Felix Salmon

How Greece’s default could kill the sovereign CDS market

Felix Salmon
Feb 29, 2012 23:26 UTC

Alea today posts the timeline for physical settlement of credit default swaps, once a credit event has been declared. He doesn’t say why he’s posting it, but the main thing to note is that it’s likely to take a couple of months between (a) the credit event being declared in Greece, and (b) the final settlement of all credit default swaps on Greece.

And that, in turn, reveals a significant weakness in the architecture of CDS documentation. It may or may not be a big deal, this time round. But market participants have already been spooked by the possibility that Greece might be able to default without triggering its CDS at all. Now they can add to that another worry: that Greece might be able to default in such a manner as to leave the ultimate value of the CDS largely a matter of luck.

The way that CDS auctions work, you start with a credit event. Then, using an auction mechanism, the market works out what the cheapest bond of the defaulting issuer is worth. If it’s worth, say, 25 cents on the dollar, then people who wrote credit protection end up paying 75 cents to the people who bought protection: that’s equivalent to the people who bought protection getting 100 cents on the dollar, and handing their bonds over in return.

With Greece, however, the bond exchange is going to complicate things — a lot. Remember that it has a natural deadline: March 20, when a €14 billion principal payment comes due. If Greece’s old bonds haven’t been exchanged for new bonds by that point, then things will get even uglier, and even more chaotic, than anybody’s expecting right now. So it’s very much in Greece’s interest, and Europe’s more generally, to have everything wrapped up by March 20. Bondholders too, truth be told — they hate uncertainty.

But then there’s the CDS holders. In the best-case scenario for Greece and Europe and bondholders, every €1,000 of old Greek bonds will get converted to new bonds with a face value of just €315. Those bonds will probably trade at about 30% of face value, which means the new-Greek-bond component of the exchange will be worth about 10 cents for every dollar in face value of old Greek bonds that you might currently hold. Add in another 15 cents of EFSF bonds, and the total value of the exchange will be about 25 cents on the dollar, which is why people are talking about a 75% “present value haircut”.

The important thing, here, is that Greece is issuing new bonds worth around 10 cents on the dollar, while the EFSF is issuing new bonds worth around 15 cents on the dollar. The structure of the new Greek bonds is secondary: these ones involve a nominal haircut of 68.5%, and a market price of about 30 cents on the dollar. But theoretically, Greece could have constructed bonds with a significantly higher coupon and a bigger nominal haircut — maybe the haircut would be 85%, with the bonds trading at 67 cents on the dollar. Bondholders would still receive about €100 worth of new Greek bonds for every €1,000 of old Greek bonds they hold. But instead of the new Greek bonds trading at 30 cents, they’d trade at 67 cents.

Why does it matter what the nominal price of the new Greek bonds is, so long as the total package, including EFSF bonds, is worth about 25 cents on the dollar? Economically speaking, it doesn’t. But for the purposes of the CDS auction, it matters a great deal.

The reason is that the key number in the auction is the nominal value of the cheapest-to-deliver Greek bond — that’s the price at which the auction clears. And here’s the rub: this auction is going to take place after March 20, after the old Greek bonds have been exchanged into new securities. Because Greece intends to use collective action clauses to change the terms of all its outstanding bonds, even if they’re not tendered into the exchange, there effectively won’t be any old bonds in existence by the time the CDS auction happens. The only outstanding reference securities will be new bonds.

In the auction, market participants will not be bidding on the value of the package that is being offered in return for every old bond. The new EFSF bonds are obligations of the EFSF, for instance: they’re not obligations of Greece, and they have no place in a Greek CDS auction.

The way that CDS auctions are meant to work is that once a borrower defaults on its debt, that defaulted debt continues to be traded in the market, and its value then determines the amount that credit default swaps need to pay out. But in this case, Greece’s defaulted debt might well not continue to be traded in the market. In which case, when traders need to find a cheapest-to-deliver bond to bid on in the CDS auction, they’re going to have to use one of the new bonds, rather than one of the old ones.

And now you can see why the nominal price of the new Greek bonds is so important. Right now, it seems that they’ll be trading at a nominal price of about 30 cents on the dollar, which is close (ish) to the current market price of the old Greek debt. But there’s no particular reason why that should be the case. If Greece had gone for an 85% nominal haircut rather than a 68.5% nominal haircut, then the nominal price of the new Greek bonds would be 67 cents on the dollar — and anybody who wrote credit protection on Greece would only have to pay out 33 cents on the dollar rather than 70 cents on the dollar.

In other words, Greece’s CDS really aren’t protecting holders of Greek bonds at all — or if they do, it’s more a matter of luck than of law. When they get paid out on their CDS holdings, people owning protection against a Greek default won’t get paid according to how much money they lost on their old bonds. Instead, they’ll get paid according to the nominal price of the new bonds.

What this means is that the CDS architecture is broken, and can’t cope with collective action clauses. And as a result, according to the hedge fund manager who tipped me off to the whole problem, “this Greece CDS imbroglio might be the final blow for sovereign CDS as a product.”

Now there is a possible solution here: ISDA could try to decree, somehow, that the total package bondholders receive in return for their old bonds will count as a deliverable security for the purposes of the CDS auction. Bundle up the new bonds, the EFSF bonds, the GDP warrants, everything — and that bundle can be bid on in the auction, to determine where the CDS pays out. That would be fair and right. But the problem is, it might not be legal. There’s really nothing in the ISDA CDS documentation which explicitly allows that to happen.

