Felix Salmon

How poverty has tracked global population

Felix Salmon
Oct 31, 2011 18:48 UTC


184x558_popchart_left_align.gif The world officially hit 7 billion people today, and so to celebrate I decided to take a look at what’s happened to poverty in the world as its population has increased — many, many thanks to Nick Rizzo and to Laurence Chandy and Homi Kharas at Brookings, two Englishmen who provided him with unpublished data and were extremely generous with their time.

The big picture can be seen in the chart at left: the number of poor people hasn’t been growing nearly as fast as the number of people. And indeed over the past 24 years, as the world’s population increased by 40% from 5 billion to 7 billion, the total number of people living in poverty has actually gone down. (One small note I should make about these charts: the dollar-a-day figures from 1987 onwards actually measure the population living on less than $1.25 a day, so a jump in the absolute-poverty numbers between 1974 and 1987 is partially a function of the fact that we’re raising the bar from $1 to $1.25.)

In fact, there’s pretty much the same number of people living in absolute poverty today — about 890 million, or 12.7% of the global population — as there were all the way back in 1804, when the world’s population hit 1 billion and 84% of them were living in absolute poverty.

Indeed, back in 1804, only 5% of the world was living on more than $2 a day. (All these numbers, of course, are real, and adjusted for purchasing power.) Today, that number is 4.7 billion, or 67% of the world’s population. The number of people in the world living out of poverty has been growing faster than the world’s population as a whole for pretty much all of recorded history.

And the “global middle” — people living on somewhere between $10 and $100 per day — is growing particularly fast. It was 1.14 billion in 1987; it’s 1.96 billion today. That’s an increase of 72%, even as the population of the world as a whole has gone up by just 40%.

A huge amount of what we’re seeing here is the effect of China, of course. Here’s what’s happened in East Asia over the past 24 years:


Absolute poverty in East Asia has gone down to 142 million today from 822 million in 1987, even as the population as a whole has risen from 1.5 billion to 1.9 billion. 24 years ago, more than half of East Asia lived in absolute poverty; today, it’s just 7%.
The other big global population center is South Asia, which includes India, Pakistan, and Bangladesh; its history of poverty reduction is less heartening but still substantial.


There’s a lot of work to be done, here, with two thirds of the South Asian population still living in poverty. But absolute poverty has declined quite dramatically in the past dozen years, which is certainly a start.

You won’t be surprised to hear that the most depressing story is in AIDS-ravaged sub-Saharan Africa.


Even here, however, the percentage of the population living in poverty is no higher than it is in South Asia, and the number of people living in absolute poverty hasn’t actually gone up over the past 12 years.
Here are the other regions:




It should be noted that all of these figures, and especially the African ones, come with massive error bars and caveats; Shanta Devarajan is very good on this. But the big picture is clear: there’s nothing Malthusian going on here. As the world’s population grows, we’re taking people out of poverty, rather than consigning them to it. Which is heartening news in a world of limited resources.


I am happy that we have had a time span where both population and some form of prosperity have coexisted. No one should assume that this relationship is an eternal verity. Our planetary population growth will continue to exert rising pressure on finite natural resources. We can all hope that the future will bring economic gains equal or exceeding population growth. But no natural law guarantees this, and we now have a decades-long failure to make the early promise of unlimited cheap nuclear power come true. A list of known problems–global climate change, depletion of fertilizer natural resources, etc., have conspired to raise food costs and render more nations dependent on imported food. At the least we should strive to enable individuals to have the means to choose whether or not to procreate.

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Word clouds done right

Felix Salmon
Oct 31, 2011 17:45 UTC

Jacob Harris is absolutely right to hate word clouds. You take a long and complex text, and then you boil it down to a group of individual words, with the most-used words being the biggest? That’s just silly. “Reporters sidestepping their limited knowledge of the subject material by peering for patterns in a word cloud,” he says, is “like reading tea leaves at the bottom of a cup”. Word clouds are crude, inaccurate, misapplied, and place the onus of understanding onto the reader.

But there’s one place where word clouds are I think both useful and accurate — and that’s when a pollster has asked a group of people to say the one word they would use to describe X. Here, for instance, is the word cloud generated when a Reuters/Ipsos poll asked Republican voters for the first word that came to mind after watching the weird Herman Cain “smoking ad”:



And here’s the word cloud from the latest Kauffman poll of econobloggers:

Here the size of the words is interesting, but more germane is the overwhelming negativity of the vast majority of words used. There’s a couple of tiny good ones in there — “rebounding” us up by the Canadian border, and “bounceback” is in the Bay Area somewhere — but they’re in a distinct minority.

