that had proved elusive for long stretches of their histories. It is also something they have relied on to temper the extremes of their often unwieldy political processes. And, from the perspective of the rest of the EU, compromising growth in Greece, Portugal, and Ireland is almost certainly a price worth paying in the name of the greater good. It would be in everyone’s interest, eventually, to have the countries that do not fit well by economic and financial criteria in the single currency to leave. But for now, the urgent task is to take the looming prospect of a deepening financial and economic crisis off the table. In words I remember from the emerging market policy crises of the 90s: first you put out the fire, and then you worry about rewriting the fire code.

Good luck.


What are you thoughts about the argument put forward here: http://streetlightblog.blogspot.com/2011  /09/what-really-caused-eurozone-crisis- part.html

If capital inflows are a larger problem than mismanagement, do you think that there are any proactive measures that could be taken to prevent future crises?

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There’s no reason why stocks are down today

Felix Salmon
Sep 22, 2011 15:48 UTC

There’s a lot of uncertainty in the global economy, and that’s the kind of thing which makes stocks volatile. This morning, we’re seeing that volatility express itself, with global stocks all falling and US stocks down about 2.5% from where they closed yesterday.

But let’s not kid ourselves that there’s any particular reason why global stocks are falling. And especially, let’s not try to invent some spurious reason for the fall, be it broad and inchoate (“global economy fears”) or weirdly specific (“Federal Reserve pessimism”).

It’s may or may not be helpful, here, to check out the price-and-volume chart of the S&P 500 over the past few days.


You see that little wobble in the mid-afternoon yesterday, before the high-volume sell-off at the end of the day? That was the immediate reaction to the release of the FOMC statement at 2:30pm. The big plunge, on unusually high volume, started about an hour later. And the big drop at the open today was much more notable in price terms than it was in volume terms.

It’s silly to think that the decline in stock-market prices was a rational reaction to the FOMC statement. If the FOMC is more pessimistic than the market expected, that’s normally a good sign for markets, since it implies that monetary policy will remain looser for longer. The market cares about the Fed because the Fed controls monetary policy. And so Fed forecasts are important because they help drive that policy. No one revised down their growth expectations as a result of the FOMC statement.

As a general rule, if you see “fears” or “pessimism” in a market-report headline, that’s code for “the market fell and we don’t know why”, or alternatively “the market is volatile and yet we feel the need to impose some spurious causality onto it”.

This kind of thing matters — because when news organizations run enormous headlines about intraday movements in the stock market, that’s likely to panic the population as a whole. They think that they should care about such things because if it wasn’t important, the media wouldn’t be shouting about it so loudly. And they internalize other fallacious bits of journalistic laziness as well: like the idea that the direction of the stock market is a good proxy for the future health of the economy, or the idea that rising stocks are always a good thing and falling stocks are always a bad thing.

Or, most invidiously, the idea that the most interesting and important time period when looking at the stock market is one day. The single most reported statistic with regard to the stock market is where it closed, today, compared to where it closed yesterday. It’s an utterly random and pointless number, but because the media treats it with such reverence, the public inevitably gets the impression that it matters.

Here’s a more useful stock market chart, for the vast majority of people for whom the stock market only matters as a long-term investment:


I’m not going to try to read any great narrative into this chart. But if you want to explain stocks to the broad population, this is the sort of thing you should be showing them. Rather than useless and irrelevant news about what happened to stock prices this morning.


Good point. The long-term chart shows a key point that the stock market has not generated a positive return for about a decade, since the peak around 2000.

This is why it is critical that folks own stocks than pay a nice dividend. Examples are AEP, D, RDS-B, MCD, KMB, LLY, etc.

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Adventures with online-banking videos

Felix Salmon
Sep 22, 2011 03:15 UTC

BankSimple came out with a preview of their service today and it’s very cool.

A couple of hours after watching this video, I got an email from Citibank — addressed to “Dear Feliz Salmon” — with the subject line “Announcing the new Citibank Online”.