The whole point about credit default swaps is that they’re meant to behave in a predictable manner in the event of default; one thing we know for sure about Greece is that the behavior of its CDS is going to be anything but predictable. We don’t even know for sure whether they’ll be triggered, let alone what they’ll be worth if and when they are.

Now there are a lot of people, among them European policymakers, who would actually be quite happy if the Greek default killed off the sovereign CDS market as a side effect. But I actually believe that sovereign CDS, when they work, are rather useful things. It’s just that Greece is having the effect of showing that they don’t necessarily work. And if you can’t be sure that they’ll work when triggered, there’s really no point in buying them at all.


The answer to this problem is straightforward: Invent a new product to serve as “insurance” (quotes to avoid its regulation like actual insurance, which requires capital) on the CDS in question.

More fees, more paper, more “robust” (in quotes because it means “without capital”) financial system.

Innovation will solve all problems. (I mean, “innovation.”)

Posted by Eericsonjr | Report as abusive

CDS demonization watch, central-clearing edition

Felix Salmon
Feb 29, 2012 16:37 UTC

Peter Eavis is too smart, and knows too much, to be writing disingenuous stuff like this, about Greece’s credit default swaps:

If parties have to make good on the credit-default swaps, the situation could send shivers through the market. An important and long-planned measure that aims to strengthen the derivatives market is not yet in place, raising questions about how the financial system will react if the credit-default swaps have to pay out.

In the financial crisis of 2008, banks feared that their trading partners might not be able to meet such obligations on derivatives and other financial arrangements. The situation set off a chain reaction that paralyzed global markets until governments and central banks provided enormous financial support.

To prevent a similar disaster from happening again, finance ministers in the United States and Europe committed in 2009 to move derivatives like credit-default swaps onto clearinghouses. These organizations, if they work properly, can sharply reduce the chances that a large bank will not make good on such contracts.

There are lots of very good reasons why credit derivatives should be moved to exchanges — even though such a move is no panacea. But it’s silly to think that Greece in particular “could send shivers through the market” with respect to counterparty risk. Counterparty risk in the CDS market is highly correlated to jump risk — the risk that a seemingly-healthy company suddenly defaults on its obligations, causing a massive unexpected payout by anybody who had written protection on that name. In a case like Greece, where default is already priced in to the CDS market, there’s no jump risk at all, and anybody who has written protection has already posted enough margin that there shouldn’t be any problems at all.

More generally, the 2008 credit crunch was never related to worries over traded derivatives; it was — like all credit crunches — related to much more general worries over bank solvency and the quality of banks’ balance sheets. And in any case, the size of a bank’s derivatives obligations is unrelated to whether those obligations are settled bilaterally or centrally. If a bank has written so much credit protection that it becomes insolvent, then there’s significant systemic counterparty risk regardless of how its derivatives trades are cleared. Moving to an exchange might make its CDS counter parties more likely to get paid out in full, but it wouldn’t prevent other banks from refusing to do business with the insolvent bank, pulling their repo lines, and generally moving back in the direction of another credit crunch.

So the move to central clearing was never — could never have been — designed to prevent counterparty risk leading to a credit crunch. I welcome all wonky Peter Eavis articles about central clearing and why it hasn’t happened yet. But I’m very disappointed by this attempt to tie the issue into the Greek default in particular, which is entirely unrelated to the central-clearing issue. More generally, I think it’s a bad idea to sell central clearing as a potential means of preventing another disastrous credit crunch: it could never live up to that billing. It’s a perfectly good thing even if it doesn’t have such mythical abilities.


Good Piece Felix-
Central Clearing is not a Panecea to what ails the Banking Sector. Its the rotten to the core balance sheets that are the problem. These banks need to open the Kimono so to speak and so far are unwilling to do so. They have skirted around openness and transparency via FASB regulations etc. There are only 2 ways to reign in the banks:
1-Bring down the leverage
2-Net Capital Rules.
This by itself will force bank balance sheets to shrink forcing the banks to get smaller.

Posted by JayTrader | Report as abusive

Why Treasury is being so nice to AIG

Felix Salmon
Feb 28, 2012 22:57 UTC

Andrew Ross Sorkin today asks why Treasury is letting AIG keep billions of dollars in net operating losses, rather than forcing it to pay income tax. I’ll hazard a guess at one part of the answer, as informed by my conversation with Jim Millstein in October 2010: if you want to have a high value for your insurance company, you want it to have a rock-solid credit rating. And so you boost the value of the equity cushion in the company by padding it with net operating loss carryovers and the like, even if that means you lose a certain amount of corporate income tax in the meantime.

But there’s something else going on here too, which is the optics of the AIG bailout. The New York Fed today announced that it had finally exited its Maiden Lane II portfolio — the toxic securities bought at a discount from AIG in the 2008 bailout — at a healthy profit of $2.8 billion. It held on to those securities in May 2011, when AIG itself offered to buy them back at a much more modest profit for the Fed. And when forced to choose sides between AIG and the Fed in 2011, Treasury sided with AIG. At all times, Treasury wants what’s best for AIG’s share price, so that it can, hopefully sooner rather than later, sell off its entire 77% stake in the company at some kind of profit.

It’s already taken longer than Treasury would have liked: there was a feeling when I spoke to Millstein that the sale of AIG might be reasonably imminent, and yet here we are, more than 16 months later, and we don’t seem to be all that much closer to such an event. So unless and until AIG gets sold, expect Treasury to continue to shower it with as much regulatory forbearance as it can possibly corral.

