Felix Salmon

Hedge funds fudge their quarter-end valuation numbers — WSJ

Maybe because they’ve been lagging the stock market since 2003 — WSJ

“100 Tweets” opening next week at Dumbo Arts Center — DAC

The STRATFOR names-and-credit-card-numbers data dump — Pastebin

MSF Shocked And Deeply Saddened By The Killing Of Two Staff Members In Mogadishu — DWB

Samoa will have no Friday this week — NYT

Did Mark Hurd woo Jodie Fisher by showing her his checking account? — All Things D

I can’t see how ruining Rakoff’s Xmas for no reason was a very smart move by the SEC — Reuters

Carrick Mollenkamp gets his first Reuters byline — Reuters

The infuriating story of Ayded Reyes — ESPN

A year ago, I spoke to the University of Pennsylvania’s Michael Kearns about whether we might be able to do something to help prevent a much worse reprise of the May 2010 flash crash. The short answer is that no, we can’t — or won’t, in any case. But the longer answer is that there is something we could do, if we just had some will and a lot of money:

You can imagine trying to build an ambitious, reasonably faithful simulator of our current markets. You’d have high-frequency algos, shorter-term stuff, dark pools, multiple exchanges, etc. A giant sandbox.

If you do a simulation and you try some perturbation or stress, and it tells you that a disaster happens, then it’s worth thinking hard about our current markets. But if you don’t find a disaster, that’s not reassurance that some other disaster won’t happen.

I’m proposing a quant version of the stress tests that were proposed for banks.

A car company, before they roll out a product, have a lab environment where they put it through tests. And in reality problems which weren’t tested for get discovered. We’d be much better off with a simulator.

We have no such lab for our financial markets. This strikes me as a little off.

People on Wall St think about simulation, but not for catastrophe prediction, just for their own trading purposes.

Kearns’s idea didn’t get anything like the traction it needs, and it’s not going to happen. But now a new paper from the UK’s Government Office for Science, written by Dave Cliff and Linda Northrop, lays out the case for building such a simulator over the course of 47 very interesting pages.

First of all, they write that the whole global economy “dodged a bullet” on May 6, 2010: if the Flash Crash had just happened a couple of hours later — and there’s no reason it couldn’t have done so — then the US markets might well have closed before the Dow had a chance to recover. The US sell-off would have triggered big market swoons in Asia and Europe, with very nasty consequences for, among many other things, Greek debt dynamics.

More generally, they write,

The global financial markets have become high-consequence socio-technical systems of systems, and with that comes the risk of problems occurring that are simply not anticipated until they occur, by which time it is typically too late, and in which minor crises can escalate to become major catastrophes at timescales too fast for humans to be able to deal with them.

Cliff and Northrop say that we should do exactly as Kearns suggested:

The proposed strategy is simple enough to state: build a predictive computer simulation of the global financial markets, as a national-scale or multinational-scale resource for assessing systemic risk. Use this simulation to explore the “operational envelope” of the current state of the markets, as a hypothesis generator, searching for scenarios and failure modes such as those witnessed in the Flash Crash, identifying the potential risks before they become reality. Such a simulator could also be used to address issues of regulation and certification. Doing this well will not be easy and will certainly not be cheap, but the significant expense involved can be a help to the project rather than a hindrance.

There are many reasons why this is not going to happen, starting with the fact that no one, right now, can afford to do it. Cliff and Northrop rather hopefully say that if this market simulator is expensive enough, then lots of Wall Street players will pay up to have access to its results — but in reality they’re much more likely to do everything they can to stop it from being built in the first place. Because if it is built, the certain consequence will be more regulation:

It may also be worth exploring the use of advanced simulation facilities to allow regulatory bodies to act as “certification authorities”, running new trading algorithms in the system-simulator to assess their likely impact on overall systemic behaviour before allowing the owner/developer of the algorithm to run it “live” in the real-world markets. Certification by regulatory authorities is routine in certain industries, such as nuclear power or aeronautical engineering. We currently have certification processes for aircraft in an attempt to prevent air-crashes, and for automobiles in an attempt to ensure that road-safety standards and air-pollution constraints are met, but we have no trading-technology certification processes aimed at preventing financial crashes. In the future, this may come to seem curious.

Even if regulators don’t have to sign off on trading strategies on an algo-by-algo basis, there’s really no point in building a hugely expensive and complex market simulator if the results of the simulations don’t result in constraining market participants somehow. And I can assure you that no amount of “you’ll all be safer” pleading with banks will persuade them that more regulation and constraint is ever going to be welcome.

Gillian Tett, too, is skeptical that anybody’s going to go ahead with a project of this magnitude:

Most regulators still prefer to forget May 6 rather than admit in public that they are struggling to understand how modern markets really work. And that, sadly, is unlikely to change, unless there is another flash crash.

And there’s a bigger reason, too, why it’s not going to happen: for all its ambition, a financial-market simulator wouldn’t actually address any of the causes of the financial crisis we just had, and probably wouldn’t address any of the causes of the next one, either. As Cliff and Northrop write,

The concerns expressed here about modern computer-based trading in the global financial markets are really just a detailed instance of a more general story: it seems likely, or at least plausible, that major advanced economies are becoming increasingly reliant on large-scale complex IT systems (LSCITS): the complexity of these LSCITS is increasing rapidly; their socio- economic criticality is also increasing rapidly; our ability to manage them, and to predict their failures before it is too late, may not be keeping up. That is, we may be becoming critically dependent on LSCITS that we simply do not understand and hence are simply not capable of managing.

We could try to spend hundreds of millions of dollars simulating and examining the fine-grained architecture of securities trading and high-frequency algorithms; and even if we were incredibly successful in that endeavor, there would still be hundreds if not thousands of other large-scale complex IT systems which can and probably will fail catastrophically at some point. We can’t simulate them all. So why pick on the stock market?

Stephen Dubner passes on what he calls the “bizarre story” of a man whose bank is unwilling to give him a $50,000 loan, even if it’s fully collateralized in cash.

Dubner seems unsure that the story’s entirely true — but it rings absolutely true to me. So why does Dubner find it so hard to believe?