Citibank has a video too, but it’s not embeddable. After looking at it, I have to say that the new Citibank Online looks much like the old Citibank Online: I don’t think there’s anything for BankSimple to worry about here.

The most interesting bit, for me, was the huge difference in the way in which the two banks put their videos together. BankSimple got its CEO to walk us through his bank account, as it appears on his website. Citi, by contrast, showed us an impossible account which looks like this:


“Jim Smith”, here, has $54,662.00 in his checking account. Of that, just $23,612 is “Available Now”. Maybe one of those 25 unread messages might tell him what seems to be the problem with the other $31,050. But he’s unlikely to read them: after all, his last login was on May 14 and it’s now sometime in the fall: his credit-card payment is due November 10, even though his Expense Analysis stops at June 5.

But my favorite bit of this screenshot is the breakdown in the expense analysis. Apparently Mr Smith withdrew $68,040 from ATMs in the past five months — that’s $13,608 per month, or about $450 per day, every day. All that cash is 57% of Smith’s total expenditures, which means that those expenditures add up to $119,368 in all, or about $286,484 per year.

Except: we’re also told that travel expenses of $9,948 are 13% of the total, which implies an expenditure rate of about $183,655 per year.

And then there are the wonderful “Other” and “Uncategorized” expenses. (The difference between the two, of course, is unexplained.) “Other” is $3,000 and 14% of the total, implying $51,428 of expenses per year.

But “Uncategorized”, at 16% of the total, is — get this — $299 million. Which means that Mr Smith seems to be on track to spend roughly $4.485 billion this year, in total.

Citi obviously poured much more money into its video than BankSimple did into theirs. It has high production values, even unto graphs which literally come out of your computer:


Clever trick, that — although customers expecting to see it in real life are probably risking disappointment. Again, the numbers aren’t internally consistent: the top expenditure category on the left is Groceries, which is just $55.50, or 2.3%, when broken down in the list on the right. Other big expenses on the left, like Business and General Merchandise, don’t even appear in that list. And Mr Smith seems to have gone on a serious diet: his total expenses from January 1 through July 20 now total just $2,411.22.

It’s literally inconceivable to me that anybody, watching these two videos, would get remotely excited about the Citibank product. Meanwhile, BankSimple already has a long waiting list of people desperate to switch over — a list which is likely only to get even longer now that glimpses of the product are being made public.

The first BankSimple accounts will start being opened in “a few weeks”, according to today’s post. They will be glitchy, as any 1.0 product always is. But I’m quite certain that BankSimple’s early customers will be patient and forgiving and that BankSimple’s executives and employees will be accessible, helpful and responsive whenever there’s a problem.

BankSimple will never release a screenshot or video of one of its products where there’s a line item showing $299 million in personal “Uncategorized” expenses. I know this despite the fact that they haven’t even launched yet, because that simply isn’t who they are. Citi, by contrast, is rudderless, spending huge sums of money putting together silly videos advertising its website and sending out 346 million card offers to North American customers per quarter. It won’t change the way it does banking. But I can.


Great post. I would have just dismissed the video without actually doing the math, so kudos for digging through and peeling the additional layers of this ridiculous onion.

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Nick Rizzo
Sep 21, 2011 23:09 UTC

UBS CEO Oswald Gruebel has apparently been asked to leave — FT Alphaville

Here’s a first look at BankSimple, a startup that promises to change the way we deal with money — BankSimple Blog

How a small college inherited a 1000-year trust that threatened to bankrupt the nation. A great read — Lapham’s Quarterly

Congressional GOP to Bernanke: You’ve done enough already — WSJ Real Time Economics

The Fed: No we haven’t. The Economist: “The hysteria over inflation has no obvious factual basis.” Take that, Volcker! — The Economist

Meg Whitman is reportedly being considered for the HP CEO position — AllThingsD

The White House has a “woman problem” — TIME Swampland

This guy was front-running Goldman Sachs from inside the firm, with a TD Ameritrade account — NPR Marketplace

Existing home sales are up 7.7% since the previous month, but prices remain flat or down — Reuters

And our new favorite Tumblr (besides Reuters Explains): Strange Bloomberg Headlines — Strange Bloomberg Headlines



Marketplace is produced by American Public Media (APM), not National Public Radio (NPR).