I’m sure there are a lot of people at Treasury who would dearly love the company to be fully privatized before the election, and there’s essentially no chance that’ll happen if the share price is much below the break-even point of $29 per share. We’re close, now, and I’m sure that Treasury wishes that AIG had managed to buy back those Maiden Lane II assets on the cheap so that the share price could have been even higher. There’s still time to privatize AIG while Tim Geithner is still Treasury secretary. And Treasury will do everything it can to make that happen, if it can do so without exiting at a loss.


Are these tax credits going to increase the value of stock options or bonuses of ex-executives that created the 2008 derivatives disaster ? that would be insulting to the USA Taxpayers that paid for the bail-out, 3 trillion dollars and counting ….

Posted by antonveronic | Report as abusive

Greece’s default gets messier

Felix Salmon
Feb 28, 2012 19:47 UTC

Back on February 17, the European Central Bank sprinkled its magical pixie dust on its Greek sovereign bonds, with the effect that they effectively ended up exempt from the restructuring and haircut being inflicted on everybody else. I wasn’t very excited about this development at the time:

On a conceptual level, it makes sense that the Troika — of which the ECB is a third — might be granted immunity from haircuts, in return for providing new money to Greece. On a legal and practical level, however, this is ugly — and you can be quite sure that it’s only going to get uglier from here on in.

Today, we’re beginning to get a hint of the messiness that this decision caused.

First, there’s a formal question which has been put to ISDA’s Determinations Committee, asking whether the ECB magical pixie dust, combined with the passage of the Greek law to allow the haircut, doesn’t in itself constitute a credit event under ISDA rules.

The question takes the form of a single 179-word sentence, which some lawyer somewhere probably thinks is very clever. But here’s the idea: the two events together have effectively cleaved the stock of Greek bonds into two parts, with one part (the bonds owned by the ECB) being effectively senior to the other part (the bonds owned by everybody else). This is known as Subordination, and Subordination is a credit event under ISDA rules.

Now there’s no doubt that the private sector’s Greek bonds are de facto subordinate to the ECB’s Greek bonds now, and that they weren’t subordinate a couple of weeks ago. But so far there’s nothing de jure about this subordination — there’s no intrinsic reason why bonds with CACs, for instance, should be subordinate to bonds without CACs. So my guess is that this request is going to go nowhere, and/or get overtaken by events.

But now there’s news that another European institution has managed to get its hands on the ECB’s magical pixie dust.

The European Investment Bank, owned by the 27-member bloc, is getting exemptions from Greek debt writedowns in the same way as the euro area’s central bank, according to two regional officials familiar with the matter.

The European Central Bank negotiated a deal to avoid the 53.5 percent loss on principal that’s costing private investors as much as 106 billion euros ($143 billion). The EIB, which unlike its Frankfurt-based counterpart represents the entire European Union, also owns Greece’s debt and is sidestepping the so-called haircut in the same way, said the officials, who declined to be identified because the plan isn’t public.

While the ECB exemption was understandable, on the grounds that the ECB was part of the Troika and the Troika is putting up new money here, an EIB exemption is less so. The EIB is not putting money into this latest Greece bailout. Indeed, it represents countries like the UK which are quite explicitly removing themselves from any such thing.

Now, admittedly, the European Commission is a member of the Troika, and the European Commission is the executive body of the European Union, and the European Union collectively owns the European Investment Bank. So this decision is, as the lawyers would say, colorable. But if the decision to exempt the ECB from the Greece haircut was ugly, then the decision to exempt the EIB is, at the margin, even uglier. I’m not saying it’s the wrong decision, necessarily. After all, sovereign restructurings necessarily have an ad hoc, make-it-up-as-you-go-along element to them.

Indeed, if the ECB’s magical pixie dust means that there’s substantially more EU support for this deal, then it might well be worth spreading it around a bit. But at the same time, predictability and consistency are important as well. And both of those seem to have gone out the window at this point. I wouldn’t be at all surprised if ISDA’s Determinations Committee just said “enough already” and declared an event of default. Because in recent weeks private-sector bondholders have been treated in an extremely cavalier manner. And those decisions have consequences.


I believe that a number of private creditors are holding back in order to force the CAC and a credit event if the ISDA does not rule in their favor.

What Europe has done is created a bifurcated market for European sovereign debt where public holders will be treated differently than private holders creating two risk profiles depending on who is the buyer.

This will cause European yields to rise in the private market as everyone takes into account this new angle to credit risk.

Honestly, if you have to get this cute in crafting a solution then it is not a viable solution.

Posted by dcurban1 | Report as abusive

Why banks are reluctant to foreclose on expensive homes

Felix Salmon
Feb 28, 2012 17:53 UTC

The WSJ has an interesting if unsurprising article today, showing that expensive homes are less likely to be foreclosed on than cheaper homes.

This stands to reason, of course. For all the talk of strawberry pickers buying McMansions at the height of the subprime bubble, expensive homes are much more likely to be owned by rich people than cheap homes are. And if a rich person owes a bank somewhere north of a million dollars, the bank is likely to be quite aggressive in attempting to get all of the money it’s owed, rather than simply letting the borrower walk away from their house. For a $200,000 house, by contrast, the cost of aggressively pursuing the homeowner is much less likely to be worth the marginal benefit.

On top of that, there’s a reasonably liquid market for smaller homes — if you put them on the market in a fire sale, there’s a good chance that they will sell, quickly, for within $25,000 or so of their fair market price. In the million-dollar-plus range, however, homes stay on the market much longer, the discounts for fire sales are larger, there’s no real rental market, and the cost of maintaining the home while it’s unsold can be substantial.

That said, there is a problem here, and it’s not that people in expensive houses get to live rent-free for 792 days on average. Rather, it’s that people in normal-sized homes are treated unnecessarily badly by Fannie and Freddie.

