Felix Salmon

Here’s how best to explain what happened to Sallie Krawcheck yesterday: Krawcheck was the head of Merrill Lynch’s Thundering Herd, reporting directly to Bank of America CEO Brian Moynihan. But Merrill Lynch’s Thundering Herd is no longer particularly important to Bank of America. When Krawcheck was offered a position commensurate with the importance of her team to the bank, she quit — as Moynihan knew she would.

Here’s a simpler way of seeing the same thing: the words “Merrill Lynch” appear exactly once in the BofA press release — and then only in the context of  “institutional investor services such as Bank of America Merrill Lynch Global Research.” See if you can spot the Thundering Herd in this sentence:

Darnell is responsible for those businesses serving individual customers and clients including deposit, card, home mortgage, wealth management, small business, and related products and services.

Yep, it’s that “wealth management” in the middle there, squeezed in between home mortgages and small businesses — a good indication of how important it is, these days, to Bank of America.

In that context, Moynihan basically had two choices: he could promote Krawcheck out of Merrill to give her all of Merrill Lynch’s consumer businesses, or he could demote/fire her. Given that she has little in the way of consumer-banking experience, and risks in the mortgage area are the biggest existential threat to BofA right now, he chose the latter.

Is it the right decision to marginalize Merrill’s brokers in this way, making them just one part of a wealth-management operation which itself is just one part of the “individual customers” group at BofA? Josh Brown makes the case that over the long term it’s probably inevitable: “the jig is up,” he writes, “and everyone knows that Merrill Lynch’s fiduciary responsibility is to the shareholders of Bank of America first and the clients second.”

Which is undoubtedly true. Here’s the end of the press release:

Removing a layer of operations management, aligning leaders with our customer groups, and simplifying the organization reflect the primary objectives of the Project New BAC, begun in April 2011. These and other organizational improvements will eventually take effect across the consumer, home loans and support areas covered by phase I of New BAC…

“There is hard work ahead to finalize and implement our New BAC decisions from among the hundreds of thousands of ideas employees have submitted,” said Moynihan.

The thing to note here is the name of Moynihan’s flagship revamping project: “New BAC.” The name of the company is Bank of America; BAC is its ticker symbol. I’m sure owners of BAC shares are happy that Moynihan has them top of mind. But if you’re a wealth manager at Merrill Lynch or US Trust, you’re working for your clients first, and your clients are not going to be happy if they think that you’re ultimately working for BofA’s shareholders.

I suspect that wealth management at BofA, then, is going to act a bit like dialup revenues at AOL: a steady and dependable revenue stream, in long-term secular decline, which can be used to fund investments in the rest of the business. For the bank, that might make sense. But for Sallie Krawcheck, it clearly marked the end of the road at BofA.

Despite the launch today of Counterparties.com — which you really should check out, if you haven’t already — we’ll continue doing a (near) daily Counterparties post here. This will consist of some of the links from Counterparties.com, organized into paragraphs and themes, plus perhaps a few unique to this blog. Or perhaps we’ll do something different; we’re still experimenting. What do you think we should do?

The CEO of Deutsche Bank has said that market conditions remind him of late 2008. Meanwhile, Heidi Moore reports that banks — including Deutsche Bank — could lose up to $60 billion in the FHFA lawsuit. Congressman Brad Miller is pleased with this lawsuit; considerably more so than the hecklers who crashed his supposedly press-only conference call.

Mother Jones has secret audio recording of a recent Koch brothers fundraising meeting, where they allege Charles Koch compared President Obama to Saddam Hussein. Not so fast, argues Ben Smith: Koch was perhaps quoting Saddam when he referred to “the mother of all wars.” (Of course, Hussein actually said “the mother of all battles.”) Michael Arrington is now also preparing for the mother of all battles, declaring his intention to control both TechCrunch and his new venture capital fund with a bellicosely-illustrated blog post.

In friendlier news, Jack Shafer, formerly of Slate, will be joining Reuters, where he gets “to be Public Editor to the universe.” Meanwhile, Shafer’s platonic work spouse Tim Noah is heading to The New Republic.

The Swiss National Bank is determined to prevent their massively-appreciating currency from getting any more expensive.

Ever wanted to know more about the Carlyle Group, the private equity firm (with an emphasis on the “private”) targeted by Michael Moore? Here’s their IPO filing.