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A topological mapping of explanations and policy solutions to our weak economy

Sep 21, 2011 18:45 UTC

This was originally posted at Rortybomb

For the next few posts I need to allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available. I figured it might be a good idea to try and create some sort of topological map of the various clustering of ideas and policies that constitute these arguments as well as the overlap among them. This is a preliminary version of this map: I’d really appreciate your input about what is missing and how to make this better.

From those who think that the problem is related to demand and Keynesian ideas, there tends to be three areas of focus: fiscal policy, monetary policy and the debt hangover in the broken housing market. One can think all three are important – I certainly do – but most think one has priority over the others. Many will think one of the three isn’t in play or particularly useful as a focus of policy and energy. Here’s a rough map. Quotations are ideas, non-quotes are policies and parentheses are people associated with each:

This war of ideas is being fought in white papers and articles, and at academic institutions, policy shops and the blogosphere. As a general resources, here are the best one-stop resources online for most of the bulletpoints above:

Fiscal Policy as Expectation Channel: Woodford on Monetary and Fiscal Policy, Paul Krugman.

Quantatitive Easing: The World Needs Further Monetary Ease, Not an Early Exit, Joe Gagnon.

NGDP Targeting: The Case for NGDP Targeting: Lessons from the Great Recession, Scott Sumner.

Mass Refinancing: Economic Stimulus Through Refinancing — Frequently Asked Questions, R. Glenn Hubbard and Chris Mayer.

Inflation to help Deleveraging: U.S. Needs More Inflation to Speed Recovery, Say Mankiw, Rogoff, Bloomberg. Overcoming America’s Debt Overhang: The Case for Inflation, Chris Hayes.

Higher Inflation Target: A 2% Inflation Target Is too Low, Brad Delong.

Bankruptcy Reform/Cramdown: January 22nd, 2008 Testimony, Adam Levitin.

Foreclosure Spillovers: Foreclosures, house prices, and the real economy, Atif Mian, Amir Sufi and Francesco Trebbi.

Balance Sheet Recession: U.S. Economy in Balance Sheet Recession: What the U.S. Can Learn from Japan’s Experience in 1990–2005, Richard Koo.

Housing Backlog: There is a Boom Out There Somewhere, Karl Smith. Yes, Virginia, Our Housing Stock Is Now Way, Way Below Trend, Brad Delong.

Debt-for-Equity Swaps: Why Paulson is Wrong, Luigi Zingales.

Debt, Deleveraging, and the Liquidity Trap: Debt, deleveraging, and the liquidity trap, Paul Krugman. Sam, Janet and Fiscal Policy, Paul Krugman.

The flip-side to a demand crisis is a supply crisis, and there’s been a large effort to explain our high unemployment and below-trend growth as the result of supply-side factors. Having surveyed the arguments, I’ve split them into two categories. There are those who think that the government has created an increase in uncertainty. This is from a combination of deficits that scare bond vigilantes/job creators, new regulations that have killed all the potential new jobs as well as the government creating disincentives to work. The second area of focuses is on the productivity of the labor force, with special emphasis on skills mismatch, the characteristics of the long-term unemployed and the idea that something has changed fundamentally in our economy that will keep so many unemployed for the foreseeable future.

I’m making the productivity circle conceptually expansive enough to include “recalculation” stories, though I suppose I could add a third circle in the next version. I tend not to find these arguments convincing, but here are the arguments made in full as best as I could find them online:

European Policies: The U.S. Recession of 2007-201?, Robert Lucas. The classical view of the global recession, Gavyn Davies.