Smaller mortgages are more likely to be bundled into securities and later resold to investors with backing from Fannie Mae and Freddie Mac. Fannie and Freddie, the government-controlled mortgage giants, have set strict foreclosure timelines and will fine mortgage servicers that are found to be needlessly delaying the foreclosure process.

There’s no reason why mortgage workouts should be long, drawn-out affairs. Indeed, if you’re going to do some kind of restructuring, it’s always better to do it sooner rather than later. But the fact is that the big banks in America are pretty incompetent when it comes to these things: they lose paperwork all the time, they don’t provide a single point of contact for homeowners, their left hand doesn’t know what their right hand is doing, etc etc. But here’s the problem: as all those obstacles and delays get thrown up, the banks get ever closer to the Frannie-imposed deadline, and are effectively forced to foreclose even if they have good workout options. Freddie Mac tells the WSJ that it requires mortgage servicers to “explore every possible avenue to help a struggling borrower avoid foreclosure” — but if at first that servicer messes things up, Freddie’s far from sympathetic about giving them time to try to rectify the error.

It gets worse. The WSJ piece includes the story of Virgilio Wani and his wife, who became delinquent on their mortgage when they both lost their jobs. As soon as Mr Wani got a part-time job, he tried to start making payments again, but the bank refused those payments and foreclosed instead, handing title to Freddie Mac. What did Freddie Mac do with the house once it had title? First, it evicted the Wanis. Then, it started talking to them about a loan modification. Not to put too fine a point on it, this is the wrong way round.

It’s entirely possible that Freddie Mac and the Wanis will find a solution which allows the Wanis to get back the title to their home. So long as that’s a possibility, the Wanis should absolutely remain in their home: evicting them does nobody any good at all.

It’s a perennial frustration to me that foreclosure always and everywhere seems to be followed immediately by eviction. That’s just stupid, for all concerned. Kicking people out of their home creates a lot of deadweight losses which can’t ever be recovered. In a case like this one, where there’s a good chance that the original homeowner will regain title, the best solution is clearly for that family to remain in the home until the situation is resolved one way or the other.

But even when there’s no chance of the former homeowner being able to buy their home back, it still makes sense to keep that family in their home. These days, many if not most of the people buying homes out of foreclosure are buying those homes to rent out, rather than to live in. And it makes perfect sense to rent the home to the family which has been living there for years, if you can. It’s always worth a try.

So for me the important thing isn’t the amount of time between delinquency and foreclosure, but rather the amount of time between delinquency and eviction. Let’s allow families to stay in their homes even after they’ve been foreclosed upon, unless and until the home is sold to someone who doesn’t want to keep that family on as renters. It would improve the quality of life for millions of people, and would create economic value at the same time. What’s not to love?


“if they are willing to rent out for 3-7 years and then resell at a higher price they will have a very good gain”

This is the principal justification for owning SFH to lease. “Real estate always goes up.”

How did that work out for you this decade?

Posted by TFF | Report as abusive

It’s time for OpenTable to think about diners

Felix Salmon
Feb 28, 2012 07:28 UTC

I’m a big user of OpenTable — I’ve used it to reserve three lunches just this week, and I’d use it to book dinner on Wednesday, too, if it wasn’t for the fact that the restaurant I want to go to doesn’t take any reservations at all. I like its reliability: I’ve been using it for over a decade now (my first reservation, according to the site, was in June 2001), and so far I’ve never had a reservation be lost. OpenTable’s particularly good for business lunches with someone you’ve never met before: you just give the name on the reservation at the front desk, you’re shown to your table, and there’s none of that weird shuffling around trying to work out who it is you’re supposed to be meeting.

All the same, for a hot San Francisco technology company, OpenTable does seem to be changing diners’ habits at a veritable snail’s pace. Even at restaurants with the OpenTable system installed, a large majority of diners still prefer to make their reservation by phone. And at reservation-accepting restaurants in general, just 12% of reservations are made online.

Using the telephone really doesn’t make much sense, most of the time, if you have the choice; Bret Easton Ellis once crafted an entire comic set-piece in American Psycho using nothing but restaurant reservations and call waiting. Maybe it’s just my natural misanthropy coming through, but I don’t like calling restaurants on the phone, and it seems to me that the only people who could credibly claim to prefer it are the elite who can drop the right names and make empty tables magically appear when they do.

So what’s preventing online reservation services from being more popular? Why do they still have such low market share? I think that OpenTable CEO Matt Roberts is more right than he thinks when he says that it’s a function of his service having to be sold, essentially, door-to-door, one restaurant at a time.

There’s a slogan online that “if you are not paying for it, you’re not the customer; you’re the product being sold” — and this, to me, is probably the main issue facing OpenTable. The company sees itself as selling reservations systems to restaurants, much more than it sees itself as selling convenience to diners. And as a result, OpenTable is having difficulty gaining traction in a world where social media is doing most of the heavy lifting when it comes to connecting our online and offline worlds.

For instance, it still insists that you use your unique OpenTable username and password to log in. It should, of course, be asking you to log in using Facebook, instead. Indeed, OpenTable should more or less live on Facebook, much as Farmville does, most of the time. And even when you go to a restaurant’s website, or to opentable.com, it should take just a couple of clicks to invite any of your Facebook friends to lunch or dinner. When they accept, that reservation should then turn up in their OpenTable account, as well as yours. Similarly, when you’re searching for a place to eat, and looking at the reviews from OpenTable diners, the site should show you where your friends eat and what they’ve said about the restaurants you’re looking at. Foursquare is miles ahead of OpenTable on this front, which is crazy; if OpenTable wants to encourage people to leave reviews, then a really good way of doing so is for those people to know that their reviews will be seen by, and useful to, their own Facebook friends.