Incidentally, that Kauffman poll has some fascinating responses elsewhere, too. Check out the sudden enormous popularity of NGDP targeting:


There’s also a very high degree of skepticism when it comes to how good colleges are at teaching kids useful stuff.


The bar charts here are again an effective way of communicating information. Things like chart types and word clouds are tools, and you have to know which tools are best used in various different circumstances. And while word clouds are usually stupid, sometimes they can be exactly right.


“How many people really think that you spend 4 years on skills that are actually useful in the job market?”

How many people would really want to hire your average college freshman as an assistant? You would spend more time baby-sitting them than the “help” would be worth.

In college you learn (or should learn):
* The language in which understanding is communicated in a variety of disciplines.
* The discipline to work independently and think critically.
* General literacy, both in writing and mathematical.

Maybe you take a couple courses that teach material you will use specifically in your first job? But even though learning doesn’t end in college, it is still important to lay the groundwork for what is to come.

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CDS demonization watch, Bloomberg edition

Felix Salmon
Oct 31, 2011 14:28 UTC

Bloomberg View’s Mark Buchanan has been taking a long, hard look at a 2009 paper by Italian physicist Stefano Battiston, Joe Stiglitz, and others; he explains what it says quite clearly and accurately on his personal blog. Basically, the paper quantifies the concept of “too interconnected to fail”: when you have a financial system with lots of banks, all of which have exposure to each other, then the system itself becomes much more fragile.

Here’s the chart:


What you’re looking at here is a blue-dotted “baseline”, where the probability of failure falls steadily as the number of counterparties goes up, and a sold-red reality, where a few counterparties help, but a lot of counterparties only serve to reinforce trends, exacerbate downward credit spirals, and generally increase systemic fragility.

So far so uncontroversial. But equally, there’s absolutely nothing in this paper to justify Buchanan’s Bloomberg headline: “Credit-Default Swap Risk Bomb Is Wired to Explode”.

There’s a germ of an interesting point in Buchanan’s column. Because the CDS market is unregulated, no one knows the degree to which it makes this syndrome worse, and exacerbates the interconnectedness of the financial system as a whole. So there’s a strong case to be made for moving the CDS market onto exchanges, where it can be watched far more closely.

But the paper Buchanan’s talking about never mentions the CDS market at all. And although Buchanan talks a lot about credit default swaps in his column and in his headline, the fact is that all of his points apply to just about any kind of interconnectedness. The paper concentrates on credit — the interbank market, basically. Buchanan extends that to credit default swaps. But most interbank derivatives exposure is not CDS related, and most of Buchanan’s points about CDS also apply, mutatis mutandis, to derivatives exposure more generally.

And this is far from convincing:

What reduces risk for individual institutions in small quantities spells trouble for the larger banking system when pushed too far. This is especially worrying when you consider that the number of CDS contracts outstanding on European sovereign debt has doubled in only the past three years, even after the AIG catastrophe. We don’t know if similar dangers lurk in the network of CDS contracts that links European banks with one another, as well as with banks in the U.S. and elsewhere.

Firstly, the amount of CDS written on European sovereign debt is tiny. Yes, it has increased over the past few years, as the Euro crisis has gotten steadily worse. These are called credit default swaps, after all: you only care about them insofar as you care about creditworthiness, and up until a few years ago European sovereign creditworthiness was not really an issue on the radar. But the European sovereign CDS market is still very much a backwater as far as the CDS market as a whole is concerned. (You can see one reason why when you look at Greece, where it looks very much as though in the first instance there’s going to be a sovereign default without a credit event.)

And secondly, we do know, pretty accurately, how much CDS protection has been written on European banks. We know this for the same reason that we know how much CDS there is outstanding on Greece: the DTCC does a very good job of keeping track of such things.

One of the interesting lessons of Lehman’s bankruptcy was that its CDS settled without a hitch, despite a lot of apocalyptic forecasts on the subject. That doesn’t mean the CDS market is fully robust, of course: it’s just one datapoint. But in the wonky world of counterparty hedging, the kind of effects that Buchanan is talking about are the first and biggest worry facing any desk. They’re not some kind of forgotten detail; they’re the whole reason why counterparty hedgers are in such demand in the first place.

