Felix Salmon

Should we care about euro/dollar?

Felix Salmon
Dec 14, 2011 18:33 UTC

There’s a lot of chatter right now about the euro, which is now worth less than $1.30. That’s a reasonably big fall: it was as high as 1.3385 on Monday. But it’s worth keeping things in perspective. Here’s a five-year chart of EURUSD, or the value of one euro in dollars:


The main thing to notice here is the volatility: we’re basically back to exactly where we were five years ago, but we’ve had a very bumpy ride along the way. Going forwards, it seems sensible to expect that there will be more of the same: currencies going up and down in a fundamentally unpredictable manner.

The second thing to notice is how tiny a move from 1.33 to 1.29 really is, in the grand scheme of things. Is EURUSD volatile right now? Yes — but it’s been this volatile for years. There’s really nothing new or different or important going on.

The third thing worth noticing is that news reports nearly always talk in terms of currencies weakening rather than strengthening. If EURUSD goes down, then that’s always a reaction to the latest eurocrisis, whatever it might be. On the other hand, if EURUSD goes up, that’s never taken as a sign of strength in Europe: instead, we get bombarded by stories about the weak dollar, normally accompanied by doom-laden prognostications about the US economy.

For all that it’s a tempting narrative, however, currency moves should not be taken as some kind of market referendum on the health of a given economy. In the Wall Street Journal, Richard Barley has ventured that “the euro may now have become the main indicator of the depth of the currency bloc’s crisis” — but in truth there’s no good reason that should be the case. And it’s an unprovable assertion, too: the minute that the euro rises as the crisis gets worse, Barley can simply declare that something else has replaced it as the indicator to look at.

Let’s say that the eurozone is going to fracture, with weaker countries like Greece leaving the currency and returning to the drachma. Would that be good or bad for the value of the euro? It’s hard to tell. The rump eurozone would be stronger, and currencies can do pretty well during a crisis, depending on how the central bank reacts. After all, in the short term, currency flows are largely a function of interest rates, which are set by central banks: money goes to where it can earn the most interest.

And in the longer term, no one really has a clue what might happen. Four years ago, Bloomberg caused a global stir when it reported that supermodel Gisele Bundchen was insisting on being paid in euros, on the grounds that the dollar was simply a bad bet. The value of the euro back then? $1.45. And of course Bundchen looked smart, for a while — until the euro fell off a cliff a few months later.

Right now, there are similar stories doing the rounds about Metallica, who are reportedly bearish on the euro. They, too, are likely to look smart until they look stupid.

The main thing to remember here is that the European Union is still an economic powerhouse, with 27 countries pumping out trillions of dollars’ worth of domestic product every year. All those goods and services are worth real money, no matter what happens to the political union. And the European Central Bank is incredibly reluctant to print money, which means that the chances of the euro being eroded by inflation are even lower than the chances of the same thing happening to the dollar.

For the foreseeable future, then, we can expect the euro to rise and fall in its now-standard pattern of unpredictable volatility. If a period of the euro falling happens to coincide with a period of especial crisis in the eurozone, then we can also expect a spate of stories extracting spurious causation from a random correlation. And similarly, if a period of the euro rising happens to coincide with bad economic data in the US, then we’ll all be told that the dollar is weakening on a deteriorating growth outlook.

What does this mean for the 99.9% of us who don’t play the currency markets? If you’re an international traveler, then visiting Europe just got a bit cheaper. If you’re not, then you can probably ignore currency rates altogether. And if you’re concerned that the crisis in Europe is going to tip the world into another global recession, then if I were you I’d look at European interbank lending rates and sovereign debt yields to get an indication of how bad things are. The euro/dollar exchange rate is just too noisy to be able to tell you much of anything.


I’d also add that the value of a currency isn’t always enhanced when rates go up – the current strength of the Swiss Franc for instance when it climbed against most G20 currencies was to do with security and perceived risk (of other currencies). The interest rates are amazingly low for such a high value, and the press and corporates were complaining about if for ages before the SNB stepped in.

You are right to look at the strength of the underlying economy of a currency area, be it single country or zone, specifically whether that country or zone is a net importer or exporter. Net importers generally lose currency value over time, net exporters generally gain value over time, all else being stable.

Posted by FifthDecade | Report as abusive

The dangers of De-Occupy Your House

Felix Salmon
Dec 14, 2011 16:22 UTC

I agree wholeheartedly with Jim Surowiecki’s sentiments this week about strategic default and the way in which it’s entirely rational for homeowners to walk away from their underwater mortgages. But I think he soft-pedals the consequences of what he calls “a De-Occupy Your House movement”:

Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future.

This is all true, as far as it goes. If more people default on their mortgages, total mortgage-lending losses will rise — but a large part of that will simply be the transference of pain from homeowners to lenders. At the same time, however, there would also be a huge rise in foreclosures, evictions, and fire sales — with the result that house prices, which are still falling alarmingly, could see another stomach-churning lurch downwards. That in turn would only serve to increase the number of underwater homes, and would set off another set of of walk-aways and foreclosures, and — well, the vicious spiral is easy to foresee.

The fact is that if homeowners act rationally with regard to their mortgages, the housing market becomes unpleasantly volatile. The New York Fed recently put out a compelling piece of research saying that both the sharp rise in house prices and the subsequent sharp fall can in large part be attributed to speculative buyers — the small minority of people who do act rationally and are perfectly willing to overpay in bull markets and walk away in bear markets. What Surowiecki is encouraging, here, is that the rest of us start to behave much as the speculators did when house prices fall.