And today wasn’t a great day for women at the tops of large corporations. Sallie Krawcheck, Bank of America’s head of global wealth and investment management and one of the most powerful women in the finance industry, is out of a job. So is Yahoo CEO Carol Bartz, who emailed every Yahoo employee to inform them she’d just been fired by phone. The WSJ tweeted that Yahoo stock was up more than 6% in after-hours trading on the news, while rapper Snoop Dogg tweeted his willingness to be the new Yahoo CEO.

Counterparties.com launched today, and was met with great articles from Megan Garber at Nieman Journalism Lab and Jason Del Rey at AdAge, as well as many congratulatory tweets. I know this because if I visit the “All Sources” page for Counterparties.com on Counterparties.com, I find a long list of people and blogs who have linked to the site today, all powered by the fabulous people at Percolate.

Percolate is a fantastic engine for this kind of thing — a pared-down, ultra-simple website which just tries to link to the best and most relevant information we can find. You show it your RSS feeds and the people you follow on Twitter; it will generate a dynamic list of stories generated by your own personal tastes. Go on, try it out: I’ve got a bunch of invites on the other side of this link.

One of the things that distinguishes Percolate from other, similar services like Summify is that Percolate itself is social: you react to stories by tagging them and adding comments for your friends to read. When I do that from the Counterparties account on Percolate, the tag automatically becomes the tag on the Counterparties website, and the comment becomes the headline you click on to get to the story.

In fact, I rarely do such things myself: the real day-to-day work on Counterparties is done by Ryan McCarthy, who was wonderfully described by Garber as the guy “playing the part of the Human in the production”. The feeds driving the Percolate engine are mine; the voice and personality of the site are Ryan’s. (He’s a genius at coming up with tags like “Hope/Change/Etc”.) There’s nothing automated about Counterparties: everything there is touched and written and placed by hand, and in fact we have a pretty steady stream of stories which don’t show up in the Percolate engine at all but which we include all the same.

A surprisingly large amount of work went into creating this pretty basic site: none of it would have been possible without Liesel Kipp organizing everything, Josh Turk designing everything, and, above all, my consecutive bosses, Keith McAllister and Chrystia Freeland. Both of them understood the idea immediately and intuitively, and managed to rustle up the funding to make it happen and hire Ryan.

Still, this is a basic site, and there’s much more to come. An email newsletter, for one thing, and also a Counterparties widget which I can embed on this blog and which can also be placed on any other page on the internet. And, eventually, some kind of advertising too. I have a dream on that front: just as Counterparties is the first mainstream media website which consists of nothing but external links, I’d love the ads to be the same. Clickable, yes, but in the sense of clickable and dynamic lists of headlines, which take you to great content rather than to the advertiser’s own site. I want to break out of the current paradigm where only idiots click on ads, and go to a place where the ads are just as useful to readers as the main content is. (If you have any interest in experimenting with that kind of model, do let me know!)

Counterparties.com is brand new, and we’re certainly making loads of mistakes — do let us know about anything you like, or dislike, or which is broken in some way. Leave a comment here, email anybody involved, or best of all use Twitter: we’re up and running there, as @counterparties, and would love you to follow us. (One question: should we tweet everything which goes up on the page, or be more selective? And another: do you still want to see daily Counterparties linkfests here on my Reuters blog, and if so, what format would you like them to take?)

As I told Del Ray, there’s nothing hugely innovative here — the idea behind Counterparties is a very obvious one, which thousands of people have had. And you’ll find more than a little of the DNA of sites like BuzzFeed and Atlantic Wire at Counterparties. If anything sets Counterparties apart from other aggregation/curation sites, it’s that it’s significantly more stripped down: we just want to send people away, and we produce no real content of our own.

But it’s also very scalable. Counterparties is built on my interests; it would be reasonably easy, now we’ve done it once, to build similar sites for health, or law, or markets, or domestic news from Canada. I don’t know how we’ll judge its success — we don’t really have any criteria on that front. But I hope that all of you will find it useful and check it out on a regular basis. There should always be some wonderful new stuff for you when you do. And we promise to try to cut down on pictures of white men talking.

The NYT’s Janet Morrissey, this weekend, had a long profile of a music-download service which as far as I can else no one else has even so much as thought about for about three years. The story itself is not particularly noteworthy, but there’s one paragraph near the beginning which encapsulates very neatly a lot of what can go wrong when journalists encounter statistics. Here it is:

About 95 percent of music downloads in 2010 were unlicensed and illegal, with no money flowing back to artists, songwriters or record producers, according to Alex Jacob, a spokesman for the International Federation of the Phonographic Industry. So riches could await a company that persuades some of these Internet scofflaws to change their ways.