It’s fair to say that CDS are more problematic than other derivatives in terms of interconnectedness issues, because of the “jump risk” involved and the fact that moves in CDS prices can themselves cause worries about a bank being close to failure. But it’s not fair to say that there’s a “risk bomb wired to explode” here. Banks don’t, in point of fact, hedge their European sovereign credit risk in the CDS market — if they did, the European sovereign CDS market would be much bigger than it is. And sovereign-debt crises are always banking crises, regardless of whether CDS even exist or not.

So while it’s fair to say that a sovereign crisis in Europe could threaten the entire banking system, it’s not fair to blame that fact on CDS. It would be true even if CDS had never been invented.


One reason euro authorities may not want CDS trigger is that it would be harder to claim that Greek bonds at ECB should be held at cost instead of market. Or put differently, if you marked the ECBs balance sheet to market today, how would all these sov bond purchases look?

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Occupy Wall Street and media ethics

Felix Salmon
Oct 31, 2011 04:57 UTC

Occupy Wall Street seems to be throwing up much more than its fair share of media-ethics questions — from a news-organization perspective, it’s a movement which seems to be very easy to respond to badly, and very difficult to respond to well.

That’s partly because OWS is a leaderless organization lacking an official spokesperson or a clearly-defined political goal. So journalists wander down to Zuccotti Park and can credibly file anything they like. One notorious story in the NYT, for instance, declared in its opening sentence that OWS “had a default ambassador in a half-naked woman who called herself Zuni Tikka”; the New York Post, going one better, decided the whole thing was rife with anti-semitism. Journalists want to be able to explain OWS; to declare exactly what it stands for, ideally in terms which can place the movement neatly on a left-right spectrum.

The best coverage of OWS, I think, has come from the media organizations which embrace its distributed nature, and let the stories simply flow — by creating Tumblrs telling the stories of the 99%, for instance, or setting up a live webcam where protestors can speak directly without intermediation. When journalists and editors start putting together stories themselves, I like the results which have a narrow focus, or at the very least the ones which are explicit about the difficulty of pinning such a broad movement down.

And some of the stories are very narrow — for instance the ones which Xeni Jardin, Conor Friedersdorf , and I wrote about the Abacus sign. What none of us ever dreamed when we were writing those stories, however, was that the woman holding the sign in the air — Caitlin Curran — would get fired for doing so, by “inconsolably angry” public-radio producer Mark Effron. He was backed up by WNYC spokesperson Jennifer Houlihan, who told the Atlantic Wire that “when Ms. Curran made the decision to participate in the protest and make herself part of the story, she violated our editorial standards”.

This is, frankly, bonkers. Here’s what the sign said, in full:

It’s wrong to create a mortgage-backed security filled with loans you know are going to fail so that you can sell it to a client who isn’t aware that you sabotaged it by intentionally picking the misleadingly rated loans most likely to be defaulted upon.

It’s possible, in the vast expanse of the internet, to find someone willing to quibble with that sentiment — but it’s not easy. And even he thinks that the decision to fire Curran is “philosophically indefensible”. There’s a crazy double standard here: you can go down to OWS wearing your journalistic hat and write anything you like. That’s fine, you won’t get fired. On the other hand, if you just want to express dismay at an action which was found illegal and for which Goldman Sachs paid a record-breaking fine of more than half a billion dollars, well, that’s a firing offense.

Now it’s possible for a journalist to become part of the OWS story in a bad way; I was peripherally involved in one recent example like that; it involves Greg Palast, Democracy Now, and my beloved Lower East Side People’s Federal Credit Union. (Blink and you’ll miss it, but my name appears underneath that of Goldman Sachs, at about the 3:29 point in the video.)

Palast is a very smart and unabashedly partisan reporter. He’s also happy to deliberately mislead if doing so will further his political ends. Amy Goodman frames the story at the beginning: “Did Goldman Sachs actually use US taxpayer bailout money to attack Occupy Wall Street’s not-for-profit community bank?” The answer to the question is a vehement no: there was no bailout money involved, even by Palast’s tortured definition of what constitutes bailout money, and in any case Goldman didn’t attack anybody.