Historically, homeowners haven’t behaved that way, and not just because they’ve been guilt-tripped into paying their debts. Rather, they’ve done what bank lenders used to do in the good old days: hold their assets at par, rather than marking them to market. I’m a homeowner myself, and I simply don’t know what my apartment is worth; I certainly have no easy way of attuning myself to the ups and downs of the East Village real estate market each quarter. When I was looking to buy, I was hyper-aware of such things. But when I’m not actively in the market, I have much better things to do with my time.

A healthy housing market, in other words, is a reasonably opaque market. People buy the house they want to live in for the long term, and then slowly pay their fixed-rate mortgage down over 15 or 30 years. When they have to move, they have to move. And every so often, if interest rates fall substantially, they’ll refinance — but that’s just a function of interest-rate movements, and not at all a function of house-price movements.

What happened during the housing boom was the rise of cash-out refinancings. Homeowners were being encouraged to take their existing home and extract equity from it — that is, to essentially mark their home to market periodically. And once people started marking to market on the way up, it was inevitable that they would do the same thing on the way down.

Surowiecki’s ideal world, then, looks a lot like the kind of world that housing speculators live in. People constantly mark their homes to market, and they flip or cash out when house prices are rising, and strategically default when home prices are falling. This is a recipe for bubbles, busts, and general house-price volatility — and remember that house-price volatility is a lot more dangerous than stock-market volatility, because it’s an inherently highly-leveraged market. Even if lenders tightened up their lending standards substantially, people buying homes would still be levered up four or five times — the kind of leverage which is unthinkable even in the most insane leveraged ETFs.

To put it another way, in Surowiecki’s ideal world, the residential real estate market starts to look a lot like the commercial real estate market — a place where fortunes are made and lost, rather than a place dominated by individuals simply buying a roof over their heads and a place to bring up their family.

I’m not convinced that a world where homeowners mark their homes to market is an obvious improvement on the status quo ante — even though I’m wholly convinced that in any given case, it’s entirely rational for homeowners to walk away from their underwater houses. The question, of course, is whether we can ever return to the status quo ante.

In his excellent book The Devil’s Derivatives, Nick Dunbar explains how banks used to lend across the business cycle, more than making up in good years for the losses they suffered in bad years. Today, however, when banks mark their assets to market daily, that kind of activity is impossible, and the markets become convinced (justifiably) that all banks are insolvent whenever there’s a crisis.

Let’s say that you’re significantly underwater on your mortgage and you don’t have much in the way of savings. Does it then make sense to say that you’re insolvent? Historically, homeowners never thought that way — the mortgage was a monthly payment they made to stay in their home, and their home was a place to live rather than a financial asset.

If we move to a world where houses do become financial assets, that might be a good thing. But let’s be honest about what such a move entails: a large decrease in homeownership. It’s not sensible, on a financial level, to have so much of your net worth tied up in one illiquid asset. So if homes are marked to market, they become attractive mainly to landlords who will in turn rent them out to the rest of us.

If Surowiecki wants millions of Americans to walk away from their underwater mortgages, I hope he knows where the buyers of those homes are going to be found. Because if they don’t appear, we could have another massive housing crash and another huge recession.


It’s been weeks since I wrote my comments and I missed a big mistake. I meant to say the town claims my house is valued at 100% of market value. My eyesight is crap and the “Zero” key sticks.

I really need a proof reader and better glasses!

Posted by paintcan | Report as abusive

CDS fight of the day, Seat edition

Felix Salmon
Dec 13, 2011 23:25 UTC

A couple of weeks ago, Floyd Norris had a column about an obscure European CDS dispute which — just for a change — didn’t involve sovereign debt at all. Instead, it involved Italian yellow-pages publisher Seat Pagine Gialle. Here’s how Norris saw the dispute:

Under the association’s rules, in some cases there is no event if investors “voluntarily” agree to exchanges that in reality cost them money…

Seat has tried to expand its Internet business. But it reported a loss of 33.2 million euros for the first nine months of this year, and on Oct. 28 it said it would delay an interest payment of 52 million euros, or about $69 million, for a month.

Last week, it said it had reached a tentative agreement with a majority of creditors, but that disputes remained with its senior debtholders over how much equity would go to the holders of 1.3 billion euros in bonds. It said that if a final deal were reached and accepted by bondholders, it would make the interest payment by Wednesday…

If the tentative deal falls apart and the interest payment is missed, there would be no doubt that a credit event had taken place. But since Seat Pagine Gialle is trying to get a voluntary agreement for a swap of the bonds for stock, it may be possible that there would be no credit event at all, even though it will be clear that bondholders have suffered a major loss.

In the end, the tentative deal did fall apart, the interest payment was missed, and an event of default was declared. Crisis averted. But Floyd was right that there would have been a big problem if the bond payment ended up being made. He’s just wrong about why there would have been a problem.

Christopher Whittall has an explanation of the real story here — which is actually more worrying than Norris implied. The problem of voluntary exchanges is a bit of a red herring: if Seat bonds were swapped for stock, that would be a credit event, and the CDS would get triggered.