This paragraph is structured in a standard journalistic manner: start with a fact, then say what your source was for that fact, and then draw a conclusion from that fact. Except that in this case, the standard journalistic formula is twisted inside out.

First of all, the central assertion is almost certainly wrong. I feel comfortable in saying that it’s simply not true that 95% of music downloads in 2010 were illegal. That number was, literally, incredible in January 2009, when the IFPI first trotted it out as a number averaged over a three-year period. And since then, the iTunes music store and other legal services have grown very fast. What’s more, even the IFPI seems to have backed away from the figure: it appears nowhere in its 2011 Digital Music Report. The highest such number there is the claim that “in the UK, for example, 76 per cent of the music obtained online in 2010 was unlicensed”.

In any case, the last people you’d trust to come up with a reliable figure for such things would be the industry group devoted to demonizing and exaggerating the threat of illegal downloading. Morrissey doesn’t seem to understand, here, that you can’t just quote the IFPI and be done: the fact that the number is coming from the IFPI, far from being a reason to believe it, is a reason not to believe it. At the very least Morrissey should have asked whether the number was based on any kind of empirical research; instead, she felt comfortable simply parroting the nonsense being put out by the paid flack for a pressure group, and reporting it as fact.

And what’s more, the statistic isn’t even relevant. Let’s say I download 361 albums one night over Bittorrent, and I have 19 friends who each download and pay for a single album on iTunes. Then it would be true to say that among me and my friends, 95% of the music downloads were unlicensed and illegal. But it would also be true to say that 95% of us are downloading music legally and paying for it. Would riches await a company that persuaded the scofflaws to change their ways? No, because there’s only one of me. And if I start paying for the music I download, you can be sure I won’t be downloading 361 albums in one night.

Before you start quoting statistics, then, it’s always worth (a) knowing where exactly they come from; (b) verifying them independently if you were fed them by some pressure group; and (c) making sure that they say what you say that they say. Otherwise, you just end up looking credulous and silly.

Update: IFPI’s Alex Jacob responds in the comments, saying that his 95% figure is “based on independent research in a series of markets around the world”.

This chart comes from a Michael Cembalest’s research note today. The key is in there too. I’m not making this up:

1. The toreador in a floppy hat, and the F1 driver with his helmet, represent Spain, Italy and the rest of the Euro Periphery.
2. The three men with helmets, shields, and medieval weaponry represent the CDU, CSU and FDP parties in Germany.
3. The blue-and-white sailor boy is Finland. Obvs.
4. The woman with an oversized carrot and her friend in overalls with a shovel represent the Social Democrats and Greens.
5. Wotan represents the Bundesbank.
6. The piggy bank is the IMF.
7. The grey-haired Banque chap is the ECB.
8. The chap in the red bib is Poland.
9. The artists are France.
10. The angry chef, the sweeper with a broom, the airline pilot, and the rest of the motley crew at bottom left, represent EU taxpayers in Core countries.
11. The storm troopers are the EU Commission and Euro Group Finance Ministers, chaired by Jose Manuel Barroso and Jean- Claude Juncker.
12. The monocled banker and his assistant are EU bondholders and shareholders.

Full credit here is given to “Peter Cembalest, who specializes in conceptualization of such phenomena”; I assume that Peter (age 9) helped out too with the Icelandic bonus extra, for people who make it to page three. But Iceland sadly didn’t make the cut as one of the “12 players in the EMU Debt Crisis most likely to affect policy from here”.

Cembalest does at one point feel the need to explain what he’s doing here:

If today’s diorama analysis borders on the absurd, so does maintaining the fiction that accumulation of massive public and private sector claims in Europe can somehow be engineered away.

Still, I like the idea of sitting all the key European players in a room with a box of lego and telling them to work things out that way. The results couldn’t really be more farcical than those of the EU bank stress tests.