I’m not going to get into the details of this story, which was covered much more fairly last week by Robert Frank. But in no conceivable sense is it true that “Goldman Sachs has declared war” on LESPFCU, as Palast says at the top of his piece. He also knows it’s not true, as he’s about as well-sourced at LESPFCU as it’s possible to get. His ex-wife is the CEO, after all.

It’s also not true that Goldman’s donation to the credit union was required under the Community Reinvestment Act, or even that Goldman was donating CRA funds to the gala event in question. And Palast’s statement that “it’s not Goldman’s money, it’s our money”, along with his idea that CRA money is the same as TARP money (which, in any event, has of course been fully repaid), is also simply false.

There are important and interesting articles to be written about the linkages between OWS, the credit union movement, and the Move Your Money campaign. One good place to start is the Alternative Banking group at OWS, which has some pretty important members and is moving in very interesting directions. There are also, always, great articles to be written about individual credit unions, including LESFCU, which do wonderful things for their low-income membership and which are an intriguing alternative to banking with a too-big-to-fail institution.

But the fact is that accessible community banking — much like OWS itself — is a cause which cuts across party lines. One of the reasons that America has so many banks is that lawmakers on both sides of the aisle have expended a lot of effort in making sure that small banks can compete effectively against the big guys.

So let’s celebrate the diversity of OWS, and let’s appreciate that a lot of what it stands for is wholly uncontroversial. Small-enough-to-fail banks are good things. The Abacus deal was wrong. The Great Recession was caused in large part by the misadventures of huge financial institutions which then got bailed out. The top 1% have become spectacularly wealthy in recent years, even as the rest of the country has struggled. Saying these things is not grounds for being fired as a journalist — saying these things is journalism. And if you say one of these things in a way which goes viral on the internet, that’s good journalism.

There’s too much real conflict in the Occupy movement, but it’s largely confined to the conflict between the protestors and the police. It’s very hard to find anybody who will come out against OWS — even the likes of Vikram Pandit are expressing sympathy with the protestors and saying that he’d be “happy to talk to them anytime”.

Journalists love conflict, of course, and so when they cover OWS there’s a tendency to try to gin up the story with imaginary beefs — OWS hates the Jews! Goldman has declared war on OWS’s bankers! Etc. This is not helpful. So let’s celebrate, rather than fire, the people who successfully get the message out. We need to save that ire for the practitioners of all the shoddy OWS journalism out there.


My friends and I on both sides of the Pacific can’t help but think that a lot of the criticism waged against OWS, and a lot of the aggression coming from OWS, is just a distraction from one basic problem; that of increasing income disparity. Here’s a chart from a blog with info from the Congressional Budget Office that demonstrates the widening gap for the past thirty years: http://bit.ly/sCXVN4

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Nick Rizzo
Oct 28, 2011 20:26 UTC

Rogoff: There’s an 80% chance Greece leaves the Euro in the next 10 years — Bloomberg

How Berlusconi and Draghi will determine Italy’s future — Economist

Erste’s “possibly the first bank earnings release in history to tout a complete retreat from the CDS market” — Alphaville

“Ms. Rand, Meet Singapore. Mr. Hayek, Meet Norway” — BusinessWeek

LSE regrets its involvement with Saif Al-Islam Gaddafi — Reuters

8 months of testing convinces JPMorgan that debit card fees are a bad idea — WSJ

WNYC’s The Takeaway has fired our favorite Occupy Wall Street protestor — Gawker

Lots more links where these came from at Counterparties.com


Just so.

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The impunity of the Big Four auditors

Felix Salmon
Oct 28, 2011 16:05 UTC

Are the big four auditors too big to fail? Agnes Crane makes a strong case that they are, in the wake of a very tough report from the Public Company Accounting Oversight Board about Deloitte. The problem is that the PCAOB has no real teeth: with the number of auditors already far too low, at four, no one can afford a potentially-fatal attack on any of them. And that gives each of the Big Four effective impunity when it comes to mistakes and lack of professionalism.

Not to mention the fact that the PCAOB itself is horribly conflicted, as Jon Weil has discovered:

Three of its five board members had recused themselves from participating in meetings or discussions this year concerning Deloitte, because of past or current ties to the firm…

You have to wonder how good a job this board can do when a majority of its members can’t make decisions about one of the largest firms it oversees. No agency’s ties to the industry it regulates should run this deep.