In fact, you see, there weren’t any Seat bonds at all. For obscure reasons, Seat wasn’t actually the bond issuer in this case — the bonds were issued by a Luxembourg-based special-purpose vehicle called Lighthouse. Lighthouse was at heart a passthrough vehicle: it took the proceeds from the bond issuance, and lent them to Seat. And in return Seat made payments on the loan from Lighthouse, which in turn were passed on to bondholders. If Seat were to default, then it would stop paying Lighthouse, and Lighthouse would stop paying bondholders — so it was always perfectly clear that bondholders were taking Seat credit risk when they bought their bonds.

Here’s where things get a bit complicated. Bonds generally come with 30-day grace periods: if you miss a coupon payment, but then make it up within 30 days, then there’s no event of default. And the Lighthouse bonds were no exception — they came with the standard 30-day grace period. If the bonds had been issued by Seat directly, there would be no event of default until 30 days after the coupon payment was missed.

But the bonds weren’t issued by Seat directly, they were issued by Lighthouse. The Seat default was not on the bond payments to the Lighthouse bondholders, but rather on the loan to Lighthouse itself. And it turns out that the loan agreement between Seat and Lighthouse did not have a 30-day grace period: instead, it just had a 3-day grace period.

Somehow, a few holders of Seat CDS managed to get their hands on the loan agreement between Seat and Lighthouse, and used that to say that there was an event of default long before the 30-day grace period was up. In fact, they said, the Seat CDS should have been triggered three days after the company missed its loan payment to Lighthouse. And so even if Seat made that payment in full within the 30-day grace period on the bonds, the CDS should still be triggered and pay out.

This argument did not go down particularly easily on the Determination Committee:

The DC reached a deadlock of eight votes to seven, and the decision was sent for external review…

“Miraculously, some loan documentation that had not been made public appeared and people tried to force ISDA to make a quick decision [that there was a credit event]. If that is not market manipulation then I don’t know what is,” said a senior trader with DC representation, whose firm was initially against the declaration of a credit event.

Eight members of the committee voted that there had indeed been a credit event — Barclays, Credit Suisse, Deutsche Bank, Morgan Stanley, UBS, Citadel, and Pimco. Seven dealers said that there hadn’t: Goldman Sachs, JPMorgan Chase, BNP Paribas, Société Générale, D.E. Shaw, BlackRock, and BlueMountain Capital. Clearly, this was no cut-and-dried case. And so the right decision was reached: to send the case out for a proper external review. A hurried decision to declare a credit event on the basis of a loan default to a single special purpose entity, even when no credit event could yet be declared on outstanding public debt, would have been a decidedly rash thing to do.

The thing to wonder about is what would have happened if, miraculously, Seat had started making its payments again in full, and the CDS question had gone to external review. The external reviewers would then have had to answer: was there an event of default, even though all Seat’s bondholders received all the money they were due within the grace period they had agreed to? Floyd Norris was worried about a state of affairs where bondholders would suffer a loss and the CDS would not pay out; in fact, the state to be worried about was one where bondholders got their coupon payments and yet the CDS was triggered all the same. After all, even if that one coupon payment was made, the bonds would still be worth much less than par, which means that triggering the CDS would cause a lot of money to flow to holders of that protection.

And the bigger worry still, here, is that the ISDA determinations committee was filled with banks who had a dog in the fight, rather than making their decision dispassionately.

The derivatives trade body admitted it was in the process of bolstering standards to ensure dealers cannot “vote their books”…

“The SEAT vote didn’t seem very independent in the way people were voting on legal merit versus their position,” said one senior credit trader, whose firm sits on the DC. “How to enforce independent decision-making may not have been carefully thought out when the DC was set up. It’s a concern that won’t go away and will eventually come up in the context of Greece.”

If banks like BNP Paribas and SocGen are voting their books over a relatively small issuer like Seat, it stands to reason that they would fight quite hard for their books if and when it comes time to decide whether there has been a credit event in Greece.

Sometimes, it’s not obvious whether CDS should be triggered or not. And in such situations, you really don’t want banks with a dog in the fight making those decisions. That’s the real lesson of the Seat fight. And I’m far from reassured that the decisions in Greece are going to be made dispassionately and objectively.


Good post, Felix.

Posted by Greycap | Report as abusive


Nick Rizzo
Dec 13, 2011 22:42 UTC

Turns out Italians work more hours than Germans, the Japanese, or Americans — Ritholtz

My, isn’t that a scary UK pension shortfall? — FT Alphaville

Steve Cohen thinks insider trading rules are “vague” — Reuters

He also hates the word “edge”; and please don’t call him “Stevey” — Reuters

.01% of the US gives 24.3% of all federal campaign spending — Sunlight Foundation

The best (and worst) hedge funds of 2011 — Fortune

Economists’ favorite charts of 2011 — BBC

The personal finance guru who thinks humans are inherently weak — Fortune

Here’s a good explainer of what the Higgs Boson, er, would be — Exploratorium

Champagne sales are up 15%, nearly to peak levels — WSJ (paywall?)

And Gawker and Business Insider are now also being sued by The New Yorker’s alleged art forger — Courthouse News Service

How Alice Walton has improved America

Felix Salmon
Dec 13, 2011 16:26 UTC

Jeffrey Goldberg is on something of an anti-Walmart campaign — and there’s nothing particularly wrong with that. There’s a lot of things to dislike about Walmart, including the fact, as Goldberg notes in his latest Bloomberg View column, that its stores don’t have windows. But having decided that he doesn’t like Walmart, Goldberg is attacking the company and its founding family on grounds which don’t stand up to scrutiny.