As markets plunge again today, ostensibly on existential worries about the eurozone, you might want a plain-English explanation of what the root of the problem is. And John Lanchester is a great place to turn for such things:

On 16 August, Nicolas Sarkozy and Angela Merkel had an emergency meeting to decide what to do about the Eurozone crisis. After it, they gave a press conference at which they spoke in platitudes about the need for Europe to improve its ‘economic governance’, avoiding all specifics. They precisely and explicitly ruled out the only two things which would have helped: the creation of ‘eurobonds’, i.e. debts backed by the full economic weight of all the countries inside the eurozone; and the extension of the €440 billion European Financial Stability Facility. It’s easy to see why they did this, and their reasons are entirely to do with the domestic unpopularity of giving more aid to the indebted and severely struggling ‘Club Med’ countries of Southern Europe. Unfortunately, Merkel and Sarkozy’s inaction is a recipe for certain disaster. Everybody and his cat knows that the eurobond is the only way out of the crisis for the eurozone in the medium term; as for the necessary size of the short-term bailout facility, Gordon Brown’s guesstimate was €2 trillion. That ‘could have convinced the markets that Europe meant business’. Huge, sustained and manifestly undeflectable government intervention on that scale is the only thing which will cause the speculators and hedge-funders and ‘hot money’ types to back off. Instead, nothing.

Lanchester’s full essay is well worth reading, and helps to put today’s news in perspective. When Mario Draghi says that Europe needs to “make a quantum step up in economic and political integration,” he’s basically agreeing with Christine Lagarde that Europe’s nations need to stand together. And when elected leaders signally fail to say the same thing, markets fall.

Meanwhile, amazingly, the Greek bond exchange is still far from a done deal, and Landon Thomas does his best to try to explain how Europe’s banks are being pushed to accept it:

This week, bankers representing the Greek government — Deutsche Bank, BNP Paribas and HSBC — have been explaining to investors why it is in their interest to trade in their decimated Greek bonds, take a 21 percent loss and accept a new package of longer-dated securities with AAA backing…

With the price of Greek debt trading in some cases at 50 cents on the dollar — even lower than when the bailout deal was announced in July — the 21 percent haircut seems to be quite a bargain.

As a bonus, the new bonds would be governed by international law, rather than Greek law. That is a significant alteration of lending terms that would strengthen the negotiating hand of the bondholders if Greece eventually concluded it had no alternative but to default — even after this latest bailout.

The math isn’t quite as simply as Thomas implies — if you take a 21% haircut on a bond, the new instrument is not automagically going to be worth 79 cents, even if it does have “AAA backing”. That backing will be in the form of long-dated zero-coupon collateral which is hard for bondholders to extract, and the new debt will still have a low credit rating and a large amount of default risk baked in.

But the governing-law part of the deal is important. Thomas cites (but doesn’t link to) Lee Buchheit’s important paper on that topic. Basically, current Greek debt is in many ways worthless to bondholders: if and when Greece defaults, they have no legal recourse. But if the exchange goes through, then the new Greek debt will give bondholders real teeth in the event of default.

There’s still a lot of weirdness going on in Greece’s debt, especially at the short end of the yield curve. Consider this, for instance: the Greek bond maturing on January 11 is trading at par — the market expects it to be paid in full, and the yield on the bond is in single digits. But the Greek bond maturing on March 20 is trading at about 63 cents on the dollar, for a yield well into triple digits. Meanwhile, the bond maturing on May 15 is trading in the low 80s, for a yield of around 30%.

There might be a good explanation for why short-dated Greek debt is trading so oddly, or it might just be an artifact of illiquidity. But the general chaos and uncertainty that’s reining in Europe right now is very reminiscent of the height of the financial crisis. Crises of confidence are always self-fulfilling, and the longer governments take to react to them, the worse they get. Europe, by its nature, moves slowly. And that’s bad news for global markets.

Microsoft releases its Ten Immutable Laws of Computer Security, showcasing their usual flair for graphic design. We particularly like number nine.

The New York Post reports that forty six people were shot in New York City over the long weekend and that’s not counting the three civilians killed and two policeman injured in Crown Heights last night. This is the highest total for one weekend in the city in a very long time. “I can’t remember a couple of hours like these since the days of crack,” said one source. Meanwhile, Yosemite National Park is also having its deadliest year in more than a decade.

Rupert Murdoch’s papers aren’t the only UK tabloids with egg on their face: the Daily Mail just made its sixth recent apology, this time for alleging that Vanessa Redgrave “had once found her husband in bed with her father.” Oof.

After an initial denial, the San Francisco Police Department is now acknowledging that their investigators did assist Apple in searching for a missing iPhone 5 prototype. This is important because SF police officers literally knocked on a door, identified themselves as police and then stood aside as private Apple detectives searched the home and made threats against its residents.

And here’s a quick Q&A with cyberpunk founder William Gibson.

As a general rule, it’s the risk-on trades which have a tendency to blow up in your face. If you borrow in a low-yielding safe currency and invest in a higher-yielding risky currency, you make money every day, but can lose it all — and then some — with one violent currency move, when the risky currency suddenly weakens.