The answer is that Dubner’s looking at the bank in functional terms — as a place which makes profits by lending out money at some spread over its cost of funds. If such an institution were perfectly rational, then it would almost certainly accept this customer’s offer. There’s no real opportunity cost to extending this loan, because if the bank turns down the customer, then it’s also turning down the funding source for the loan. (The offer, of course, is essentially self-funding: the customer is offering to put $50,000 on deposit and then use that as collateral against a $50,000 loan.)

But of course there’s no such thing as a perfectly rational institution. And as banks grow, they become hyper-aware of the number of places where errors in judgment can cause losses. And their reaction is always the same: they reduce that number.

This does make a certain amount of sense — if you don’t let bank managers approve loans, then you won’t get a rogue bank manager throwing away millions of dollars of shareholders’ money. More importantly, if you approve all loans centrally rather than at the bank-branch level, then, at least in theory, you can see bank-wide risk exposures emerging which individual branch managers would never know existed.

Of course, centralizing loan approvals, and computerizing them so that they’re automated, has costs as well as benefits. For one thing, it means that errors of judgment at the loan-approval level can cost billions of dollars, rather than millions. And it also means that you’re building model risk into the system, and losing a lot of the natural diversification that you get from a heterogeneous set of individual bank managers making individual decisions to customers whom they personally know.

But the people making the decisions to centralize are also the people responsible for making the centralized lending decisions, and they tend to be very sure of themselves and their models. So bank managers get ever less freedom to do sensible and profitable things, while computers churn away making decisions which sometimes defy common sense.

I’m quite sure that there’s no one at the bank in question who thinks that its response in this case made sense. But that’s a known issue when you automate underwriting decisions: computers don’t have common sense. Some unknown proportion of sensible loans will end up not being made. But the bank will sign on to such a system anyway, because it’s cheaper than having humans make those decisions, and because it reckons that computers will make fewer errors than humans in aggregate.

After all, it’s not exactly every day that someone walks into a bank and essentially offers to lend himself money, while paying the bank a decent rate of interest at the same time. If it did happen every day, then I’m sure someone at the bank could program the computer to set attractive terms for such people. But it’s rare enough that it’s not worth the time and effort involved in doing so.

Now, from the point of view of the customer — and, indeed, of the customer-facing loan officer at the branch level — all of this is extremely frustrating and Kafkaesque. Which is one reason why it makes a lot of sense to bank with a small community bank, or a credit union, rather than some enormous centralized franchise.

But yesterday I spoke to the woman who got turned down by her credit union for a personal loan, and who was forced to go to a much more expensive installment lender instead. (I’ll return to this story once I have a bit more information.) Her experience at her credit union was also frustrating, and constrained by computer-set rules. So even credit unions with only a handful of branches aren’t immune from this syndrome. But I feel safe in saying that there’s a direct correlation between the size of the institution, on the one hand, and the chance of running into this kind of frustrating stupid-computer situation, on the other.

Matt Yglesias is, I think, very wrong about this:

The idea that a mass market of retail investors ineptly attempting to maintain a balanced diverse portfolio serves a useful role in steering capital to productive uses doesn’t pass the laugh test.

Not only does it pass the laugh test: it’s the driving idea behind capital markets. You take a large mass of inept investors — call them noise traders, or dumb money, or whatever you like — and watch as they do silly things, often lose money, and nearly always underperform some simple buy-and-hold strategy. Then sprinkle in some smart investors and arbitrageurs and the like, who make markets vaguely efficient and help with price discovery. The effect is a market where people feel safe stashing millions of dollars, and where companies can raise billions in equity and debt.

The point here is that you don’t need the noise traders to be smart or efficient in order to make markets work; their role is basically to provide the fuel for the fire. It’s the companies and entrepreneurs who light the match, add value, and create economic growth.

And the more efficient a market is, the dumber investors can be while still making near-optimal returns.

Yglesias has an alternative, of course. Basically, retail investors pay more in social-security taxes, leaving less money left over for savings; that money gets put into some form of federally-insured savings account where it can be used on a rainy day or maybe Christmas. The government takes on the job of insuring all those savings at 100 cents on the dollar, and of guaranteeing a comfortable retirement from Social Security.

Now I’m a great believer in the government offering defined-benefit pensions to its own employees. But there’s a difference between Social Security and defined-benefit pensions: pension funds can and do invest in anything they like, while the Social Security trust fund invests only in Treasury Securities, nearly all of which currently trade at a negative real yield.

The point here is that pension plans can do something that Social Security can’t: they can invest in the future growth of the economy, rather than just paying out pensions to the elderly and maybe buying a few Treasury bonds, at the margin, so long as the plan is still cashflow positive.

There’s another reason, too, why individual pensions are a great idea: they don’t suffer from the kind of maturity mismatch that’s endemic to most of the rest of the financial world. I can invest my pension-plan money with a 20-year time horizon, because I’m not going to be retired for another 20 years. (And even once I’m retired, I’m not just going to liquidate everything and go to cash.) By contrast, the people putting money in a savings account until Christmas literally measure their time horizon in months. Banks take that money and lend it out for much more than a few months, of course — it’s called maturity transformation, and it’s basically a good thing. But it’s also dangerous, and needs careful hedging and insurance and risk management.

And banks do much more than simple maturity transformation: they’re involved in what Steve Waldman calls a mutually-beneficial con. (Go read his post, by the way, it’s fabulous. Chris Hayes says it “may be the most thought-provoking post I’ve read all year”.) Banks create all manner of opacity and complexity just so that everybody thinks that he’s not bearing any risk; as a result, they can end up putting on risk trades that none of us would really have any appetite for on our own.

Except, that is, perhaps, in our ultra-long-term retirement accounts.

Pension plans are the one part of the financial world where risk appetite is real, and doesn’t have to be covered up with financial opacity and complexity. Let’s build them up, rather than try to marginalize them by constructing an ever-growing welfare state. “No firm is nearly as big or durable as the entire United States of America”, says Yglesias, quite rightly. But if there’s one thing we’ve all learned this year, it’s that even the United States of America isn’t risk-free. And the bigger its entitlement programs get, the bigger the amount of sovereign risk there is in the US.