Weil also points out that the PCAOB hasn’t even attempted to explain why it took 41 months to disclose its Deloitte evaluation; he might have added that we have no idea how many other, similar evaluations might be in the works.

I’m reminded of Jed Rakoff’s pointed questions for the SEC: what’s the point of regulating a company if you have no way of enforcing those regulations?

The dynamics at both the PCAOB and the Big Four are horrible. The incentive at the Big Four is to keep prices down to the point at which it’s impossible for a new entrant to break into their charmed group; after all, if it means they end up cutting corners, the worst that happens is that they get gummed by the toothless PCAOB. Even if they get broken up so that their consulting arms are spun off from their auditing arms, that still leaves only four auditors for most of the world of big business.

Is there a way of fixing this mess? Not an obvious one. Agnes says that “the only way to increase competition in the industry is for the incumbents to break into pieces”. But they’ll never do that voluntarily. And it’s very hard to see who’s going to force them.


In terms of who can break them up .
Surely “we the people” can do it ?

Maybe the occupy wall street people need to add this to their agenda

Maybe the rest of us should not give up on democract and wring out hands in anguish

If we really think that breaking them up is important to a vibrant capitalist system we do have the power


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Why the Greek CDS market is OK

Felix Salmon
Oct 28, 2011 14:23 UTC

All the talk about sovereign CDS of late — pegged off the fact that the Greek restructuring might not trigger an event of default — is I think missing three big points. First, why ISDA’s rules make sense. Second, why Greece’s CDS spreads are still extremely wide. And third, what sovereign CDS are used for.

But before we get to any of that, it’s important to understand the big picture. Greece has a lot of private-sector debt; most of it is held by banks. There is a small amount of sovereign CDS outstanding, which references that Greek debt. To give you an idea of the orders of magnitude here, we’re talking about roughly €200 billion in Greek bonds, and less than €4 billion in net CDS exposure. Even if all of the net CDS exposure was held by bank creditors, it wouldn’t remotely offset the write-down they’re going to have to take on their bonds.

In reality, the banks have de minimis net CDS exposure. They might trade the CDS, and have either a long or a short position on their trading books at any given time, but they’re not using the CDS to hedge their bonds.

Those bonds are freely tradeable: if at any time a bank wants to reduce its exposure to Greece, all it has to do is sell some of its bonds. Doing so would almost certainly involve taking a loss, of course, since the bonds are trading at about 40 cents on the dollar. Which is why the banks are even thinking about accepting an offer at 50 cents.

And in fact, an offer at 50 cents is exactly what Greece is going to give them. Although it’s not really 50 cents in cash; it’s 50 cents in partially-collateralized new Greek debt, which your guess is as good as mine where it will trade if and when any exchange is finished.

The banks may or may not have much of a choice when it comes to accepting Greece’s offer. Some of them are having their arms twisted extremely hard by their respective governments, and feel that they have to do what they’re told. Others are more prone to asserting their independence. Again, it’s going to be a while until it’s clear what the final outcome of any exchange offer will be. But one thing I can guarantee you: there won’t be 100% take-up. In fact, there almost certainly won’t even be 90% take-up. All we know for sure is that if and when this exchange offer comes along, some bonds will be tendered into it, and others won’t be.

Now the way a credit default swap or an insurance contract works is that it’s contingent on some bad event happening out there. If that bad event happens, then you get paid out. The person who owns the CDS or the insurance contract is a passive player in this game — they can’t unilaterally determine whether there’s a payout. So the event of default cannot be a decision to tender a bond into a bond exchange — because that decision is taken not by the debtor but rather by the creditor. Debtors can offer to buy back their debt any time they like, at any price they like. That’s not a credit event, it’s a market.

Now if the offer to buy back the debt is coercive, then things change. But again, the question is who is doing the coercing. Is it the debtor? Is Greece promising to do unspeakable things, under Greek law, to any holders of outstanding bonds who don’t tender into the exchange? Is it threatening to default on those bonds? Is it going to take actions which make the bonds untradeable? If so, then we’re looking at a credit event, since bondholders would be damaged greatly either way.