For most of 2010 and the beginning of 2011, OpenTable’s stock went on an absolute tear, rising from $25 to over $115. A lot of that was misplaced excitement about OpenTable entering the deals space, I think, but the company absolutely should have used the currency of its highly-valued equity to make a big investment in consumer-facing communication generally, and social in particular. If OpenTable could make restaurant reservations fun and easy enough that people actually started eating out more, then the pushback from restaurants in terms of OpenTable’s cost would surely dissipate overnight.

Instead, OpenTable decided to double down on its restaurateur-facing strategy, wheeling out new software which makes it easier for the computer to combine tables on the fly, to create say a 4-top from two 2-tops, and also a new iPad app for owners giving them detailed analytics on their restaurants.

All that new flashy software is great, I’m sure. But as far as a consumer like me is concerned, I still get asked, the tenth time I’m making a reservation at one of my regular lunch spots — and after I’m logged in to the site — whether or not I’ve ever eaten at this restaurant before.

I’m not asking, here, for sophisticated Netflix-style algorithms which look at where I eat, and where my friends eat, and how I rate restaurants, and which then make personalized recommendations for me and which will give me hints as to where I might like to take a certain person for dinner. (That might be a bit creepy, actually.) I’m just asking for a level of polish and customer service from OpenTable which matches the service I get from OpenTable’s participating restaurants. Because it seems to me that if OpenTable wants more people to make use of its product, then it should probably work on getting more people to like that product. Right now, it’s a clunky utility, albeit one which is much better than the telephone alternative. It can, and should, do a lot better.


I felt the same way about OpenTable, but then I saw this article and it really gave me a new perspective on how I can use OT in my restaurant. http://www.vsag.com/news/index.php/2010/ is-opentable-worth-it-founding-farmers-s ays-yes

Posted by skippymcgee | Report as abusive

The relational aesthetics of Davos

Felix Salmon
Feb 27, 2012 15:59 UTC

Nick Paumgarten was told repeatedly, both before and during his first trip to Davos, that he couldn’t possibly get it right after going only once. But he had to try, and he ended up delivering what might be the best description of Davos yet: accurate, well-written, keenly observed.

The Davos of Niall Ferguson, for instance, tells you pretty much everything you need to know about Niall Ferguson:

“What this is is Brownian motion, with human beings,” Niall Ferguson, the financial historian, said one morning, outside the Congress Hall, as his eyes darted about. Vikram Pandit (Citigroup) marched by, and then Brian Moynihan (Bank of America). “Last year, I bumped into Tim Geithner, and he said, ‘We’re going to prove you wrong with our fiscal policy.’ ” At that moment, Ferguson was jostled by a woman who was pushing swiftly through the center, with an entourage of journalists and aides. “Hello, Christine!” he said. It was the I.M.F. chief, Christine Lagarde. She touched his shoulder in greeting. Ferguson turned back to me. “See there? Right on cue.”

Paumgarten decided not to fillet Davos, in the end, although he easily could have done. He goes surprisingly easy on Richard Stromback, for instance, the founder of the you-couldn’t-make-it-up Piano Bar Partners. Stromback’s LinkedIn page identifies him first as “Davos” and second as “YGL”, which is another way of saying “Davos”; his current positions include both “Managing Partner at Piano Bar Partners” and “Young Global Leader at World Economic Forum”.

And Paumgarten also went easy on the Global Shapers, the new set of ultra-earnest twentysomethings who infested Davos this year but who in the end didn’t even get mentioned in his piece.

He even ends with a scene which could have been dictated to him by Klaus Schwab, the Forum’s founder. Davos is glistening; “The mountains, newly covered in snow, sparkled beyond the rooftops. Snow misted down from the pines like pixie dust; now and then, as the sun warmed the boughs, clumps fell noiselessly to the street.” Two men, leaders in their respective fields, engage in a fruitful interdisicplinary conversation about what each can do for the other, after the executive had attended the scientist’s WEF panel earlier in the day. Finally, the two “exchanged cards, shook hands, and parted ways.”

Such genuine and useful encounters do happen in Davos, normally at the rate of once per attendee per year. But they’re not really what Davos is about. Paumgarten gets that the monks and the scientists are “window dressing”, but I think what he misses is the way that that they’re being wheeled out as brain-ticklers for the financiers and plutocrats who actually pay for the whole thing.

In the case of Victor Pinchuk’s annual panel discussion, the power relationship is clear: many of the people up on stage (Jeff Koons last year, Chelsea Clinton this year) are not invited to the WEF meetings at all, and have simply been summonsed by Pinchuk in a highly-conspicuous display of just how rich and important he is. Other famous people flit in and out of Davos while barely being noticed: this year, for instance, Paumgarten’s New Yorker colleague Malcom Gladwell was flown in by Deloitte, gave a speech to a select group of clients at dinner, and then immediately left.

But even within the Forum and the conference center itself, the economics are clear. Paumgarten says that the big spenders “subsidize the scores of academics, scientists, artists, journalists, and N.G.O. chiefs who attend for free” — but that’s putting it politely. The truth is that the academics, scientists, artists, journalists, and NGO chiefs are there for the big spenders, and would immediately be uninvited if the big spenders didn’t want them to be there. And the genius of Klaus Schwab is to persuade those academics, scientists, artists, journalists, and NGO chiefs that being invited to Davos is a great privilege, rather than something they should charge for.