Today, however, it’s the other way around. With one announcement, the Swiss National Bank sent the Swiss franc — a classic safe currency, which rallies in times of uncertainty — plunging. To give you an idea of just how insanely huge today’s currency move was, here it is in the context of the past 12 years or so:

What this chart shows is that even during the recent crises, the Swiss franc basically never rises or falls more than 2% in one day. Today, it moved more than 8% — that’s a 20 standard deviation move. If market movements were normally distributed (which, of course, they’re not), 20 standard deviation moves would never happen. You can be quite sure though, that the SNB move today caused a lot of pain to a lot of people. Remember what the Swiss franc volatility surface looked like a couple of weeks ago?

As I wrote back then, this chart shows a market very bullish on the Swiss franc and bearish on the euro — a market betting strongly against the SNB’s ability to weaken the Swiss currency. Well, that didn’t work out very well. But just check out what the same chart looks like today, post intervention:

The first thing to note here is that the crazy implied volatilities seen two weeks ago seem positively low by today’s standard. Check out the y-axis: it’s now going all the way up to 31.35, compared to a maximum of 26.975 last time we looked at this chart. And in general the entire surface has risen a lot over the past couple of weeks. If you want to bet on the Swiss franc today, in any direction, you’re going to have to pay a lot of money to do so.

But there’s still a huge amount of skew here, in exactly the same direction. Over the near term, it’s not as pronounced as it was — there are lots of people betting that the SNB might be able to weaken the Swiss franc over the next few weeks. But over the long term, the market is speaking clearly: everybody thinks the Swiss franc is going to strengthen and many fewer people think it’s going to weaken. The SNB might have won this battle, but it’s not going to win the war.

And this is a hugely important war for Switzerland. Michael McDonough puts the Swiss franc’s strengthening into the context of Switzerland’s domestic economic health:

The problem is that the international capital flocking to the safe haven of the Swiss alps really doesn’t care about Swiss exports. And if you look at Swiss exporters, even the top gainers, like Swatch, which rose 6% on the day, actually fell in euro terms. The broad Swiss stock market, up 3.9% today, didn’t even come close to making up for the currency losses imposed by the central bank on foreign investors.

The main winners today, I suspect, are just going to be black swan funds and anybody else making bets on extreme market moves. You don’t see 20-standard-deviation events very often, and when you do, there are always one or two people with out-of-the-money options who suddenly make a fortune. But over the long term, the markets are stronger than any central bank. The Swiss franc will test 1.20 again, and when it does, we’ll see in practice just how many euros the Swiss National Bank can stomach before it gets full.

I like the fact that the NYT splashed Steven Greenhouse’s article on the Post Office’s woes all over its front page yesterday. There’s not much new here, but it’s a huge and important story and the public is far too ignorant of it.

“The causes of the crisis are well known,” writes Greenhouse, “and immensely difficult to overcome.” This is true. And the big one — the secular shift from snail mail to email — is not something that Congress can do anything about. But just look at how Congress is tying the Post Office’s hands behind its back here — and not just by forcing it to pay $5.5 billion per year into a retiree healthcare fund.

The law also prevents the post office from raising postage fees faster than inflation…

In some countries, post offices double as banks or sell insurance or cellphones. In the United States, the postal service is barred from entering many areas…

The postal service is also asking Congress for permission to end Saturday delivery.

It seems to me that a significant part of the problem here lies with Congress and that a massive bout of deregulation could be just the solution that the Post Office is looking for. Congress is micromanaging the Post Office, telling it how much it can raise postage rates, telling it that it can’t offer financial services (despite its huge business in money orders), telling it that it can’t get into all manner of other businesses either and telling it that it has to deliver mail on Saturdays. Astonishingly, amid all these rules and regulations, the Post Office is losing billions of dollars.

I see a lot of scope for bipartisan agreement here — unshackle the Post Office so that it has a hope of serving the country indefinitely into the future. Republicans like deregulation, right?

The problem, I think, is that for all that Republicans like deregulation, they really hate the idea of a state-owned organization competing with the private sector. Of course, the Post Office does that already — it competes with FedEx and UPS. But the USPS, as a government-subsidized organization with thousands of locations nationwide and a massive reserve of public trust, could be a formidable competitor in all manner of different markets and none of the incumbents in those markets would welcome the competition.

Over the long term, however, I suspect that the only way to save the Post Office will be to allow it to move into financial services. There’s a lot of expertise in the rest of the world when it comes to the questions of how to set up and run a post bank. Meanwhile, banks in the U.S. are mistrusted and disliked and many people would love to be able to just bank at the Post Office instead.