For instance, take this seemingly damning statistic from Goldberg’s column:

In 2007, according to the labor economist Sylvia Allegretto, the six Walton family members on the Forbes 400 had a net worth equal to the bottom 30 percent of all Americans. The Waltons are now collectively worth about $93 billion, according to Forbes.

This sounds outrageous, until you stop for a second and take note of the fact that Jeffrey Goldberg, individually, has a net worth greater than the bottom 25% of all Americans.

According to the latest data we have, 24.8% of American households had zero or negative net worth — add them all together, and you get zero. Jeffrey Goldberg’s net worth, it’s safe to say, is greater than zero. And while it’s definitely a bad thing that one in four Americans have no net worth at all, I don’t think you can really blame Walmart for that. Indeed, Walmart saves money for poor Americans — while it might not be a great employer, there are many more poor Americans than there are poor Walmart employees. From a financial perspective, Walmart has been a decidedly positive force in terms of bringing down the cost of living for those on extremely limited budgets.

Goldberg’s thoughts, on the other hand, are in a higher place. The main subject of his column is the new Crystal Bridges Museum of American Art, in Bentonville — a museum which Goldberg (or at least his headline writer) considers “a moral blight”.

What makes Goldberg say that? Well, while the museum itself is beautiful, he says, and contains much beautiful art, the “American landscape has been systematically disfigured by thousands of hangar-sized warehouses bearing the Wal-Mart name”.

This might be true — although to be honest I can’t recall ever seeing a Walmart erected anywhere particularly beautiful; they tend to pop up, in my experience, in vast and dreary expanses of exurbia. But even if Walmart is a beauty-destroying monster, that hardly makes Crystal Bridges equally monstrous.

Warming to his theme, Goldberg notes that the messages of Norman Rockwell’s “Rosie the Riveter” and Jacob Lawrence’s “Ambulance Call” stands in contrast to, respectively, the way that Walmart treats its female employees, and the way in which it’s denying many of them healthcare coverage.

Does Goldberg celebrate the fact that these messages are being displayed for perpetuity in the town where Walmart has its headquarters, and might somehow serve to remind Walmart’s executives of the broader American context in which they’re making their decisions? He does not. Instead, he thinks that this art does not deserve to be in Bentonville at all:

I’m not begrudging Alice Walton her inherited wealth. What I am begrudging are her priorities. Walton has the influence to help Wal-Mart workers, especially women, earn more money and gain access to affordable health care.

But her response so far to the needs of the people whose sweat pays for her paintings is a simple one: Let them eat art.

Talk about looking a gift horse in the mouth. Firstly, it’s not clear that Alice Walton does have a lot of influence within Walmart’s senior managerial ranks. Could Walton really help Wal-Mart’s workers earn more money and get better healthcare? Maybe she could; I’m not convinced. But here’s the thing: in what way does building a beautiful museum prevent her from doing just that? The only way, it seems to me, is if we’re in some kind of a zero-sum game, here, where the alternative to building the museum would be for Walton to take the money she would otherwise have spent on Crystal Bridges, and give it directly to Walmart workers.

Except, Goldberg says quite explicitly that he doesn’t begrudge Walton her wealth. Does he want her to give it away or not?

Let’s say that Walton has spent a total of $1 billion on this museum. According to its latest annual report, Walmart has 2.1 million “associates”: if you shared $1 billion between them, that would be an investment of $476 apiece in giving them more money and better healthcare on an ongoing basis. Even if you could somehow manage to use 10% of that value every year on a sustainable basis, that’s less than a buck a week.

Walmart is a public company, now — it’s owned by hundreds of thousands of individual and institutional shareholders. (Goldberg himself is probably a beneficial shareholder somehow, through a pension plan or insurance policy somewhere.) Walmart has been good to Alice Walton, and she’s giving back to Bentonville and to America by building a fine museum in a part of the country which is relatively starved for cultural goodness. Her impulses and her museum are admirable, whatever you think of Walmart.

When the East Coast liberal elite, in the form of Jeffrey Goldberg, sneers at Walton’s generosity and calls her museum a moral blight, that only serves to make us seem even more elitist and out of touch. It’s pretty clear that Goldberg would have preferred Asher Durand’s “Kindred Spirits” to have remained in New York, rather than being moved to Bentonville — maybe we have finer aesthetic sensibilities up here, and therefore the painting would be better housed in the Stephen A. Schwarzman Building on the corner of Fifth Avenue and 42nd Street. I’m sure that Stephen A. Schwarzman, for one, would like that.

But Arkansas is America too. And it’s fantastic that a wide range of exciting American art — including the likes of Jenny Holzer and Kara Walker — is being displayed in the heart of Red State America. Well done to Alice Walton for making that happen. Arkansas is a better place, now, thanks to Crystal Bridges, and Walton deserves our thanks. Not brickbats.


I noticed Mr. Goldberg wrote another article today on Alice Walton. I sent him the following after the first article.

I read your article about Alice Walton and the new Crystal Bridges Art Museum and have to say your research is either lacking or you just have a problem with the Walton family and Wal-Mart. It is easy to jump on the bandwagon that paints the Walton’s and Wal-Mart as an evil empire, rather than look at the many good deeds the family, Wal-Mart and their foundation does for the general public. I realize this is just an opinion piece and you can simply write your view, but I believe it is irresponsible to continue to fuel the flames against this family and the company. Actually, if you were any sort of real journalist, you would actually write something that doesn’t cater to popular opinion. For full disclosure, I grew up in Arkansas and lived there until I was 26. I worked for the Walton family bank for 7 years and knew many of them personally. It was the best job anyone in my family ever had and had my husband not been transferred to Los Angeles, I would still be working for them. I now live in Chicago and work for one of the largest banks in the country.