Expansionary Austerity: A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked, AEI. Large changes in fiscal policy: taxes versus spending, Alesina and Ardagna.

Liquidate the Homeowners: Are Delays to the Foreclosure Process a Good Thing? Charles Calomiris and Eric Higgins.

Stimulus is Sugar: Geithner Finds His Footing: Zachary Goldfarb.

Two-Deficit Problem, Bond Vigilanties: Spend and Save, Noam Scheiber.

Great Vacation: Compassionate, But Inefficient, Casey Mulligan. The Dirty Secret of Unemployment, Reihan Salam.

Long-Term Unemployed: Potential Causes and Implications of the Rise in Long-Term Unemployment, Andreas Hornstein, Thomas A. Lubik, and Jessie Romero. 10 Percent Unemployment Forever?, Tyler Cowen, Jayme Lemke.

Great Stagnation: The Great Stagnation, Tyler Cowen.

Patterns of Sustainable Specialization and Trade (PSST): PSST vs. the Aggregate Production Function, Arnold Kling.

Labor Mobility: Housing Lock is not a Major Part of this Crisis, Plus Scatterplots of Deleveraging!, Mike Konczal.

So what did I miss? What should go in the next version of this chart?

Read the original post here


The world is flat. I know that Friedman’s concept is simplistic, overused, and dated, but I am intrigued by the notion that the education and industrialization of the developing economies are leveling the production playing field, lowering barriers to entry for just about any productive or intellectual endeavor, and evening out wealth across much of the world. Some of this may be refected in your long term unemployed category, but I think it’s broader than that.

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The ETF loophole (almost) everyone missed

Sep 21, 2011 15:26 UTC

by Paul Amery

This post originally appeared at IndexUniverse.eu

For the webinar we ran last week on the subject of regulation, I put together a slide listing the ETF-related warnings that have been issued by an alphabet soup of international supervisory bodies since 2009.  In repeated public statements, regulators have reiterated their concerns over ETFs’ structure, their collateral and counterparty risks, possible contagion effects from ETFs to the broader financial market, short selling, leverage, and fallible liquidity.  Ironically, though, given what’s just happened at UBS, not one warning mentioned the issue of clearing and settlement as a potential concern.

Although we still don’t know the full details of the fraud at the Swiss bank, and my colleague Kumaara Velan reminded us yesterday of the danger of jumping to conclusions on the basis of insufficient evidence, multiple reports now point to loopholes in the way ETF trades are reported, cleared and settled in Europe as the key to unlocking the latest rogue trading scandal.  We tried to fill in some of the details ourselves a couple of days ago.

For many observers, it’s still hard to understand how UBS could have traded in ETFs using settlement dates that extended weeks into the future—as they apparently did—without the requisite post-trade checks occurring.

“When I found out banks were not confirming forward ETF [trades] until settlement date, I was pretty surprised,” Conrad Voldstad, chief executive of ISDA, the trade association for the world’s over-the-counter (“OTC”) derivatives market, said yesterday, according to Reuters.

Many criticisms of European ETF market transparency have focused on the fact that a large proportion of trades is conducted OTC.  However, the simple fact that transactions may be conducted away from a public exchange doesn’t relieve the counterparties involved from the obligation to record, administer and settle them properly, Voldstad is implying.

“Trillions of dollars trade every day in the OTC market…these trades are verified by back and middle office personnel, generally within 24 hours. For the operations department [at UBS] not to have called or e-mailed the fictitious counterparties to verify these multi-billion dollar trades does not make sense. Given the magnitude of the losses on the real trades, the fake trades must have had a multi-billion dollar gain, creating a large counterparty credit risk which should have been elevated to the credit risk department for vetting, margin calls or other action,” one industry insider commented yesterday on a Wall Street Journal article, making exactly the same point as Voldstad.