It might be too late now to set up a post bank — but I doubt it. (This is still a country, after all, where most people still use paper checks.) There’s a window of opportunity here. Let’s grab it, before it’s too late.

Why is BNY Mellon’s ex-chief, Bob Kelly, getting $33.8 million in severance and benefits in the wake of resigning his position? As Theo Francis explains, it’s because, in the words of the official 8-K, “Mr. Kelly will receive the benefits to which he is contractually entitled on a termination other than for cause”. If this was actually a resignation, Kelly would have got much less. But in reality — and this will come as a surprise to absolutely no one — he had no choice in the matter: he was fired by the board.

The board is spinning this as a question of management style: they’re kicking out the hotshot CEO, and replacing him with the company man. That’s fine, and their prerogative. But the real problem at BNY Mellon is not one of management. And although it can look pretty bad in the press, massaging its earnings and neglecting its duties as RMBS trustee and ripping off its customers on FX fees, ultimately such things are symptoms of a much deeper malaise.

BNY Mellon makes its money by managing $26.3 trillion in assets under custody. That’s a bigger number, I think, than is humanly possible to comprehend, but here’s a start: it’s about $4,000 per human being on the planet, or $85,000 per American, or $235,000 per US household, or five times the market capitalization of the S&P 500. It’s a truly insane amount of money. These aren’t BNY’s assets, of course — they all belong to someone else. But BNY looks after them, and reliably looking after that quantity of assets is an incredibly important and stressful and difficult and expensive thing to do.

Now if you have $26 trillion in assets under custody, and you can lend them out at a very modest interest rate, you can make a lot of money. But interest rates have been at zero for three years now, and show no sign of rising any time soon — BNY Mellon, and its custodial rival State Street, are among the biggest losers when it comes to the Fed’s zero interest rate policy.

So BNY Mellon is facing a much bigger problem than the question of whose name is going to be on the CEO’s desk. It can try to squeeze profits out of areas where they shouldn’t really be squeezed — by dodgy accounting, or by being less than fully transparent in its FX dealings, or by failing to live up to its duty as a trustee. But the big problem, of zero interest rates, isn’t going away any time soon. Which is why BNY Mellon is trading at a market capitalization of less than $25 billion, despite having roughly six times that sum in cash on its balance sheet.

The board, I think, should not be trying to maximize quarterly profits in this interest-environment. The right thing to do, in terms of preserving the long-term value of the franchise, is to treat clients as well as you possibly can, understand that profits are hard to come by when rates are at zero, and wait patiently for better days to arrive. BNY is a public company, so it finds it hard to do that — you can be sure that Kelly would never have been fired if the stock had been going up rather than down. The board’s duty is to represent shareholders, and the shares have been falling, so the board fired the CEO. It’s unlikely to make much of a difference. It just isn’t Bob Kelly’s problem any more.

Update: The part about lending out assets was silly and lazy, sorry. BNY does have an asset-management business with something over a trillion dollars under management; those assets can be lent out. Are repo rates directly related to the overnight Fed funds rate? No, but they’re not unrelated, either. More importantly for BNY, there’s the question of how custodian banks make money from the assets they’re looking after. I haven’t seen a breakdown, but my guess is that most of those assets are fixed income of some description; even if they’re not, their owners tend to be hyperconscious of every basis point when they’re living in a zero-interest-rate environment. Custodian banks make money by effectively reducing the income that the owner gets from her securities by a certain number of basis points. That number looms much larger in a zero-interest-rate environment than it does when rates are higher.

With the help of Nick Rizzo, I’ve done some basic number crunching on the FHFA lawsuits. I used three different metrics to see how aggressive any given lawsuit was: the number of individual named defendants; the total number of pages in the suit; and whether it asked for punitive damages. My favorite of the last form is the one taking aim at the Squid (which, incidentally, quotes Matt Taibbi at the bottom of page 77):

Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.’s misconduct was intentional and wanton… Punitive damages are therefore warranted for Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.’s actions in order to punish them, deter them from future misconduct, and protect the public.

In any case, here’s the league table. I calculated a total score by taking the number of pages in the lawsuit, adding the number of individual defendants multiplied by 10, and then adding an extra 100 points if the FHFA was asking for punitive damages:

JP Morgan, here, is the clear winner — until you realize that Bank of America is split into three different parts. If you take Countrywide, Bank of America, and Merrill Lynch and add their scores together, then the total for BofA reaches 884 points, and no I’m not going to worry about double counting.