As to some of your statements, I take offence that you believe it is a moral tragedy to build a billion dollar art museum in a recession. First, do you not think it created much needed jobs? I can tell you that it did, especially for those in construction, a business sector that has suffered considerably during the recession. Maybe you should reach out to some of those contractors who were hired to build Crystal Bridges and get their take on it. Second, were other billionaires on financial lockdown? Given my position, I first hand witnessed the upper 1% continue to build extravagant homes and spend significant sums on art (it was a buyer’s market, after all), but for their own personal collection. I also witnessed them tightening their belts by way of cutting back on their philanthropic giving. Ask anyone who works for a non-profit and they will tell you their major donors were no longer major. I commend Alice and the foundation for giving tremendous amounts of money throughout the recession. While the Walton Family Foundation did give $1.2B to build the museum in 2010 (which created both short term and long term jobs), they gave another $276M to education and conservation programs. With the museum built, the vast majority of those grants will go back to education and conservation like it did in 2009 when the foundation gave $327M to such programs. I do believe only the Gates foundation can claim more.

As far as the building itself, yes, it is indeed a beautiful building and you are right in stating it is the handsomest building ever built by Wal-Mart money. That is because Wal-Mart has never felt the need to build some grandiose monstrosity to flaunt their success, as so many of these enormous corporations feel the need to do. They don’t waste revenues on such extravagances; their buildings are for function, which should make shareholders happy. When companies build such lavish buildings, they are shouting, “Look at us! We are so successful and powerful, we just had to show you by this outlandish display of wealth!” Quite simply, it is nothing more than textbook megalomania. They could have contributed that money to charity.

It is also funny you take a jab at Wal-Mart for selling foreign goods. Did I miss the memo that Target only sells American goods? Or Amazon? Or any other major department store, for that matter? Also, working for Bloomberg, you should know that foreign trade is extremely important to the American economy and without it, the cost of goods would be exorbitant (think of all those foreign manufactures for GE and Apple). It is unfair and quite frankly, irresponsible, to make such a statement. You only fuel the flames of a deeply divided political state that at this point in time, needs more compromise than agitation. Your comments suggest that it is even a possibility to sell only domestic goods, which you well know is impossible.

When you speak of values and the paintings that are the antithesis of the Wal-Mart spirit, I would like to share with you a bit of my own story and suggest you reconsider what you believe to be values. As I said, I grew up in Arkansas. My mother was a single mother who worked for a small diner that did NOT have to pay the state required minimum wage because of the “tip exemption”. At that time, between 1973 and 1995, minimum wage for the state went from $1.20/hour to a whopping $4.25/hour – and my mother made less. Now, if you are working at Morton’s or a high end restaurant, you can make a decent living off of tips. However, if you’re working at a small town diner that serves a 60 cent hamburger, tips don’t amount to much. If my mother received a 50 cent tip, that was high; a $1.00 was almost unheard of. It was not enough money to live on and we lived with my grandmother for 8 years out of necessity. Also, the restaurant did not have to provide health insurance and my mother made just enough to not qualify for Medicaid; all medical expenses were paid for in cash. Needless to say, we were on a very tight budget. So to us, Wal-Mart was the greatest place ever built. We could buy clothing and home goods for a fraction of the cost and a loaf of bread for $.85, instead of $1.10 at the local “mom & pop” store. Which as a side note, the owner of the “mom & pop” in town was the only man who could afford a Cadillac, send his children to the University, and actually take a real vacation (not camping 2 hours from home). To this day, I don’t have a lot of sympathy for the mom & pop retailers of the world. Wal-Mart has done more for the lower 50% of this country than most any person, company or government entity, and a lot of us owe our sheer survival to them. Where my mother could save her tips, they went toward my college education. Literally, nickels, dimes and quarters paid for my education and I went to the cheapest school in the state. After graduation, I was hired to work for the Walton family bank and I made more in one week than my mother made in a month. Wal-Mart’s values was to always to provide the lowest cost and everything about their business model is driven by this mission. Having the lowest cost items means that you support the poorest families, allowing them to stretch their dollars farther. I, for one, am a fan of Wal-Mart’s values.

On your comments about the paintings in the museum and the seeming contrast between the work and the family values, I ask you this: Since when did an art museum have to hold the values and beliefs as the artists exhibited? By that standard, you should walk around the Guggenheim and ask that they take down at least half of all of the works. The Guggenheim fortune was built with old inherited wealth created by gold mining, which exploited workers and their environment, all for their own financial success. In fact, I believe most artists would have related more to Sam Walton with his creativity and vision, as well as his desire to help the poor (including starving artists). I’m beginning to think your issue might be that the museum was built in lowly Arkansas, built by a man of little to no means.

On your point about the inequality of women, I certainly do agree there is a disparity in pay between men and women. But to be fair, that is a national problem and almost every corporation in this country is guilty of it. Even this well regarded bank that employees me discriminates against females in both pay and upper management. It is not fair to only call out Wal-Mart alone on this. This company also does not offer coverage to part time employees, as great majority of companies do not.