By radically expanding Social Security, you would be making it riskier, at exactly a point in time at which it’s generating negative real returns. And that can’t be sensible. Right now, thankfully, there’s an enormous amount of demand for Treasury securities coming from all over the world. Let’s embrace that demand, and use it to fund our present expenditures. But let’s not kid ourselves that Treasury bonds are a smart investment over a retirement-style time horizon.

The two biggest expectations-defying retailers of the past decade were Sears Holdings and the Apple Store. Expectations could hardly have been higher when the former was created: it was one of those rare deals where the stock of the acquiring company went up on the news, and in an article headlined “Eddie’s Master Stroke“, Businessweek waxed positively rhapsodic about the prospects for the company becoming the next Berkshire Hathaway. Three years earlier, of course, it had published a column headlined “Sorry, Steve: Here’s Why Apple Stores Won’t Work“.

There are lots of reasons why Apple Stores succeeded while Sears stores have failed, not least the fact that people really want what Apple is selling. But the biggest and most obvious difference, I think, is in the two companies’ approach to spending money. Apple Stores are the most expensive on the planet: whatever it costs to make them insanely great, it will get spent. Meanwhile Eddie Lampert seems to have exactly the same attitude — only instead of spending money on his stores, he spends it on stock buybacks.

While retailers generally spend $6 to $8 per square foot a year on updating their stores, Sear’s spends only about $1.50 to $2, notes ISI analyst Greg Melich. That is not even enough to keep up with depreciation and amortization.

Amazingly, Sears has spent $5.2 billion over the past five years buying back its stock, more than twice as much as on capital investment.

Steve Jobs was never very good at financial engineering; Eddie Lampert has never been very good at anything else. Lampert likes to buy things which already exist; Jobs liked to spend money building things the likes of which the world had never seen.

One of my favorite new toys is the Apple Store app for the iPhone. You walk into an Apple Store, find any product selling for less than $100, and scan the barcode with your phone’s camera. The app then asks you if you want to buy the product; if you do, you just type in your iTunes password, and you’re done. The purchase is charged to your iTunes account, and you can waltz out of the store without interacting with a single salesperson.

It’s just another small way in which Apple is revolutionizing the retail experience. And it seems to me that if you’re an ambitious retailer, then if you don’t want to revolutionize the retail experience, at least somewhere, somehow, you’re doing something wrong. Which does contrast, rather, with the way that Eddie Lampert extolled Sears when he bought it, saying the store was “every bit as good as any of the competition”.

Well, it wasn’t for long.

Update: Jeff Matthews reminds us that Eddie Lampert actually compared Sears to Apple in last year’s letter to shareholders. “Like Apple,” writes Lampert, Sears tries to “create long-term value” by “improving our operating performance, innovating, and delighting customers”. Matthews also notes:

An investor with access to a Bloomberg machine can spot one difference between Sears and Apple that would make a Sears shareholder throw up: even at current prices, Apple shares are cheaper than Sears, at 8.3X EBITDA versus 10.2X for Sears.
Oh, and we used EBITDA to compare the valuation, since Sears doesn’t have any earnings to speak of.

It’s that time of year when resolutions get made, and people have a bit of free time on their hands, and so thoughts turn to financial planning. This is a good thing. Top priority should always be liability management: make sure you’re not paying more interest than you need to, especially since interest rates are so low right now. If you’re carrying a substantial balance on your credit cards which isn’t likely to be paid off any time soon, look hard for some kind of loan which can pay that balance off.

Once you’re done with your liabilities, move on to your cashflows: put together a budget, set up automatic transfers into savings, that sort of thing.

Finally, and least importantly, there’s assets: where you should you invest your savings? This is the bit which people actually like doing — or certain people, anyway, including a quite enormous proportion of the readers of finance blogs and financial journalism.

The syllogism goes something like this: if you’re investing savings, that makes you an investor. If you’re an investor, then you should know what you’re doing. So go out there, get informed, make good decisions, and watch your net worth soar as you make your money work for you. Companies like thestreet.com and the Motley Fool make millions of dollars by selling information and investment advice to such people; Barron’s has been doing it for more than 90 years.

But you shouldn’t buy what they’re selling, even when it’s free. Trying to respond to global events so as to maximize your returns and minimize your risk is a great idea, in theory. But for individual investors — for you — it doesn’t work. Inevitably, there will be comments on this post from people saying that it does work, for them: that they’re successful individual investors. Those commenters might or might not be telling the whole truth. But even if they are, you’re not going to be able to replicate their success.

Henry Blodget has a fantastic post explaining why this is a game you simply should not get involved in.

If you’re an individual with some money to invest, the first thing you need to know if you want to invest intelligently is that you shouldn’t play the Losers’ Game, following global economics and markets and investment advice and trying to make smart decisions along the way.

If you play that investment game, you’re almost certain to lose.

If you want to invest intelligently, the first thing you should do is ignore 99.9% of what you hear in the financial media.

Because, if your goal is to invest intelligently, what you hear in the financial media is mostly distracting noise that will trick you into making expensive mistakes.

Go read the whole thing, it’s very good. And then, just for giggles, read some of the financial media. How would you “play Europe”, for instance, if you read the WSJ’s “Ahead of the Market” column?

Mr. Masterson worries that Europe could fall into recession and that China could suffer a sharp slowdown. “If that scenario plays out and we get a global slowing, then the U.S. will slow as well,” he says. “We’re all connected, and the strength in the U.S. markets now will be perceived with the benefit of a hindsight as being somewhat optimistic.”

On the other hand, some investors argue that European and Asian stocks could rebound dramatically next year, leaving the U.S. behind, if the sense of crisis fades. That could unwind the safe-haven flows into the U.S. this year.

The fact is that you can’t get “ahead of the market”: the market will always be ahead of you. You really only have one possible advantage over the market as a whole: if you’re investing over a very long time horizon — 20 years or more, say — then you can ride out volatility and take advantage of illiquidity premiums. But both of those things are easier said than done, especially for people who follow the news. And illiquidity premiums are hard to find for small investors: investable products like stocks and mutual funds tend to be run by companies which are constantly marking to — and trying to anticipate — market reactions.