All silliness aside, the total number of named defendants here, including various different individuals and corporate entities, is a whopping 268, including a small amount of double-counting. This is a full-employment act for lawyers, and I’m pretty sure they’re going to be fighting this one out for a long time; I can’t imagine, having put all of this work into these suits, that the government is going to be remotely willing to simply give all of these banks blanket immunity as part of a global settlement with the 50 state attorneys general.

I’ll have more on the substance of the suits later; suffice to say that they’re strong, and aggressive, and exactly what I’ve been looking for for a while. These banks lied to investors when they put together mortgage securitizations. And one way or another, they’re about to start paying for that. About time too.

Felix Salmon Paul Smalera, you’re the king of all media!

Paul Smalera Well yes, I suppose I am.

Felix Salmon First you post a piece about how Slate should spin itself off to some VCs

And now we’ve gone and done a video too!

So, I threw lots of very sensible objections at you

Paul Smalera Indeed you did.

Felix Salmon And at the end of the whole thing, I assume that you inwardly conceded that I was right

You’re really just trolling, right? You’re not actually serious.

Paul Smalera Ha! You assume incorrectly!

This is no Swiftian Modest Proposal, Felix.

I really do think Slate needs to tap into the cash, talent and ambitions of the tech economy in order to have a shot at making it another 15 years.

Felix Salmon And you honestly think that someone out there thinks that they can make VC-type returns by investing in Slate?

Paul Smalera I think if the Washington Post co. can spin Slate off with the right leader at the helm, the angel investors of Silicon Valley and Alley can be convinced there are less bad options than Slate out there for their money.

Arrington should do it!

He’s got $20 million in the CrunchFund and no editorial control over a media platform.

Felix Salmon Perfect!

I can just imagine David Plotz working for Mike Arrington. A match made in heaven!

Paul Smalera Ok, maybe I’m being a little Swiftian with that one.

Felix Salmon It’s creative destruction, baby

There was a flurry of predictable coverage on Wednesday when the news broke that a subprime mortgage bond called Springleaf Mortgage Loan Trust 2011-1 was being priced with a triple-A rating from S&P. The WSJ’s Al Yoon has the best detail on how the bond is structured; basically, 5,629 performing subprime loans are being put into a pool, and holders of triple-A bonds get the first 48.85% of the cash flowing from that pool. Because you can be pretty sure that at least 48.85% of the mortgages will be making their payments, the triple-A tranche is considered ultra-safe; Daniel Indiviglio has attempted to defend the deal and its rating on those grounds.

But as Bloomberg reports, it’s not as simple as that. There are at least five main arguments for subprime bonds not to have a triple-A rating when the US is only double-A:

1. The US is not revenue-constrained in the way that a structured product is: the US can raise taxes, but Springleaf can’t raise mortgage rates. In extremis, the US can act to avert a default; the Springleaf deal can’t.
2. If the US were to default, the repercussions would be so huge and unpredictable that it’s very hard to see how anybody can have faith in the Springleaf deal continuing to pay out in full. That’s the thinking behind the institution of the sovereign ceiling: you can’t really have more faith in an American bond deal than you can in America itself.
3. A triple-A rating is pretty useless if there’s a good chance that it’s just going to get downgraded in the near future. S&P downgraded $30 billion of re-remics shortly after giving them post-crisis triple-A ratings; there’s no good reason to believe the same thing won’t happen here.
4. The reason for the triple-A is that mortgage payments are uncorrelated: even if some people default, they won’t all default at the same time. But as we learned so painfully in 2008, correlations tend to spike dramatically during a crisis, and the whole point of a triple-A bond is that it’s meant to be crisis-proof.
5. Rating structured bonds is impossible. These things are simply too complex and unpredictable to be able to apply a triple-A rating to. Haven’t we learned anything from the financial crisis?

And even putting all those arguments aside, the very existence of this bond is depressing, for a couple of reasons.

Firstly there’s that 48.85% number — much, much lower than the kind of numbers we saw during the subprime boom, when well over 90% of a subprime pool would regularly receive a triple-A rating. S&P is putting up unprecedented barriers to structured products getting a triple-A rating — and companies like Fortress Capital, which owns Springleaf, are still going through all the hoops they need to go through to get one. What that says to me is that we really haven’t learned one of the main lessons of the financial crisis — that triple-A ratings are treacherous and largely meaningless things, and that it’s silly to go to great lengths to get one, or to confine yourself to investing only in bonds with that particular seal of ratings-agency approval.