My final point is in regard to your statement about how Wal-Mart made its money. Wal-Mart was so successful, not because it undercut its employees as you suggest, but by streamlining distribution, creating better technology and simply out-maneuvering the competition. Wal-Mart, particularly Sam Walton, revolutionized business as we know it. Wal-Mart paying employees’ minimum wage is what all companies pay their non-skilled labor. But when Sam and the family managed Wal-Mart, those employees also received stock options. My uncle worked for Wal-Mart for 25 years as a truck driver. At retirement, he received over $350,000 from options – 10 times what he had personally saved for retirement. There are many others who benefited from options as well: secretaries, shelf stockers, and cashiers received significant sums from options, well more than what my uncle received (there was a very memorable stocker that retired with $1mm). There were also those that took what little savings they had and bought additional stock with it, with many of them having 10’s of millions in Wal-Mart stock by the time they retired. Everyone in the company wanted to keep costs down, regardless of what they were, because they had so much to gain on the future success.

So, the next time you want to write an opinion piece, you should consider choosing a topic that might actually make people think and consider that there are multiple sides to every story. As a few suggestions, you can look within your own piece.

1) National pay inequality between men and women, and the fact that women stopped gaining ground in high level executive positions and government in 2006.
2) Large companies sitting on trillions of dollars that could be deployed for goods, buildings and jobs, but are not.
3) Wealthy families that contribute little to none to charity (a shame list would be great and a mile long), yet spend their dollars lobbying for regulations that would benefit them to the great expense of others.
4) Corporate mismanagement and fiscal irresponsibility.
5) The long term affect of low minimum wages and the exemptions.
6) Health care for people who do not qualify for Medicaid.

Posted by Jweb | Report as abusive


Nick Rizzo
Dec 13, 2011 01:36 UTC

New rules may force Euro banks to borrow from their own governments — Bloomberg

These banks have largely bought hedges from other struggling Euro banks — WSJ (paywall)

The Merkelization of Europe, and why it’s a problem  — Foreign Policy

From Friday, 8 (still relevant) unanswered questions for Europe — WSJ Marketbeat

Mikhail Prokhorov: Russian democratic savior or oversized Putin puppet? — Reuters

11 things Brad DeLong’s gotten really wrong in his career — DeLong

Ocwen, a large mortgage servicer, now employs 16 psychologists — WSJ

LinkedIn’s P/E is roughly 300 — Fortune

And House GOP whip Eric Cantor is blocking a (Spencer Bachus-sponsored!) insider trading bill — CNBC

How Vogue monetizes old content

Felix Salmon
Dec 12, 2011 23:32 UTC

Conde Nast, fresh off its success with monetizing old New Yorker articles, is getting much more ambitious with Vogue, as Charlotte Cowles reports:

Vogue’s much-hyped archive website goes live today, and as promised, it contains every single page from every issue dating back to the magazine’s American debut in 1892. According to Vogue’s press release, the site is searchable by decade, brand, designer, and photographer; you can also sort results by articles, images, covers, or ads. It’s a wildly impressive undertaking to organize such a massive amount of information, and bravo to Vogue for providing a great tool for researching the historical context of moments in fashion and society.

Cowles is stunned that subscribing to this archive will cost you $1,575 per year, but the price point makes sense to me. The value here is in the index: even if you had a full archive of Vogue back-issues sitting on your bookshelf (something many fashion-industry professionals spend much more than $1,575 to obtain), you still wouldn’t be able to find what you were looking for without great difficulty. The Vogue archive is that rarest of beasts: a fully searchable picture archive, which covers not only all the editorial content but all the advertisements as well.

The ad content alone is hugely valuable: it’s almost impossible, right now, to follow the course of, say, Dolce & Gabbana’s ad campaigns from inception to date, or to follow the career of a star model or photographer as they move back and forth between expensive editorial shoots and much more expensive ad shoots. The Vogue database even allows you to search by individual garment — again, giving you the opportunity to see how a certain pair of shoes, say, is portrayed in different contexts.

The people who really need this kind of information are professionals who happily spend $131 on lunch and will be equally happy to spend the same amount on a month’s access to the Vogue archives. And while the rest of us would have fun with the site if it were free, it’s hard to see how that would benefit Condé Nast would get a huge amount of benefit from our doing so. Meanwhile, the possibilities here are enormous, and revealing:

It’s possible to get lost in these archives. One can peruse a single issue, such as the April 1950 issue with Irving Penn’s famous cover of a swan-necked model in black netting. Data can be culled and analyzed, creating charts and graphs. I researched Coco Chanel, plotting out the high and low points of her career on a fever graph, based on the number of appearances her label had in ads and editorials.

When I graphed “Balenciaga,” I discovered that the brand is far more referenced today than it was when Cristobal Balenciaga was designing it post-World War II.

The only real reason that $1,575 per year seems expensive for this service is that we’re used to much larger and more valuable databases — the most salient, of course, is Google — being free. But I, for one, would shell out significantly more that $131 a month for access to Google if that were the only way I could access its database and if it didn’t have any real competitors.

Vogue is really two magazines in one: it’s a mass-market book for sale at supermarket checkout counters across the country, and at the same time it’s a very fashion-insidery bible which has featured every major designer, photographer, model, and ad campaign in the industry for longer than anyone can remember. The Vogue Archive is a way of monetizing the trade-mag part of Vogue’s identity without alienating any of the readers in flyover country.

As with any new digital project, there’s going to be a period of price discovery here. Condé has set the initial price at $1,575 per year; depending on demand at that price, it could easily go up or down in future. But I like the ambition here. Legacy media properties are often hobbled when they move online, by the constraints of their old business. It’s great to see them turn those constraints from a bug into a potential highly-lucrative feature.