Schwab tells Paumgarten that “you cannot buy your way in” to Davos, but the astonishing number of hedge fund managers with white badges puts the lie to that. The hedgies are ubiquitous at Davos, and they love to talk about how brilliant it is to be able to organize a private dinner with Larry. And when Paumgarten says of the meetings at Davos that “all that’s missing is the hourly rate”, I think he’s wrong twice over. For one thing, companies justify the immense cost of Davos by working out the cost per hour-long meeting, and working out how much those same meetings would cost to organize elsewhere. And for another thing, certain big-name “gets” really do ask for money if you want them to attend your dinner. One of them even included the contact details of his speaking agency in the “Not for Distribution” press release announcing his attendance.

All of which explains the power dynamics of Davos. The CEOs and hedgies might be paying for everything, but in a sense that just makes them the punters, rather than the stars of the show. It’s the people who don’t pay, but whom everybody wants to get, who have the power — whether they’re politicians or Nobelists or rock stars. And then of course, always, above it all, is Klaus Schwab himself, manipulating the puppet strings and keeping everybody on their toes, convinced that they’re missing the real action, wherever that might be. It would be a masterful exercise in relational aesthetics, if only anybody but Klaus himself were able to actually observe it.


Thanks for share

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Why journalists need to link

Felix Salmon
Feb 27, 2012 07:12 UTC

Jonathan Stray has a great essay up at Nieman Lab entitled “Why link out? Four journalistic purposes of the noble hyperlink”. I basically agree with all of it; links are wonderful things, and the more of them that we see in news stories — especially if they’re external rather than internal links — the better.

It’s very easy to agree that if a story refers to some other story or document, and if that other story or document is online, then it should be hyperlinked. But Stray goes further than that:

In theory, every statement in news writing needs to be attributed. “According to documents” or “as reported by” may have been as far as print could go, but that’s not good enough when the sources are online.

I can’t see any reason why readers shouldn’t demand, and journalists shouldn’t supply, links to all online resources used in writing a story.

Tellingly, Stray provides no hyperlinks at all for his assertion that “every statement in news writing needs to be attributed”. Is this really true? It certainly isn’t in the UK, where I come from. What’s more, even before the WSJ got taken over by foreign marauders like Rupert Murdoch and Robert Thomson, it followed this rule mostly just by inserting the stock phrase “according to people familiar with the situation” into any story. That phrase, of course, tells the reader exactly nothing.

In recent days, a debate has emerged online on what I consider to be two very different subjects, which are getting unhelpfully elided. The first question, raised by MG Siegler, is whether outlets like the WSJ have an obligation to say who first broke a piece of news, when they report that news. The second question, which is often mistaken for the first, is whether outlets like the WSJ should link to outside sources of information.

To the second question, my answer is simple: yes. But look at the story by Jessica Vascellaro about Apple acquiring Chomp. There’s only one part of that story which obviously needs a hyperlink, if such a thing were available, and that’s in the first sentence, where we’re told that Apple said it has acquired Chomp. If there’s some kind of public press release from Apple saying such a thing, then the WSJ should link to it. But there isn’t, so the lack of any link there is forgivable.

What Siegler wants is for extra text to be added in to Vascellaro’s story, saying that he first broke the news. And I’m pretty sure that Stray would want the same thing — after all, Vascellaro’s own tweet does imply that she first got wind of the story online, before confirming it with Apple. If it was Siegler’s article which caused Vascellaro to call Apple, then Siegler certainly counts as an online resource used in writing the WSJ story, and should therefore, by Stray’s formulation, be fully linked and credited.

On the other hand, if Stray agrees with Siegler, that doesn’t mean that Siegler agrees with Stray. Siegler cited no source at all, named or anonymous, for his scoop that Apple had bought Chomp: he simply asserted the fact. “Apple has bought the app search and discovery platform Chomp, we’ve learned.” If every statement in news writing needs to be attributed, then Siegler just failed that test.

But I don’t think it does. If you attribute a statement like that to “sources familiar with the situation”, or something along those lines, then the attribution looks a lot like a CYA move. Consider the difference between (a) “Apple has bought Chomp”, and (b) “Apple has bought Chomp, say sources familiar with the situation”. Technically speaking, if the sale falls through, then (a) is false, while (b) was actually true. In that sense, failing to provide attribution is a way of sticking your neck out and asserting news to be a fact. Here’s Siegler:

I reported the Apple acquisition of Chomp as a fact for good reason — It. Was. A. Fact. If I had reason to believe it may not be a done deal or not 100% certain, I would have said that. I did not because I didn’t need to.

Not too long ago, I had a conversation with a journalist who was adamantly sticking up for her story in the face of criticism. The story included a statement of the form “X, says Y”, where Y was an anonymous source. Various other people were saying that X was not, in fact, true. But the journalist was standing firm. I then asked her whether she was standing firm on the statement “X, says Y”, which she reported — or whether she was standing firm on the statement that X. And here’s the thing that struck me: it took her a long time to even understand the distinction. A lot of American journalists stick the sourcing in there because they have to — but they very much consider themselves to be reporting news, and if X turned out not to be true, they would never consider their story to be correct, even if it were true that Y had indeed said that X.

Elsewhere, however, those conventions don’t hold. In a lot of political reporting, you have one person saying “X”, and another person saying “not-X”, and it’s left to the reader to decide whether one or the other or neither is telling the truth. And even facts can end up being attributed to people, which is even more confusing. Consider this, for instance, from a recent NYT article by Motoko Rich:

The home ownership rate has been falling from its peak of 69.4 percent in 2004, according to census data. By the fourth quarter of 2011, it was down to 66 percent. That means about two million more households are renting, said Kenneth Rosen, an economist and professor of real estate at the Haas School of Business at the University of California, Berkeley.