But here’s the thing: simply following Blodget’s good advice — buy a handful of index funds, and rebalance automatically when the allocations get out of whack — is much harder than it should be. It’s hard enough that a company called Betterment feels comfortable charging a fee of 0.9% of all your assets, every year, just for doing it for you. The fee continues to rise as your asset base rises, but starts falling as a percentage once it goes over $25,000: if you have a nest egg of, say, $200,000, then Betterment will charge you $1,250 a year to put it in index funds: that’s 0.625%, over and above all of the fees on the index funds it’s investing in. To give an idea of what that means, $200,000 compounded at 7% over 20 years will become $770,000. The same amount compounded at 7.625% over 20 years will become $870,000. That’s a difference of $100,000.

For people who try to save a certain amount of money every paycheck, rebalancing should be done dynamically — you just buy whatever you need to buy to keep your asset allocation stable, and you never sell anything. But no one wants to do that kind of math manually every paycheck. One thing you can do is simply put all of your money into a single balanced index fund, like a target-date fund; that solves a lot of problems while adding a chunk of idiosyncratic fund risk. But in general the world of financial services is designed to extract as much money from you as possible, by offering as many unnecessary products and bits of advice as it can. Which is why following Blodget’s advice is much easier said than done.

Update: As various commenters and Timothy Lee have noted, there is at least one easy way to get a low-cost, diversified, set-it-and-forget-it portfolio: buy a Vanguard target-date fund and just keep adding money to it regularly over time. This is very good advice.

China supports Argentina in Falklands dispute — Univision

“You can have opacity and an industrial economy, or you can have transparency and herd goats” — Interfluidity

Annals of immovable objects, LACMA edition — NYT

Thinking about god does help you achieve your goal, but only if your goal is to successfully resist the urge to do something — PRBNM

2011′s worst chief executives — Dealbook

Greece’s diabetics can’t get insulin — NYT

Meet your newest Fed Board nominees — WSJ

Wherein Khoi Vinh calls the NYT’s user experience “haphazard”, “insulting”, and “hostile” — Subtraction

American Banker’s Andy Peters has a jolly story about how West Virginia’s United Bank is teaming up with Washington’s bike-sharing program, to help the formerly unbanked have access to this handy form of transportation.

To check out a bike from one of Capital Bikeshare’s 110 solar-powered stations, users must first swipe a debit card or credit card.

Such a system locks out plenty of low-income commuters who use Washington’s Metro trains and buses but lack a checking account or a credit card…

Bank on DC is offering a $25 discount on yearly Capital Bikeshare memberships to those who open an account at either United Bank, a unit of United Bankshares, or District Government Employees Federal Credit Union. A Capital Bikeshare annual membership normally runs $75.

“These are not necessarily high-balance accounts, but a lot of the customers are using their accounts very prudently,” says Craige L. Smith, the chief operating officer of United Bank’s Virginia division. “We think there is real value in establishing those relationships.”

The fact is, however, that there’s a lot not to like here, most of which is elided by Peters. This scheme is not going to get the unbanked onto Capital Bikeshare in any remotely significant numbers, for a lot of reasons.

Firstly, the $25 discount comes only on the most expensive form of membership — the annual membership which the poor and unbanked are least likely to be able to afford. If you want to help bring down the cost of accessing these bikes, then charging $50 just to get started is not a great way of doing that. In many cases, that’s $50 desperately needed for food or rent: buying bike access in eleven months’ time simply isn’t on the list of priorities, no matter how good a deal it might be.

Secondly, the unbanked tend to be unbanked for many, many reasons. Some are good, some are bad. But it’s ridiculous to imagine that getting a $25 discount on a bikeshare membership is going to be enough to persuade anybody to open a bank account. Millions of dollars have been spent on all manner of imaginative approaches towards trying to get the millions of Americans without bank accounts to open one. Few if any of those approaches actually work. This one won’t work either.

Thirdly — and this is key — opening a bank account isn’t enough to get you that $25 discount. A bank account will come with a debit card, and a debit card will get you a bike for either 24 hours or three days. But as the bikeshare website clearly says, “all Capital Bikeshare memberships require a credit card”. If you want to get that $25 discount, you’re going to need not only a bank account but also a credit card.*

At the same time, even if you don’t take advantage of the $25 discount, it’s still a bad idea for the newly-banked to rent a bike even for just one day, using their United Bank debit card. Capital Bikeshare spells this out quite explicitly:

When you join Capital Bikeshare with a 24-hour or 3-day membership, a preauthorization hold of $101 per bike is placed on your card account. This is a not a charge against your account. It serves as a security deposit and will be returned to you when the hold expires. Holds may last up to 10 days, depending on the credit card company. We recommend using a credit card and not a debit or check card when becoming a 24-hour or 3-day member. Using a debit card may result in overdrafts if you don’t have sufficient funds in your account to cover the hold.

It’s easy to imagine someone opening their first-ever bank account with United Bank, using their debit card to pay $7 for one day’s biking, and then immediately getting hit by some whopping overdraft fee because of that $101 hold.

Then again, the possible charges if you rent a bike with your credit card are substantially higher. This is hidden away in the small print when you sign up for a membership:

If Member maintains possession of the Capital Bikeshare bicycle beyond the Permitted Period of Continuous Use, then the Capital Bikeshare bicycle is deemed lost or stolen, Member’s credit card will be charged a fee of $1,000, and a police report may be filed with local authorities.

(The Permitted Period of Continuous Use, incidentally, is 24 hours.)

In order to get that $25 discount, then, an unbanked person in Washington has to first open a bank account; secondly get a credit card; and thirdly sign a contract under which they agree to pay $1,000 should their bike be lost or stolen or taken out for more than 24 hours. It’s not even clear that United Bank is promising to give a credit card to anybody who opens up a bank account under this scheme, but assume that they do: then they’re immediately putting the newly-banked individual into $50 of debt, with no real idea as to whether or when that debt will get paid off. Add in late fees and the like, and the $25 savings starts looking even less desirable.