I wonder how much they’ll get for the puff piece on Assad just before he started murdering his own people?

Posted by Danny_Black | Report as abusive

Central bank secrecy datapoint of the day

Felix Salmon
Dec 12, 2011 18:05 UTC

I’ve moaned on many occasions about the secrecy of the Federal Reserve, which can and should be much more transparent than it is. But Bloomberg’s latest story on secretive Fed lending is a helpful reminder that while the Fed is opaque by US government standards, it’s positively crystalline by global central-banking standards.

The subject of the story is the set of unlimited swap facilities that the Fed set up during the crisis with the world’s big central banks. Any time they wanted to lend out dollars, they could borrow as many dollars as they wanted from the Federal Reserve, putting up their own domestic currency as collateral. At the peak of the crisis in December 2008, the Fed had lent out as much as $586 billion under these facilities, most of it to the European Central Bank.

Bloomberg’s problem with this is that once you’ve followed the money to the ECB, the trail goes cold — the ECB won’t say which banks it lent those dollars to. Because while the Fed has revealed the names of the banks that it lent money to under various programs, no other central bank has followed its lead.

The ECB won’t publicly disclose names of borrowers under any circumstances and doesn’t share the identities outside the 17 euro-area central banks, a spokesman wrote in an e-mail…

The Bank of Japan, which tapped 3.9 percent of the aggregate swap dollars according to the GAO, has no plans to publicize borrowers’ identities and declined to comment on whether it shares the names with the Fed, a spokesman said. The Swiss National Bank, which accounted for 4.6 percent, “as a matter of principle” doesn’t publish counterparties, said Walter Meier, a spokesman.

The Bank of England doesn’t publish details of individual financial institutions’ use of its facilities.

Placed in context, then, the Fed’s secrecy and resistance to releasing information makes a bit more sense: it’s just doing what central banks all over the world do. Dean Baker is quoted in the Bloomberg article as saying that “U.S. policy makers should encourage international standards for disclosure through talks at forums such as meetings of the Group of 20 nations.” But you can be sure that any such encouragement would go nowhere, since all these central banks are independent and would start screaming about how their independence was being compromised if politicians started telling them what to do.

Besides, the Fed was hardly enthusiastic about releasing the information that we’ve seen so far.

Personally I think it’s vital that the public be able to see charts like this one, showing the degree to which individual banks were saved by central bank lending; the case for secrecy — which always for some reason includes the word “stigma” — is pretty weak. Has anybody ever tried to quantify this “stigma” effect? By all means put a two-year delay in before the lending is revealed. But letting the public know what you did during the course of a crisis two years ago is an important part of the accountability that any central bank has to the country or currency area as a whole. And if you think the Fed is bad on such matters, it’s worth reminding ourselves occasionally that every other central bank is significantly worse.


Ohhh! I’m happy I checked back. Good find, UProf! LibertyStreetEconomics is the NY Fed’s blog on the down-low. (Well, it isn’t on the down-low, they make the affiliation clear by virtue of the URL and banners on every page). That is such a perfect response as well, specifically to the very words used in the column, about the “stigma effect”. Thank you for posting the link. Let’s see… dated August 2011. Sounds like Felix’s new personal assistant (research assistant?) could have done a better job and found this too. Liberty Street isn’t just for the cool econ crowd: Common folk like me have access too!

Also, I’ve just noticed the Narrow Tranche recently. Quite nice too! And yes, Bloomberg does read like a demented blogger lately (not any single one in particular), which is not inconsistent with what Felix is saying, though of course not as extreme.

Posted by EllieK | Report as abusive

Jon Corzine, rogue trader

Felix Salmon
Dec 12, 2011 14:53 UTC

Dealbook has a big piece on what went wrong at MF Global today, which removes any doubt about the way in which the firm’s sudden death was entirely the fault of Jon Corzine. The idea that Jon Corzine was a “rogue trader” has been raised in the past by the likes of Bill Cohan and John Carney, just on the basis of the size and riskiness of MF Global’s $6.3 billion bet on European sovereign debt. But now it’s looking increasingly as though Corzine demonstrated virtually all of the pathologies of the rogue trader more generally.

Lots of financial firms make big bets and blow up. But what we saw at MF Global was much more than that. In fact, as Corzine detailed at great length in his prepared testimony last week, his big sovereign-debt bet didn’t actually lose money at all. But MF Global died all the same, because the bet was so large and risky that it caused a fatal cascade of downgrades and margin calls.

Now the risk of such a fatal cascade is always front of mind at any broker-dealer, and all such firms have mechanisms in place to prevent any single bet getting big enough to imperil the company as a whole. What distinguishes rogue traders from traders who simply have big losses is fourfold:

  • they develop an ability to circumvent risk-management controls;
  • they aspire to be recognized as a star trader making huge amounts of money for the firm;
  • they tend to arrive earlier and leave later than anybody else, as they jealously guard their trades;
  • and they panic when losses start appearing, doing things which are downright illegal in the process.

Corzine had much more ability to get around risk-management controls than most rogue traders, because he was the CEO. As a result, his big sovereign bet was, relative to the size of the company which made it, by far the largest rogue trade of all time. And the way that he circumvented existing controls was brazen:

Soon after joining MF Global, Mr. Corzine torpedoed an effort to build a new risk system, a much-needed overhaul…

The size of the European position was making the firm’s top risk officers, Michael Roseman and Talha Chaudhry, increasingly uncomfortable by late 2010, according to people familiar with the situation. They pushed Mr. Corzine to seek approval from the board if he wanted to expand it… Mr. Roseman eventually left the firm.