On the other hand, if it’s France and Germany and other European governments who are being coercive, things change, because the coercion is creditor-specific. It’s in the fundamental nature of bonds that they’re fungible: if we both own the same Greek bond, then anything which is true of my bond must be true of your bond. (I believe this is related to Leibniz’s law of the indiscernibility of identicals, but let’s not go there right now.) France and Germany might be able to twist the arm of BNP Paribas or Deutsche Bank. But if I’m sitting at home in New York with a few Greek bonds in my brokerage account, I’m not going to care very much what Sarkozy or Merkel say. No matter how much they scream and shout, that screaming and shouting can’t constitute a credit event on my bonds.

So let’s wait until Greece does something coercive which seriously damages its outstanding bonds. At that point, we can declare a credit event, and move on.

And that’s going to happen: all you need to do to understand that is to look at where Greek CDS are trading. The tender offer itself might not be a credit event — although it might, if Greece starts larding it up with exit consents and the like. But at some point, there’s going to be a credit event on those reference obligations, if only because no European politician is going to stand for free riders holding on to their old Greek bonds and happily cashing coupon checks at 100 cents on the dollar. Once Greece has swapped out most of its old bonds for new ones, don’t for a minute expect that the holders of the old debt will be free and clear.

And if you want to take the Greek government to Greek court for the money they owe you under Greek law — well, good luck with that. Basically, post-exchange, the cost of default for Greece is tiny. So there’s no reason for Greece not to do it.

Sovereign CDS aren’t dead, then — they just take a little longer to pay out than some people in a hurry might like.

And that’s fine, for the kind of people who actually use sovereign CDS for anything beyond purely speculative reasons. These instruments aren’t used by banks to directly hedge their Greek bond exposure. Instead, they’re used by institutions who are financially exposed to the country of Greece, and who want to hedge their country risk. If you do a lot of business in Greece, or if you have a lot of receivables from there, or if you partner with Greek companies whose failure would hurt your business — then there aren’t many ways of hedging that exposure, but Greek CDS is one of the best of a bad bunch.

Greek CDS is useful even for hedging indirect exposure — a small holding of Greek CDS, for instance, can partially help offset a larger and vaguer exposure to the eurozone as a whole.

And the market in Greek CDS has been pretty efficient when it comes to this role. As Greece has got ever riskier, the price of buying credit protection on Greece has risen, and people owning that protection have made money. That’s the way it’s meant to work.

The only reason that Greek CDS spreads didn’t spike when the latest euro bailout was announced is that they were essentially already pricing it in. If and when Greek CDS spreads come down even as Greece’s creditors are forced to take a 50% haircut, I’ll concede that the sovereign CDS market is broken. But for the time being, it seems to be working OK.


It’s not ok. check out what this guy has posted.
http://trendwhizo.blogspot.com/2011/12/j oke-of-day.html

The CDS was above 10K bps…implying the cost of insurance was more than the par value of the underlying bond.

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Jed Rakoff puts the SEC on notice

Felix Salmon
Oct 28, 2011 03:31 UTC

Jed Rakoff has been a hero for a while now, but his questions for the SEC with respect to its Citigroup settlement are truly great even by his standards. It’s worth transcribing them for internet posterity:

Pending before the Court is the proposed Final Judgment on consent in the above captioned case. The Court is required to ascertain whether the proposed judgment is fair, reasonable, adequate, and in the public interest. The Court will convene a hearing on November 9, 2011 at 3:00 pm to assist in this determination. Among the questions (without limitation) that the Court will want answered at this hearing are the following:

1) Why should the Court impose a judgment in a case in which the S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?

2) Given the S.E.C.’s statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the S.E.C.’s charges are true? Is the interest even stronger when there is no parallel criminal case?

3) What was the total loss to the victims as a result of Citigroup’s actions? How was this determined? lf, as the S.E.C.’s submission states, the loss was “at least” $160 million, what was it at most?

4) How was the amount of the proposed judgment determined? In particular, what calculations went into the determination of the $95 million penalty? Why, for example, is the penalty in this case less than one-fifth of the $535 million penalty assessed in SEC v. Goldman Sachs? What reason is there to believe this proposed penalty will have a meaningful deterrent effect?

5) The S.E.C.’s submission states that the S.E.C. has “identified… nine factors relevant to the assessment of whether to impose penalties against a corporation and, if so, in what amount.” But the submission fails to particularize how the factors were applied in this case. Did the S.E.C. employ these factors in this case? If so, how should this case be analyzed under each of those nine factors?