Jim Surowiecki has a column on layaway this week; United Bank should take a leaf out of that book and offer their customers the opportunity to pay the $50 membership fee at a rate of say $4.25 per month, plus whatever usage fees are run up on the Bikeshare program.

Who, under that kind of continuous-layaway scheme, would take on the responsibility of paying $1,000 if a bike were to be lost or stolen? Bank on DC is the obvious organization to do such a thing. They should post a $10,000 bond to cover the first ten times this happens, see whether the scheme is any kind of success, and then take it from there. If there are lots of stolen bikes and the $10,000 disappears quickly, then the scheme would be an interesting failure — but organizations trying new ideas should be open to failure. And there’s a good chance that the $10,000 would not be touched at all.

What’s really needed, in other words, to get the unbanked onto bikeshare schemes is not bank accounts at all — it’s a way of finding institutions which will accept the responsibility of paying $1,000 should the bike be lost or stolen. If you do that, then memberships can be given out to individuals without bank accounts at all, and they can use any old prepaid card to pay the modest usage fees they run up, without worrying about the $101 hold.

Which institutions would do such a thing? Well, there are a lot of non-profit organizations which work with the poor and try to get them mobility — they’re a good place to start. But there’s another set of institutions which might be interested as well: churches, of which there are very many in the DC area. Churches know their flocks, after all, and might well be interested in giving out memberships to those who need them, and taking on a contingent liability in the process. All you’d need is a single credit card belonging to the church, which could then deal in its own way with any congregant who ran up that $1,000 charge.

The Capital Bikeshare scheme has been built in a very cautious manner, carefully constructed so that everybody with a membership needs to have a credit card associated with that membership. That in turn allows Capital Bikeshare to be sure that it can collect $1,000 every time a member loses their bike for whatever reason. This system was set up ex ante, with no indication of how often such a fine would turn out to be necessary — and it has essentially excluded the unbanked from Bikeshare.

I would much have preferred to see an optimistic scheme at first, with the restrictions coming in later if the cost of lost or stolen bikes turned out to be substantial. But even now it’s possible to imagine ways around these problems, if some well-intentioned group has faith in its members and in the Bikeshare scheme. The Bank on DC promotion, however, is not such a way.

*Update: It seems that the website is wrong about this: you can use a debit card to pay for a 30-day or 1-year membership, and when you do so no hold is put on your account. On top of that, Bank on DC also has a scheme to help defray the $1,000 cost if your bike is lost or stolen. More details as I get them!

Update 2: Details, from Bikeshare:

• You can pay for 30-day and annual membership with a debit card.
• There is no hold on an individual’s account if they purchase a 30-day or annual membership with a debit card. The reason for this is that Bikeshare has contact information (name, address, etc.) when an individual signs up online for one of these types of memberships — but not for 24-hour or 3-day members.
• If the bike is stolen and no police report is filed, Bikeshare would charge the debit card $1,000. If the individual who is responsible for the bike does not have $1,000 in their account, Bikeshare would charge the amount available in the account and work with the financial institution to ensure no subsequent charges can be made to the account until there is a full reimbursement for the cost of the bike.
• Approximately 85 percent of annual members do not incur any usage fees when riding. The average usage fee the other 15 percent incur is between $6-$7 per individual per month.

Maija Palmer, with another one of those end-of-email articles, finds this intriguing story:

Andy Mulholland, chief technology officer at Capgemini, says email works poorly for people working in unstructured roles, such as engineers solving IT problems. “Someone asks you a question you don’t know the answer to, so you send out emails to everyone you know. Out of 20 people, 19 have their time wasted and the 20th gives you half an answer,” he explains. Social networking, in this case, can give faster and better answers.

He cites a recent example where an engineer had an unusual problem with some Unix code. He posted the question on Yammer, and within two hours had an answer from someone in the company he didn’t know, in a department of the business he barely knew existed.

On its face, this doesn’t make a lot of sense. If you’re worried about wasting people’s time, why is it better to waste hundreds of employees’ time on Yammer than a couple of dozen over email? I think the answer to that question is the key to understanding the power of social networks.

The Yammer solution here is clearly superior for the person asking the question, in other words — but why is it superior for all the people reading and thinking about and maybe or maybe not answering it? After all, they spend much more time on this question, in aggregate, than any email cc list would.

But it’s voluntary time: Yammer is the kind of thing which fits neatly into whatever interstices one has in one’s day. It doesn’t ping at you and annoy you and distract you at inopportune moments.

Social networks are also supererogatory: they have none of the feeling of being forced to read and participate that comes with almost all corporate emails. Much of the current case against James Murdoch, for instance, is based on the idea that if he was emailed something, he must have known it. No one would dream of making the case that if some fact was revealed on a Yammer board, and Murdoch had access to it on Yammer, then he must have known that fact.

Related to that is what you might call lurkability: you can spend as much (or as little) time as you like on these boards, learning about anything you’re interested in, without being formally copied-in on anything. Something which might be a waste of time to you can be useful and valuable to me — and social networks are a great way of giving people access to the stuff they find valuable, without anybody having to second-guess what it is they want to know.

Finally, if and when you do choose to participate, you get to do so in public. The engineer who answered that question got noticed, in a good way, and no one else took credit for what he said or tried to hide his participation in the process. No space is entirely free of office politics, but social networks, because they’re public, make such politicking rarer and less harmful when it does happen.

It’s also much easier to share information you find on a social network: worries that some piece of information might be confidential tend to be much smaller and much less important. As a result, such networks have much less friction than email does.

And anything which reduces the mounds of emails we all have to deal with every day has got to be a good thing. My work email account, in particular, is a nightmare: it’s 95% unsolicited PR pitches and 4% internal emails going out to enormous distribution lists which I have no interest in at all. Which means I have to go to a lot of effort to find the 1% of emails that I actually want to read. There’s got to be a better way.

What’s behind the rise in bus travel in recent years? It certainly seems very impressive, according to the latest research from DePaul University.