This is Rosen’s only appearance in the article, and he’s not being used to give an opinion, or an expert analysis: he’s being used to count rental households. And, at least on the face of things, he’s not particularly good at that. According to the 2010 census summary, there are 116,716,292 occupied housing units in America. So a basic back-of-the-envelope calculation would say that if the proportion of those units which went from owner-occupied to rented moved from 69.4% to 66%, then the increase in rental households would be 3.4% of 116,716,292, which comes to almost exactly 4 million. That’s double Rosen’s number.

Or, we can get more accurate, and go back to the 2005 American Community Survey, which showed 36,771,635 renter-occupied housing units in total. Contrast that with 2010, where there were 40,730,218 renter-occupied housing units. The difference, again, is almost exactly 4 million.

Most accurately of all, you can look directly at the Census Bureau’s quarterly estimates of the US housing inventory. According to that series, the number of renter-occupied houses in the US was 32,913,000 in the second quarter of 2004; it’s now 38,771,000. The difference there is not 2 million or 4 million but rather 5.9 million. (In the same time, the number of owner-occupied households has increased by 1.2 million.)

Now Rosen may or may not have good reason to believe that in fact the real increase in renting households is only 2 million rather than 4 million or 6 million. But if he does, that reason is not the drop in the homeownership rate from 69.4% to 66%. Not given the number of households in this country. (The homeownership data is here, by the way; it’s worth noting that Rich didn’t link to it.)

All of which housing wonkery is to say that even basic facts like the increase in US rental households can be non-trivial to pin down, and that both Rich and her readers would probably have been better off if she hadn’t bothered phoning Rosen at all, and had just got her numbers for the increase in rental households directly from the people measuring such things. Citing sources doesn’t help the reader at all, here: if Rich had been forced to assert the increase in rental households, rather than simply attributing the number to Rosen, then she would probably have got something closer to the truth.

The difference between linking and citing is the difference between showing and telling. I’m not a big fan of citing, mainly because it gets in the way: we might learn a lot about where the Haas School of Business might be, but at the same time we’ll learn nothing useful about the increase in the number of rental households. On the other hand, if Rich had simply said that “about six million more households are renting”, complete with hyperlink, that would have been shorter, more useful, and more accurate, even if there were no explicit citation.

Similarly, there’s a case to be made that Vascellaro could and should simply have put out a one-line story under the exact same headline (“Apple Acquires App-Search Engine Chomp”), saying “I’ve talked to Apple and they confirm this story is true.” Vascellaro had exactly one new piece of information: Apple’s confirmation of the news. In a world where TechCrunch is only a click away, why write out a lazy rehash of what Siegler had already written, rather than just linking to his story and moving on to breaking and writing something more interesting?

One reason is that the WSJ still has a hugely successful print product, and that therefore WSJ journalists’ pieces need to work in print as well as online. What’s more, as people increasingly read WSJ.com stories offline, on things like the WSJ iPad app, the need for those stories to be reasonably comprehensive remains. Even in the age of the hyperlink. Here’s Stray:

Rewriting is required for print, where copyright prevents direct use of someone else’s words. Online, no such waste is necessary: A link is a magnificently efficient way for a journalist to pass a good story to the audience.

The problem is that a journalist never really knows whether their work is going to be read online or offline, even if they’re writing solely for the web. The story might get downloaded into an RSS reader, to be consumed offline. It might be emailed to someone with a Blackberry who can’t possibly be expected to open a hyperlink in a web browser. It might even get printed out and read that way.

Besides, the simple fact is that even if people can follow links, most of the time they don’t. An art of writing online is to link to everything, but to still make your piece self-contained enough that it makes sense even if your reader clicks on no links at all. Cryptic sentences which make no sense until you click on them are arch and annoying.

What’s more, as Stray says, “online writing needs to be shorter, sharper, and snappier than print”; his link will take you to Michael Kinsley, moaning about how “newspaper stories are written to accommodate readers who have just emerged from a coma or a coal mine”. In that context, does it really behoove reporters to build a long list of sources into all of their stories? Does every news story need to link to the organization which first broke the news? Does every journalist need to hat-tip the friend of theirs who retweeted the nugget which ultimately resulted in their story?

My feeling is that commodity news is a commodity: facts are in the public domain, and don’t belong to anybody. If you’re mentioning a fact which you sourced in a certain place, then it’s a great idea to link to that place. And if you’re matching a story which some other news organization got first, it’s friendly and polite to mention that fact in your piece, while linking to their story. But it’s always your reader who should be top of mind — and the fact is that readers almost never care who got the scoop.

There’s one big exception to that rule, however. Often, a reporter spends a long time getting a big and important scoop, which comes in the form of a long and deeply-reported story. When other news organizations cover that news, they really do have to link to the original story — the place which did it best. Otherwise, they shortchange their readers. A prime example came last August, with Matt Taibbi’s 5,000-word exposé of the SEC’s document-shredding. Anybody covering that story without linking to Taibbi was doing their readers a disservice.

As a result, like most things online, it’s very dangerous to try to come up with hard-and-fast rules about such things. In general, it’s good to link to as many different people and sources as possible, because the more links you have, the richer your story is. On the other hand, the journalistic web is full of garbage hyperlinks — automated links to irrelevant topic pages, for instance, or links to an organization’s home page when that organization is first mentioned.