Details of how exactly the UBS fraud escaped the attention of the bank’s supervisors, and why trades were apparently not documented properly, will emerge in due course.  However, according to many press reports over recent days, several involving apparent leaks from people inside UBS, there’s been a widespread practice in Europe of failing to confirm immediately those ETF trades that are conducted on a bilateral basis.  Two days ago IndexUniverse.eu asked two European investment banks with large “delta-one” desks—Deutsche Bank and Credit Suisse—whether they send out confirmations as a matter of course following trades in ETFs.  Neither bank has yet responded. I should add that there’s no suggestion that either institution was involved in the UBS scandal.

On the basis of the available evidence, it appears that the UBS rogue trader combined two key bits of knowledge: awareness of the fairly liberal trade settlement rules in London (where there’s little sanction for late settlement, a compulsory “buy-in” of unmatched trades only occurs 30 days after the intended settlement date, and so by itself the forward settlement of an ETF transaction might not have raised suspicions);  and the knowledge that many counterparties wouldn’t automatically request trade confirmations.

Taken together, these two loopholes may have enabled the creation of fake transactions in UBS’s systems.  Even if this was the immediate cause of the fraud, the bank’s risk controllers seem to have missed other warning signs.  High gross trading positions, even if the trader reported his position as hedged, plus what were presumably significant cash outflows in margin as the result of losing futures positions, might together have been expected to flag that something was wrong.  Perhaps this is how the fraud was eventually spotted.

But it’s now clear that there’s a specific ETF element to the story too.

When I wrote about the issue of settlement “fails” in ETFs over two months ago, I was prompted to do so after hearing a passing comment from a trader to the effect that timely settlement of exchange-traded fund trades in the UK market was the exception, rather than the norm.

Unlike some commentators, who claim to have had foreknowledge of an impending ETF-related scandal, I admit I had no idea that lax settlement practices in ETFs might be disguising a major fraud.  I approached the subject more from the assumption that a hidden tax might be being imposed on people buying ETFs (for example, via higher bid-offer spreads than ought otherwise to occur) by those taking liberties with settlements procedures.

The subject of ETF settlements in Europe proved remarkably difficult to investigate. Traders were—with a couple of exceptions—unwilling even to discuss the subject.  One leading ETF issuer told me it didn’t monitor secondary market settlement efficiency in its ETFs, only whether primary market trades settled on time.  My enquiries to the three largest European stock exchanges, to regulators (BIS, the FSA, the Bank of England) and to clearing systems (EMCH, LCH.Clearnet), all met with similar responses: we don’t have any data on ETF settlement efficiency; or we have, but it’s confidential.

Only one organisation involved in clearing was prepared to help research the issue, but even then only on a non-attributable basis.  As I reported in my article, the data that organisation put together pointed to a specific practice of delaying ETF settlements in London, by comparison with other European trading centres, although not quite to the extent that my trader contact had reported.

Compare the relative openness in the United States.  There, the Depository Trust and Clearing Corporation (DTCC) reports regularly on settlement “fails” in both ETFs and equities.  The New York Fed does so for Treasuries and other bonds. It was as a result of the public availability of this data that some researchers, like Basis Point Group’s Fred Sommers, started writing about the disturbing rise in failed securities settlements (not just in ETFs, by the way) in the first place.

I’ve read reports over the last couple of days to the effect that compulsory post-trade reporting for ETFs can’t be brought in until 2013 at the earliest, with the next MiFID review.  The harmonisation of European securities settlement procedures, via the European Central Bank’s Target 2 Securities project, is even further away from implementation.

However, Europe’s ETF market participants surely need to move as a matter of urgency to throw light on the murky world of OTC trading and on ETF settlement efficiency.  All bilateral, off-exchange trades in ETFs must be reported so that the average investor can get a fair idea of what’s going on. Clearing houses and settlement systems—and I realise that there are many of them in Europe—should publish data on the efficiency of the post-trade processes in ETFs just as their counterparts do in the US market, and in the same way as Europe’s stock exchanges regularly publish data on bid-offer spreads and turnover.  Such data should be published both for individual funds and for ETF market makers, so we can see where potential problems lie.