Here’s how Bloomberg’s Jeff Plungis characterizes it:

Megabus.com and BoltBus led U.S. curbside bus companies that boosted trips by 32 percent this year as travelers opted to leave their cars behind and surf the Internet while traveling.

And here’s Matt Yglesias, with a slightly different take:

Like Duncan Black, I’m far from certain that the right way to understand this is actually as intercity bus trips substituting for intercity car rides. The way I would primarily interpret it is as these services leading to additional trips that wouldn’t otherwise have been taken. Instead of riding Amtrak to New York once a year, you ride the bus three times instead.

If you look at the data, Yglesias seems closer to the mark than Plungis. Could the massive 30% rise in curbside bus ridership be accounted for by the 1% fall in private autos? Possibly. But it’s more likely that something else is going on.

Both Plungis and Yglesias, I think, miss the elephant in the room, and the obvious reason why the DePaul measurements for bus ridership have been growing at such a startling rate. Here’s how the paper puts it:

The analysis we provide also excludes all “Chinatown operators,” which have significant different qualities than mainstream operators. As a general rule, those carriers listed on the GotoBus.com web site are considered for purposes of our study to be Chinatown operators. Many of these carriers do not invest in a brand identifiable by the paint scheme or insignia on their buses.

Indeed, DePaul specifically excluded the dramatic growth of California’s USAsia Bus Lines, just because they determined that it counted as a Chinatown operator.

The obvious theory, then, is that big operators like Megabus and Bolt Bus saw the huge success of the Chintaown bus market and saw an opportunity there. They brought in branding and professional marketing and wifi and much higher safety standards, and succeeded in taking a huge amount of market share from the Chinatown operators who were never part of the DePaul survey in the first place.

That theory is borne out by my own anecdotal experience: when my friends took the bus from New York to DC or Boston ten years ago, it was normally a Chinatown bus. Today, it’s more likely to be a Bolt Bus, or even a higher-end product like the Limoliner.

In other words, the DePaul data is consistent with total bus ridership actually staying constant, with the recognized curbside buses simply taking ridership share from unrecognized Chinatown operators. In reality, I suspect that bus ridership is growing. Just not nearly as fast as the DePaul paper would have you believe.

As for the much-vaunted wifi on these buses, it’s basically the same as the wifi on Amtrak, or from Gogo in-flight: in a word, crap. If you’re working on a laptop and can download emails or web pages in the background while reading or writing something else, then it’s fine. But it’s pretty much useless for people on iPads, where the lack of multitasking means you can’t read one thing and download something else at the same time.

It seems to me that the travel industry in general has done a very bad job of adjusting to the fact that most wifi-enabled devices these days are not laptops. I even stayed at one pretty high-end hotel in England, recently, which thought that providing an ethernet cable was a perfectly good alternative to providing wifi, and which didn’t have any kind of Airport Express devices or similar that it could lend out to guests who didn’t have ethernet ports on their computers or tablets.

So far, no one’s really cracked the problem of the mobile web — we’re still in a world where connecting to the internet when on the move is far too difficult, and needs to be configured (and often paid for) on a device-by-device basis. Companies like Lightsquared want to change that, but for the time being they’re vaporware, and I’m not holding my breath for them to arrive. Which means that for the time being it’s a bit of a stretch to say — as Plungis, for one, does — that the mobile web is actually changing the way we travel from city to city.

There’s a distinct whiff of the faux-naive coming off Mary Williams Walsh’s article about the fate of Jefferson County’s general-obligation bonds:

People who own what is considered the safest type of municipal bond may be in for a surprise.

This safe debt, called a general-obligation bond, is said to be the next strongest thing to Treasuries because it is backed by a “full faith and credit” pledge. That means the government that issued it will pay it on time, no matter what.

But now Jefferson County, Ala., has stopped paying such debt, breaking with convention and setting up a fundamental test of what full faith and credit truly means.

While we’re repeatedly told what “conventional wisdom” has to say on such matters, or what certain fund managers might once have been taught, not once is any authority actually cited saying that GO bonds are “the next strongest thing to Treasuries”.

Which is hardly surprising, since the muni market hasn’t been considered particularly strong for some time now. Back in February I blogged Michael Corkery’s article on how individual investors were abandoning the market, precisely because they had become aware that it was anything but safe. When 60 Minutes is running alarmist pieces on how hundreds of billions of dollars of muni bonds could default, no one’s sitting back with a smug expression and saying “well, your muni bonds, backed by actual cashflows, might default, but my muni bonds, backed by some amorphous ‘full faith and credit’, are perfectly safe”.

And in truth no one ever said that — it’s hardly been a closely-held secret that Jefferson County has no tax-raising abilities. In fact, that’s one reason why revenue bonds came into being: as in most other markets, there’s a strong case to be made that secured bonds are safer instruments than unsecured bonds.

Indeed, if you carry on reading through the end of the NYT piece, you’re eventually told that Jefferson County’s MBIA bonds were wrapped (that is, insured) by MBIA. Obviously, if everybody thought they were perfectly safe, then no one would have demanded them to be insured.

But the biggest problem with the NYT article is its deep premise: that Jefferson County is some kind of harbinger, and that if it can default on its GO bonds, then lots of other municipalities can as well. This meme is both very pervasive, and very dangerous, as Bond Girl explained in a long blog entry in October:

Some people mistakenly characterize Jefferson County’s financial problems as a canary in the coalmine for the municipal bond market, which suggests that they still have no idea what transpired there (or how long Jefferson County has been in financial distress). Portraying Jefferson County as a typical municipal credit is akin to portraying Enron as a typical corporate credit. With Jefferson County, various financial firms – but primarily JP Morgan – exploited an existing culture of corruption and made taxpayers the victims of one of the largest frauds in the history of the financial markets.

I’ve been saying at least since at least April 2009 that munis are one of those asset classes which is safe until it isn’t — that once you get some unknowable number of municipal bond defaults, suddenly no one will have access to the market any more, and the whole market could implode:

If five or six munis default, things get much, much worse. At that point, the cost of default for a wrapped muni issuer plunges, and possibly even goes negative. Once a few munis default, no one’s going to lend to any muni, even the ones which are current on their debt. So why bother staying current? Why not just default and let the insurer, rather than your local taxpayers, take most of the pain?