6) The proposed judgment imposes injunctive relief against future violations. What does the S.E.C. do to maintain compliance? How many contempt proceedings against large financial entitities has the S.E.C. brought in the past decade as a result of violations of prior consent judgments?

7) Why is the penalty in this case to be paid in large part by Citigroup and its shareholders rather than by the “culpable individual offenders acting for the corporation?” If the S.E.C. was for the most part unable to identify such alleged offenders, why was this?

8) What specific “control weaknesses” led to the acts alleged in the Complaint? How will the proposed “remedial undertakings” ensure that those acts do not occur again?

9) How can a securities fraud of this nature and magnitude be the result simply of negligence?

The parties should be prepared to answer these questions in detail at the November 9 hearing. In addition, the parties are permitted, but not required, to file with the Court written answers to these questions in advance of the hearing, provided such submissions are filed no later than noon on November 7, 2011.


My favorite, here, is probably #6, but they’re all great. I would not want to be the SEC’s lead counsel on November 9, especially given how Rakoff has treated the agency in the past.


Personally, I think #2 is the key. How the hell can the SEC meet its institutional mission by settling on a case like this?

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How to justify Groupon’s valuation

Felix Salmon
Oct 27, 2011 21:27 UTC

Henry Blodget has a smart post on how to value Groupon today. Is he right that it’s vastly overpriced at a $10 billion valuation?

Blodget’s main thesis is that revenue growth at Groupon is slowing — and that transitioning from a high-growth company to a relatively modest-growth company is something which tends to hurt stocks. He’s the expert on such things; I daresay he’s right. But just for the sake of symmetry, here’s a simple bull case for Groupon, and for how it could get its really high revenue growth back.

Basically, Groupon’s been involved in a race to get a huge email list together; its revenues have largely tracked its subscriber base. After all, if any given deal is going to be bought by X% of your subscribers, then your revenues are going to be directly proportional to the number of subscribers you have.

Recently, Groupon has found that its earliest subscribers were its most valuable subscribers, and that it’s getting diminishing marginal returns from the 100 millionth subscriber. So it’s spending less money on acquiring new subscribers, and that’s feeding into fewer new subscribers and slower growth.

But Groupon has its huge subscriber base now — which means it’s ready to attack Phase 2 of its plan, and really start monetizing them.

Think of it like this: up until now, Groupon has been selling daily deals to customers. And it’s now ready to pivot, and start selling customers to merchants on many other fronts.

Right now, customers don’t spend all that much money on Groupon: in the first three quarters of 2011, its 142,865,836 subscribers spent $2,754,633,000 in total. That’s an annualized rate of about $25 per year. People love deals, but it turns out that the model of showing them one deal a day in their inbox is always going to limit how much they’re ever going to buy.

So Groupon is branching out into various other projects, all of which promise to increase customer spend dramatically — travel deals, high-priced goods, spur-of-the-moment impulse buys, you name it. Not all of them will work. But there’s a decent chance that some of them will. And if that happens, Groupon could easily become as valuable as, say, Priceline, which has a market capitalization of $24 billion. If you look at the size of the customer base, and the loyalty of those customers, it’s hard to make a case that a mature Priceline is five times more valuable than a mature Groupon. After all, Priceline is much more constrained in what it sells than Groupon is, and it reaches fewer people.

Which is not to say, of course, that Groupon is a buy at a $10 billion market cap. But I can easily see how such a thing could be justified, if the business goes according to plan.


Agreed with 2contango. Groupon’s business model relies on:

(1) The willingness of restaurants and other businesses to offer a 75% discount in the hope of attracting repeat customers at the full price.

(2) The inability of competitors to elbow in and offer either restaurants or consumers a better deal.

(3) Cutting costs sufficiently to turn an operating profit.

I’m personally puzzled at their inability to turn the 75% discount into a profit. Admittedly they pass the majority of that along to the customers, and spend even more on convincing new customers to sign up with them, but it shouldn’t be THAT expensive to attract business. And if it is, then your business might not be as promising as you hoped.

A month ago we received a Groupon (actually a look-alike competitor) offer for a local restaurant that we’ve already visited a couple times and enjoyed. Still didn’t bite because the setup ultimately seemed to be more hassle than it is worth.

Will be hard to build a $10B business on that.

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