As for crediting the news organization which broke some piece of news, that’s more of a journalistic convention than a necessary service to readers. It’s important enough within the journalism world, at least in the US, that it’s probably a good idea to do it when you can. But most of the time it’s pretty inside-baseball stuff. And in the pantheon of journalistic sins, failing to do it is not a particularly big deal. What’s much more important is that your reader get as much information as possible, as efficiently as possible. Which means that if you’re writing about a document or report, you link to that document or report. Failure to do that is a much greater sin than failure to link to some other journalist.

So while sometimes the failure to link is unavoidable, I look forward to a time when journalists face much more criticism for not linking to primary documents than they do for not linking to some other news organization which got the news first.


many problems could be avoided altogether if journalists remembered that the basic function of their job is to report. i am not surprised that far too many people have developed a blanket distrust of the news as reported; i think many realize instinctually that the article is not giving them the facts but a view that is filtered through the journo’s sensibilities.

reporting means stating facts, not speculating. when i assigned reporters to events i reminded them that “if it happens you report it” without embroidery. you also don’t leave anything out. because of the proliferation of talking heads it seems every journo thinks s/he is an analyst, a commentator, an interpreter.

too few journos nowadays think “reporter” has sufficient cachet and consequently fantasize themselves into a role where they overstep the bounds. in fact, the ability to separate and clearly present just the facts is more difficult than spewing one’s opinion – with the facts added for the sake of plausibility.

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Chart of the day: Warren Buffett’s bolt-ons

Felix Salmon
Feb 26, 2012 18:21 UTC


Reading Warren Buffett’s latest shareholder letter, I was struck by the number of times he talked about bolt-on acquisitions — situations where one of his subsidiary companies makes an acquisition of its own. They’re mentioned six times in this letter, and then at the end he mentions a “tuck-in” acquisition, which is essentially the same thing.

I wondered if he’d ever been so keen to talk about such things in the past, so I called up the last ten years’ worth of shareholders’ letters. He’s never used both terms in the same letter before, and he’s never used the term “bolt-on” more than once.

This could of course simply be random variation, but I think that something important is going on here. The big question, with Berkshire Hathaway, is how it’s going to invest its billions of dollars, especially now that companies like Swiss Re, Goldman Sachs and General Electric are exercising their options to return billions of dollars of emergency funding from Berkshire.

In the past, Buffett has talked about spending enormous sums buying very large companies: last year, for instance, he said that Berkshire will need “major acquisitions” (his emphasis), adding that “our elephant gun has been reloaded, and my trigger finger is itchy.”

This year, there’s no talk of elephants. Instead, various bolt-ons are scattered throughout the letter, Princeton Insurance being the only one mentioned by name. The rest are relatively small and anonymous. But I see a message here: just because you don’t see Berkshire bagging elephants, that doesn’t mean it isn’t growing by acquisition. It probably is, but just at the level of subsidiary companies, buying other companies you probably haven’t heard of and which probably aren’t big enough to warrant Berkshire’s shareholders being told the details.

Essentially, Buffett is saying “trust us: we’re growing, even if you can’t really see it.” But what you can see is the change in his language. The only real difference between a bolt-on and a tuck-in is that a bolt-on sounds bigger and more important. And so after using the term “tuck-in” seven times between 2006 and 2008, he’s now largely abandoned it. And the bolt-ons are coming thick and fast.

John Hempton singles out one 2002 acquisition which Buffett made and which has been extremely successful — but the fact is that the company in question was bought for $139 million and is now worth maybe $1 billion, after throwing off $180 million in cash. That is indeed impressive, but it doesn’t move the needle for a company with a market capitalization of $200 billion. You need a lot of such acquisitions to do that, and they don’t scale: they’re hard to find, and don’t come along every month.

At the beginning of every annual letter, Buffett compares the performance of Berkshire Hathaway’s book value to the performance of the S&P 500. Here’s two ten-year periods: on the left is 1973-1982, and on the right is 2002-2011.


What you’re seeing here is something that Buffett makes no secret of: it’s much easier to grow very fast when you’re relatively small than it is when you’re huge. Check out that run of growth beginning in 1975, in the first column: it’s simply astonishing. And even the relatively modest performance in 1973 and 1974 looks fantastic when you compare it to what the rest of the market was doing.

Buffett’s kept his ability to stay conservative and outperform in down markets. His two best years of the past ten, if you look at the “relative results” column, were — by far — 2002 and 2008, when the broad stock market fell a lot, but Berkshire’s book value did much better. And that’s largely an apples-to-oranges test in any case: after all, the book value of the S&P 500 didn’t fall nearly as much as its market value either.

If you look at Buffett’s own favored metric, the per-share book value of Berkshire, he’s had some good years of late, but nothing which even comes close to the numbers he was posting in the 70s.

That’s to be expected: big, mature companies don’t grow as fast as the best small companies. But when you’re a public company, shareholders’ desire for growth never goes away. Especially when, as at Berkshire, the stock doesn’t pay any dividends. As a result, every year Buffett does two things in his letter to shareholders. Firstly, he tries to downplay expectations as to how fast Berkshire is going to be able to grow going forwards. And secondly, he tries as best he can to explain where the future growth they want is going to come from. He’s consistent on the first part. But on the second he moves around a bit more. And this year, the message is that he’s going to encourage his subsidiary companies to make lots of acquisitions.


Sorry, one more thing I forgot to mention.

Felix: Thank you for this write-up. I appreciate the fact that you provided in-line links to each PDF you cited, the B-H annual shareholder updates. I would not have had the opportunity to access those otherwise. Well, not easily. (David’s comment made me remember to mind my manners better).

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