In other words, there’s a very serious, and pretty much impossible to hedge, risk of snowballing muni defaults.

But the point here is that Jefferson Country is sui generis and emphatically not one of those five or six munis. It’s a case unto itself, cut through with corruption and fraud, and is in no sense an example for any other municipality to follow. Jefferson County’s GO bonds are not an example of the safety of GO bonds more generally: as Bond Girl says, they’re more akin to the way that people lost their money with Enron or Madoff. The germane risk in Jefferson County is fraud risk, not GO-bonds-defaulting risk.

And remember that no one knows what the recovery value is likely to be even on Jefferson County’s bonds: it could yet turn out to be quite high.

Now I’m no great believer that bondholders should be senior to everybody else, to the point at which bond coupons are more important than vital municipal services. But let’s not look to Jefferson County to blaze a trail on that particular front. What’s going on in Jefferson County is an interesting datapoint, but it’s in no sense the beginning of some kind of muni-default snowball.

Alan Feuer has the story of the Bank of Cattaraugus, a tiny community bank in the eponymous town an hour south of Buffalo. It’s a heartwarming tale of community banking:

A few years ago, when Ms. Bonner fell behind on her property taxes and was forced to sell her home, the bank’s president, Patrick J. Cullen, who held the mortgage on the house, had his son Thomas buy it. Thomas Cullen, who lives in Chicago, never intended to live there.  Ms. Bonner and her sister were able to stay as renters.

“The whole thing was incredible,” Ms. Bonner said the other day, a single pine branch hanging in her living room in lieu of a full Christmas tree, which she could not afford. “I just didn’t realize there were people like that in the world, people who would help you.

“Especially,” she said, “a banker.”

Feuer doesn’t get much into the financial details, but the ones he does have are intriguing:

With $12 million in total assets, the Bank of Cattaraugus is a microbank, well below the $10 billion ceiling that defines small banks…

In its 130-year history, the bank has rarely booked a profit for itself in excess of $50,000. Last year, Mr. Cullen said, it made $5,000…

The largest employer in the village is the school district, and many village residents survive, like Ms. Bonner, on pensions or government subsidies, in homes that have an average mortgage of $30,000..

Even in Cattaraugus — population 950 — Mr. Cullen says he receives at least two offers a week from larger institutions that want to buy him out. He claims to be unsurprised by these overtures, though his business is exceptionally simple: 80 percent of the loans in his portfolio are mortgages.

The bank’s official FDIC reports add a bit more detail — and show income of $8,000 on total assets of $16.2 million as of September, along with $1.1 million in equity capital. Last year, net income was $47,000, which even then was a return on assets of just 0.3%.

Total salaries and employee benefits are $276,000, split between eight employees, plus $34,000 in directors’ fees. (Both the CEO and his daughter, the CFO, are directors; his son Thomas is “Director Emeritus”.) Feuer describes Mr Cullen as “a well-to-do man”; but he’s clearly not extracting a huge salary from his bank. Instead, Cullen uses the bank as a vehicle for his civic ambitions: he holds a position of great importance in this town. It’s easy to see why he has no interest in selling the bank and getting replaced by some ambitious banker working his way up the corporate ladder. Instead, this bank is a family affair: a Cullen has been president since 1957, and Cullen’s daughter will surely replace him when he retires.

Understandably, Bank of Cattaraugus doesn’t have online banking, although it does have something it calls “bank-by-mail”. And there are signs of significant political clout, too: the bank is home to state and municipal deposits totaling $5.42 million, more than 37% of its total deposit base. Without those deposits, its hard to see how the Bank of Cattaraugus could run any kind of profit at all.

What the bank does have, of course, is much more liquidity than any individual in town. And although it doesn’t engage in complex trading strategies, it does do its own kind of risky proprietary trading: the bank took took over one abandoned house, for instance, fixed it up, and sold it for an eventual loss of $500.

Most interestingly, it also has a local monopoly. As a result, it faces little competition when it comes to things like deposit interest rates, and extremely little competition even when it comes to lending rates. No other bank understands local property values like the Bank of Cattaraugus does, which almost certainly means it’s often the first and last stop for locals looking for a mortgage. Cullen also tells the story of a local Amish man who got an $85,000 consolidation loan from the bank: no one else would loan him anything like that, given his declared income of just $2,300 a year. But the result is that if you get a loan from the Bank of Cattaraugus, you’ll pay whatever Patrick Cullen says you’ll pay.

Now there’s no evidence that Cullen is abusing his monopoly at all. The bank has earning assets of $13.7 million, on which it earned net interest income of $544,000: that’s an average interest rate of less than 4%. And service charges are running at $58,000 per year, which works out to just under $3 per month, on average, for each of the bank’s 1,625 deposit accounts. That’s an entirely reasonable sum to pay for the utility service of having a bank account at your local community bank.

The Bank of Cattaraugus, then, really does look as though it’s everything Feuer says it is. It’s run by a pillar of the local community, to really help local businesses — and the town itself — thrive. I’m sure that if you wanted to buy up the old hotel in the center of town and spruce it up a bit, Cullen would give you all the help and support you needed. The Cullen family gets to live well in, and provide some financial plumbing for, a town they clearly love and feel partially responsible for. And the bank looks perfectly healthy, even without much in the way of profits.

Of course, this kind of model doesn’t scale: that’s kinda the point. And neither could some enormous franchise with hundreds or thousands of branches ever provide the same kind of service that the Bank of Cattaraugus does now. But without what you might call the Cullen family’s noblesse oblige, they would surely have sold the bank for a seven-figure sum by now, and gone off to more lucrative careers elsewhere.

How can one institutionalize that kind of citizenship? The answer is simple: credit unions. While the Bank of Cattaraugus is a prime example of a small community bank which really is doing God’s work (on a total asset base rather lower than Lloyd Blankfein’s annual salary), everything it does could also be done by a credit union, without the associated risks of the owners selling out at some point.