Without such steps, public confidence in the ETF market, which must already be at a low ebb after the UBS scandal, is likely to wane further.  John Bogle, founder of Vanguard and the father of index-based investing, repeated his long-standing criticisms of ETFs in a CNBC interview on Monday, calling them “a bastardised version of the index fund” and adding that “only an idiot would want to trade indices all day in real time”.  The onus is on the ETF industry to prove him wrong.

Read the original post here

Why mortgage servicing won’t get fixed

Felix Salmon
Sep 21, 2011 12:50 UTC

Back in November, Treasury’s Michael Barr set a clock ticking, with respect to mortgage-servicing reform.

“Institutions are resistant to change and have difficulty implementing,” said Barr, but “you’ll see flow improvement over the course of the next year.”

Could I hold Treasury to that? Sort of: “You should hold us to whether things get better or worse. If a year from now nothing has changed, that would be a reasonable criticism.”

I was skeptical — and in March, when reform guidelines were leaked, I retained my belief that mortgage servicers simply aren’t capable of reforming themselves.

Now, we’re only a couple of months away from Barr’s self-imposed deadline, and the chances of anything substantive having happened by year-end have never looked more remote. Instead, we’re just getting more talk from the official sector that things aren’t good enough. Here’s Raj Date, who’s running the Consumer Financial Protection Bureau, addressing the American Banker Regulatory Symposium:

Date said servicing is marked by two features – the structure of servicing fees, and the consumer-servicer relationship – that make it especially prone to consumer harm.

Mortgage-servicing rights, for example, are often bought and sold among servicers.

“So a servicer can, in a sense, ‘fire’ a borrower; but a borrower can’t fire a servicer,” he said. “That reduces the incentive for servicers to treat borrowers properly.”

He said the servicing fee structure has also encouraged servicers to spend less than they might need to handle a spike in foreclosures.

Essentially, we’re still in the same place that we were a year ago: the government is wholly cognizant of the problems, but is having enormous difficulty implementing solutions.

Date’s point here is very important: the whole structure of the mortgage-servicing industry mitigates against reform. Servicers are like shareholders: if they don’t like something in their portfolio, they can just sell it. That’s a lot easier than trying to change things themselves. And the secondary market in mortgage-servicing rights also means, inevitably, that mortgages will, in general, end up being serviced by the institutions best capable of extracting the maximum amount of money from any given borrower. Their responsibilities are first and foremost to their own shareholders; any responsibilities to borrowers are far down the list.

A great example of this has been uncovered by American Banker’s Jeff Horwitz, who has a two-part article (part one, part two) on the fiasco that is captive mortgage reinsurance.

Mortgage insurance started out as something very sensible: if there were doubts about a borrower’s creditworthiness, that borrower was required to buy mortgage insurance. But then the banks decided they wanted in on that income stream, and things started getting very skeevy. Essentially, they asked for 40% of the insurance premiums to be returned to them as kickbacks, disguised as “reinsurance” — a product carefully designed so that the banks would never have to pay any claims. It was $6 billion of free money for the banks, and of course it all ended in tears when the mortgage insurers went bust.

According to Horwitz, the Department of Justice has been sitting on a massive dossier explaining all this activity in great detail, and has the ability to bring a big case against the banks in question. But no case has been brought, maybe because Justice doesn’t have the financial expertise to have confidence in their ability to prosecute a case.

Will the CFPB step up and enforce mortgage-reinsurance cases against the banks? Maybe — although I’m not holding my breath. But conceptually speaking, I’m still very skeptical about the idea that the mortgage-servicing industry can be fixed with a combination of regulations and enforcement. Even if you get tough regulation, the enforcement never seems to happen. That’s why we won’t have seen any serious change to mortgage servicing by the time Barr’s deadline has been reached. Or thereafter, either, for that matter.


tmc, why wait? You can move today to a bankster free society in North Korea.

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