Secondly, there’s the fact that the Springleaf deal is made up of old, seasoned loans, rather than new mortgages. It’s financial engineering, in other words, and isn’t driving any capital to the housing market. During the bubble, there was too much money going from structured finance into the housing market; right now, however, the market needs all the help it can get, and it’s getting none at all from that quarter.

Finally, it’s worth noting what people are buying, in terms of bonds backed by brand-new mortgages. They’re buying agency bonds, issued by Fannie Mae and Freddie Mac, which carry a double-A credit rating. (And which yield much less than the 4% on the Springleaf deal.) If we ever want to transition to a world where the private sector is funding American mortgages and the federal government is getting out of it — if we ever want to realize the stated aim of politicians on both sides of the aisle to make Frannie much smaller — then we’re going to have to find some kind of palatable alternative to agency bonds. But there’s no indication that any such alternative exists.

There’s no way that the Springleaf model can be extended to new mortgages. The overcollateralization in Springleaf is too great: it would be uneconomic to put such a deal together with new mortgages, since it would be impossible to find investors to take the other 51.15% of the deal. And of course investors would demand even more overcollateralization with new mortgages than they do with seasoned ones.

The story of Springleaf, then is ultimately a depressing one. It shows that people still care about triple-A ratings when they shouldn’t; it shows that mortgage finance is not going to move to the private sector any time soon; and it shows that the paradigm of ratings agencies needing to ratify structured products and give them a triple-A rating is alive and well. Whether you think this particular rating is justified or not, there’s no good news in its existence.

One of the main reasons for the euro experiment failing is the obvious fact that the eurozone doesn’t have a common language. An optimal currency area needs labor mobility — areas without jobs need to provide workers for the areas with demand for them. But it’s hard to get a good job in Germany if you don’t speak German. And so something quite astonishing is going on:

In 2006, only 156 Angolan visas were issued to southbound Portuguese, but in 2010, the figure was 23,787.

To put that number in perspective, total emigration from Portugal — to all the countries in the rest of the world combined — ranged between 12,000 and 17,000 a year in the 1980s. Portugal is a very small country, and it hasn’t seen this level of emigration since the 1960s.

One reason: for skilled workers, a job in Angola pays a lot more than a similar job in Portugal: for a civil engineer, we’re talking four times as much, according to one Portuguese entrepreneur in Luanda. And there’s similar demand for skilled workers in fast-growing Brazil, too.

From a global perspective, this is good news. Developing countries like Angola and Brazil get to leverage western European education, while underemployed Portuguese find good jobs abroad. It’s an example of the cross-border labor market actually working.

From a European perspective, on the other hand, there’s a lot to worry about here — the PIGS aren’t going to recover if they lose the highly productive workers they spent so much to educate. But they can hardly wall those workers in and prevent them from moving to greener pastures. The only solution is domestic job creation. And that’s hard to do when you’re on an austerity regime.

The symbolism of today’s payrolls report — ZERO — would be bad enough even if it wasn’t coming out in advance of the Labor Day weekend. There’s a pattern here: no matter how bad Wall Street thinks the employment report is going to be, it always seems to be worse, these days. It’s like GE’s earnings circa Jack Welch, but in reverse.

It’s increasingly looking as though the government is utterly incapable of creating jobs, but is actually pretty effective at destroying them. It’s doing so in a direct, literal way — there were 17,000 fewer government employees in August than there were the previous month, and local government has lost more than half a million jobs since September 2008. And it’s also doing so in an indirect way — there can’t be much doubt that a significant part of the jobs weakness is a function of the anger and uncertainty caused by the utter dysfunction of the legislative branch of government.

Hiring and firing decisions, of course, happen slowly — and they often happen after the summer. The jobs situation, which is always cyclical, now seems to be in a downturn rather than an upturn, which raises the prospect of a negative payrolls figure in September and further gruesome news over most of the 2012 election year. President Obama can speechify all he wants on Thursday, but I can’t imagine that he’s going to be able to get anything substantive through the House — not when Eric Cantor is demanding that even emergency hurricane relief be paid for with spending cuts.

You can call this a double dip, if you like, or you can view it as a kind of aftershock of the financial crisis. Either way, the economy is clearly now below its stall speed, and we don’t have access to the mechanisms necessary to get it moving again. That is going to make for poisonous politics, Washington gridlock, and untold human misery among millions of new and long-term unemployed across the land. Happy Labor Day, people.