Everything, that is, except one important thing: banks are allowed to accept state and municipal deposits, while credit unions are not. If the Bank of Cattaraugus became a credit union tomorrow, it would have to return $5.42 million in deposits, and it would become insolvent overnight. So while I don’t for a minute begrudge the bank those deposits, I do wonder why credit unions don’t have the opportunity to do the same kind of thing with them. The world would be a better place if they could.

S&P on Europe: still pretty much hopeless — Reformed Broker

Bernanke sees his shadow, may keep cheap money around for two more years — WSJ (paywall)

Meanwhile, Bloomberg releases all his 2007-2009 emergency lending data — Bloomberg

Low holiday prices should terrify retailers about the future — NYT

AIG’s CEO would like to hang around a while longer — WSJ (paywall)

FT Alphaville’s New York team present their awards video — FT Alphaville

What it was like to run a bar in Baghdad during the Iraq war — The Atlantic

Buzzfeed’s 50 funniest headlines from 2011 (two strange ones to follow) — Buzzfeed

Handsome accordian maker is North Korea’s kingmaker — Reuters

‘Gay Robot’ Heckles Bachmann At Iowa Event (VIDEO) — TPM

More links at Counterparties.com and across the pond. I’ll be off next week, so your Counterparties posts will be by OG Felix Salmon himself. Thanks so much for reading, enjoy your holidays, and I’ll see you in the New Year!

The Stanford Social Innovation Review is hosting a debate over philanthrocapitalism in which Kavita Ramdas, on the anti-philanthrocapitalist side, makes some very salient points.

Firstly, Ramdas breaks philanthropy down into three groups: traditional philanthropies; philanthrocapitalism; and what she calls “social change philanthropies”, which “are emerging to challenge the substance, form, and direction of philanthrocapitalism as well as the current, largely unequal systems of trade and global capitalism”.

Ramdas doesn’t give examples of these anti-capitalist social change philanthropies, so I’m a bit unclear on what exactly she has in mind, although Occupy Wall Street and its funders certainly seem to count. And interestingly, although Ramdas is siding with the social-change philanthropies against the philanthrocapitalists, the philanthrocapitalists, in the form of Matthew Bishop and Michael Green, seem more interested in opposing traditional philanthropies:

We still need to talk about nonprofit performance and impact. Most nonprofits are “black boxes” to their supporters. We are excited that the Internet and social media can engage and mobilize “mass philanthrocapitalism” from ordinary donors. Organizations such as GlobalGiving, Kiva, and DonorsChoose have made a great start, but this revolution has a long way to go. And we mean revolution, maybe even a mass extinction of traditional nonprofits that cannot engage their givers.

Although I have no desire to overthrow the capitalist system, I have a lot of sympathy with Ramdas, here, and very little with the philanthrocapitalists. The idea that a “black box” is always and obviously a Bad Thing is oversimplistic: while transparency and accountability are good, they can result in conservatism and a lack of the very kind of risk appetite and failure-embracing that the philanthrocapitalists love to espouse.

Meanwhile, Ramdas has a strong point here:

Current philanthropic practice is also driven by the need to find technological solutions, the same “fix-the-problem” mentality that allowed business people to succeed as hedge-fund managers, capital-market investors, or software-developers. This approach is designed to yield measurable and fairly quick solutions. A symptom of this may be found in the kind of skills that new foundations are seeking. I am struck by how few social scientists are employed at the new “mega-philanthropies.” Instead, the people most sought after are management consultants, business people, former industry leaders or lobbyists, and scientists. Each of these is expected to bring a crisp and coolly efficient approach to their work, demonstrating their “expertise” on specific issues—climate change, agricultural productivity, soil quality, or infectious disease. The nuance and inherent humility of the social sciences—the realization that development has to do with people, with human and social complexity, with cultural and traditional realities, and their willingness to struggle with the messy and multifaceted aspects of a problem—have no cachet in this metrics-driven, efficiency-seeking, technology-focused approach to social change.

Pointedly, Ramdas asks for — and the philanthrocapitalists fail to provide — “evidence that philanthrocapitalism works”. When the Gates Foundation, armed with a million-dollar salary for its new CEO, ends up hiring a second Microsoft centimillionaire, the simplest explanation is usually the right one: it’s not because that person, at that salary, is the best possible choice for the foundation. It’s just that extraordinarily rich people, like everybody else, like familiar surroundings. And they’re also disproportionately likely to have an immodestly high opinion of their own ability to be a success in any field they choose. If they hired management consultants as a tool to make lots of money, then why not hire management consultants as a tool to give it away?

There’s a lot of this which can’t and won’t be changed. Philanthropy is driven by money, and money comes from rich people. If it’s rich people who are paying the philanthropic piper, then it’s rich people who will call the philanthropic tune. And non-profit organizations which don’t pay the requisite lip service when it comes to return on investment and the like will simply get passed over, when the dollars are doled out, in favor of fundraisers who can talk the talk.

I have little reason to believe that the rich are better at giving away money than the poor, or that they run philanthropies better. But this is how rich people like to give away their money, these days — and it’s better that they give it away than that they don’t. I think they have a lot to learn from philanthropies which have been around for decades, but they’ll have to learn that themselves, slowly. In the mean time, we don’t need to celebrate philanthrocapitalism in order to be happy that the rich are choosing to give their money away, rather than just keep it in their families forever.

Europe hasn’t learned the lessons of Argentina’s financial crisis, say Argentinians — Spiegel

“China hedge fund bears look good in shorts” — Reuters

Ron Paul’s investments are a “half-step away from a cellar-full of canned goods” and ammo — WSJ Total Return

Actually, 18 years ago, Ron Paul wrote a letter warning of a “coming race war” — Reuters

Katya Wachtel learns Paulson’s Advantage Plus fund’s off more than 50% on the year — Reuters

Fred Wilson: The market for web company IPOs is healthy and rational — A VC

Brookings’s favorite economic stories of the year — Brookings

Many more great links at Counterparties.com, as well as further reading at our salmon-colored friend’s.