In August, some directors questioned the chief executive, asking him to reduce the size of the position. Mr. Corzine calmly assured them they had little to fear.

“If you want a smaller or different position, maybe you don’t have the right guy here,” he told them.

As CEO, of course, Corzine could and did overrule or ignore any concerns about his big trade: “One senior trader said that each time he addressed his concerns, the chief executive would nod with understanding but do nothing,” we’re told in the Dealbook piece. Only the board had the ability to rein Corzine in — but Corzine made it abundantly clear that as far as he was concerned, the board had only one job: to keep him in his job, or to fire him. If they wanted him to run the company, he was going to run it his way, with all the risks that entailed.

Of course, Corzine was happy to structure his bet in such a way as to minimize its perceived riskiness:

The firm bought its European sovereign bonds making use of an arcane transaction known as repurchase-to-maturity. Repo-to-maturity allowed the company to classify the purchase of the bonds as a sale, rather than a risky bet subject to the whims of the market.

This is absolutely the kind of thing that a rogue trader does, rather than a CEO. A CEO wants to be paranoid about all risks; a rogue trader wants to hide them. It’s clear which one Corzine was.

Corzine’s risk circumvention has been widely reported already. But other parts of Corzine’s pathology were new to me. For instance:

He fashioned new trading desks, including one just for mortgage securities and a separate unit to trade using the firm’s own capital, a business known as proprietary trading.

Not to be outdone, Mr. Corzine was the most profitable trader in that team, known as the Principal Strategies Group, according to a person briefed on the matter. Mr. Corzine traded oil, Treasury securities and currencies and earned in excess of $10 million for the firm in 2011, the person said…

His obsession with trading was apparent to MF Global insiders over his 19-month tenure. Mr. Corzine compulsively traded for the firm on his BlackBerry during meetings, sometimes dashing out to check on the markets. And unusually for a chief executive, he became a core member of the group that traded using the firm’s money. His profits and losses appeared on a separate line in documents with his initials: JSC…

At Goldman, which he joined in 1975, the young bond trader quickly gained a reputation as someone able to take big risks and generate big profits. Even after ascending to the top of the firm, he kept his own trading account to make bets with the firm’s capital.

I still can’t quite believe this, although it does seem to be true — did Corzine really have his own personal trading account while also being CEO, both at Goldman and at MF Global? At Goldman, which was still a partnership when Corzine was in charge, there would at least have been serious limits on what he could trade, and the bank was big enough to be able to withstand losses in his personal account. But at MF Global, where he was charged with turning around the entire company, the picture of the CEO trading on his Blackberry during meetings is, frankly, bonkers.

Does this happen elsewhere? Are there other brokerages where the CEO has his own personal P&L line in the trading books? Citadel, perhaps.* But this is not a good idea. You want the CEO encouraging the rest of the trading desk, not competing with them. And you want the CEO judging himself by the performance of the firm as a whole, rather than obsessing over the profits and losses he’s personally responsible for.

Certainly the fact that Corzine was working two jobs — as well as more general rogue-trader pathology — helps to explain the fact that he “impressed colleagues” with his work ethic:

He often started his day with a five-mile run, landing in the office by 6 a.m. and was regularly the last person to leave the office.

(I’ll guess, though, that he wasn’t up at 2:30 most mornings, trading the European markets from the foot of his bed.)

In the macho world of Wall Street, working incredibly long hours is generally grounds for admiration, so it’s easy to see how this didn’t raise any red flags. But it should have.

And then, at the end of the story of any rogue trader comes the spiral of panic-driven illegal activity.

MF Global filed for bankruptcy on Oct. 31. As the firm spun out of control, it improperly transferred some customer money on Oct. 21 — days sooner than previously thought, said people briefed on the matter. And investigators are now examining whether MF Global was getting away with such illicit transfers as early as August, one person said, a revelation that would point to wrongdoing even before the firm was struggling to survive…

A deal became crucial as trading partners and lenders circled the firm. LCH.Clearnet, the firm responsible for clearing the vast majority of MF Global’s European sovereign debt trades, was also demanding $200 million to maintain the positions, atop $100 million it had claimed from MF Global earlier in the week, one person briefed on the situation said.

Other people close to the investigation, led by the Commodity Futures Trading Commission’s enforcement division, have said that as the firm rushed to pay off creditors, MF Global dipped again and again into customer funds to meet the demands.

It’s quite common for rogue traders to go to jail; as one of the biggest rogue traders in history, it looks as though Corzine might well join their ranks. It would certainly be a great shame if he avoided that fate by dint of the fact that he was CEO and therefore has some kind of plausible deniability about the mechanics of the illegal transfers. Everything in this sorry story has his fingerprints all over it.

*Update: Citadel calls to say that Ken Griffin, the CEO, does not engage in trading at the company.


MacTM19 shared this video on another Reuters story:
http://www.youtube.com/watch?v=xm3VMrKqJ SA
Watch Joe Biden praising Jon Corzine as his mentor on economic stimulus! And just watch Jon Corzine’s body language while Biden feeds his ego! This says all the things Felix Salmon has been describing in his article…

Posted by matthewslyman | Report as abusive