Felix Salmon

Gawker Media jettisons its porn blog

Felix Salmon
Feb 17, 2012 18:47 UTC

Back in November, Nick Denton put Gawker Media’s Fleshbot up for sale. The official announcement, here, is NSFW due to the ads surrounding it — which pretty much explains why Fleshbot was being sold: its customers — porn sites — are very, very different from the brand advertisers who supply the money to all the other Gawker Media properties.

In the end, Fleshbot LLC was sold, or “sold”, on February 1, to Fleshbot’s editor, Lux Alptraum; if money changed hands I’m sure there wasn’t much of it. Jolie O’Dell, writing about the news of Fleshbot going up for sale, said that “the day a porn site can’t make money on the Internet is the day we all pack up and go home” — but in fact turning a profit on a porn blog is not easy at all. There’s a virtually infinite amount of competition, and the cost of porn online has basically gone to zero at this point, which means there’s even less money than there used to be for ad campaigns on sites like Fleshbot.

Fleshbot is certainly not the iconoclastic site that Denton aspired to creating when it was launched in 2003 — rather than taking a fresh look at where porn and eroticism might be found in life and on the internet, it increasingly became a mouthpiece for, and captured by, the porn industry. To the point that when Gawker Media started looking at porn-industry scandals, that ended up happening on Gawker, rather than on Fleshbot.

Interestingly, the kind of site that Denton originally envisaged is nowadays very common on Tumblr, which has a thriving porn-reblogging community, based around as many different niches as there are porn specialities. (Which is to say, a lot.) Fleshbot tried to be all things to all porn consumers, both gay and straight, and that’s not how porn works: people tend to gravitate towards their own personal kinks, rather than going for the anything-and-everything approach.

So what’s going to happen now that Fleshbot is an independent entity? For one thing, it has already moved to the ubiquitous WordPress platform from Gawker’s custom publishing software, which makes serving up the porn industry’s advertisements significantly easier. “For a variety of reasons, Gawker was looking to completely separate itself from Fleshbot,” says Alptraum; “on our end, the restrictive nature of the Gawker CMS/layout wasn’t really conducive to our work. On our own, we’re more capable of focusing our layout/ad sales/tech strategies in ways that are optimized for an adult site, rather than trying to shoehorn Fleshbot into models designed for a broader, more mainstream stable of properties.”

Alptraum’s job is not an easy one. The guy who used to sell Fleshbot ads for Gawker Media is now the CFO of Fleshbot LLC; there’s a lot of work to do, and I don’t think the site has ever made money. And now, of course, they need to worry about things like health insurance and payroll and all the other burdens of being an independent company, which were previously picked up by Gawker Media’s operations crew.

Alptraum is optimistic: Fleshbot is “an incredibly valuable property that hasn’t been optimized,” she says, “and I’m excited about the possibilities for expansion.” That might mean more live events like the Fleshbot awards; it probably means even further alignment with the porn industry. “At its core, it’s a project about destigmatizing and celebrating sexuality,” says Alptraum. “I also think it’s played a powerful role in helping to mainstream the adult industry.”

Meanwhile, Gawker Media now runs on a single advertising platform, rather than having to make Fleshbot the exception to many rules. Nick Denton wanted to shake things up, with Fleshbot; in the end, he just created a headache for himself. He kept the blog much longer than most entrepreneurs would have done, and Alptraum only has good things to say about him. But the parting has been inevitable for a long time now, and both sides are surely happier now that it’s happened.


Pútavé čítanie, dosť podobné ako keď som si minule bral pôžičku online. Pôžičky online sú zaujímavé v tom, že s ťažko hľadajú ale minule som na Googli našiel odkaz http://pozicky-online.net/ – pôžičky online a tam som sa všetko o pôžičkách online dozvedel. Ďakujem za to!

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The Greece game turns chaotic

Felix Salmon
Feb 17, 2012 06:18 UTC

Back in 2010 the ECB started buying Greek bonds to try to prop up Greece’s debt markets. It did so in the open market, which meant that it was the highest bidder at the time; reportedly it paid somewhere in the region of 75 cents on the euro for each bond. They’re currently trading at about half that level, so when the bonds get their 50% haircut, it’s going to lose billions of euros, right?

Wrong. For one thing, as John Carney pointed out in January, it didn’t really spend money on those bonds, it just printed money. If Greece doesn’t pay the ECB back, the worst thing that happens is that the euro money supply gets expanded a little.

But for another thing, it turns out that the ECB had a little trick up its sleeve all along:

The national central banks in the euro zone are set to exchange their holdings of Greek bonds into new bonds in the run up to a private sector debt deal to avoid taking any forced losses, euro zone sources said on Thursday…

Sources said the process could start over the weekend, with one adding that the move was a technicality and that the new bonds would have the same terms as the original ones.

A technicality?! Ha! What’s happening here is many things, but it’s most definitely not a technicality. The ECB is taking its stock of old Greek bonds, which are worth very little and which are going to suffer a whopping great haircut next month, and swapping them out for shiny new bonds which Greece is going to pay in full.

This is no normal bond exchange: No one else gets this deal, and there are no tag-along rights for private-sector investors who might fancy the opportunity to do something similar. It’s a basic tenet of bond market that all bonds of a given series are equal and fungible, and that what happens to one happens to them all. But not here. You can fight about whether this bond is or should be pari passu with that bond, but it’s a no-brainer that any bond is pari passu with itself. Except in this case, it seems, where the ECB’s stock of Greek bonds have suddenly become senior to everybody else’s stock of the exact same securities.

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.

Which brings me to the blog post of the month, from Daniel Davies, a/k/a dsquared. He’s structured the choices facing the Troika as a choose-your-own-adventure book; needless to say, none of the outcomes are particularly palatable, although some are definitely worse than others.

The point here is that given political realities, there is literally no real solution to the Greece problem. The market attempted some kind of rally on the ECB news today, which on its face is weird — if the ECB takes its bonds out of the restructuring pile, then that just means a bigger haircut for everybody else, if Greece is going to reach debt sustainability. But the rally, if it was related to the news at all, was probably just relief that something is being done — that plan beats no plan. Which is probably overly hopeful. There might be a plan here, but equally there might not: this could be a purely defensive mechanism, protecting the ECB from a chaotic Greek default.

The most notable thing about the news, for me, was the utter lack of eyebrows which were raised when it happened. Everybody’s expecting the unorthodox at this point, to the degree that when it happens, no one seems to care very much. Or maybe it’s just that no one has a clue what’s going on. I was at a very wonky dinner this evening, talking details of CDS determination committee protocols and the like, when it struck me that the politicians making the decisions here are not financial sophisticates; many of them like the idea of the CDS not being triggered just because they think that means Greece won’t have defaulted.

In short, expect things to get weird from here on out. We are entering a zone of probability distributions at this point, where actions stop having foreseeable consequences. No one’s really in charge, which doesn’t help. Greece has sophisticated and professional advisers, but Greece isn’t in control of its own destiny; the Troika is. And the various members of the Troika are no longer singing from the same songbook. The ECB has partially protected itself, with this move; but in increasing the amount of preferred-creditor debt that Greece has, it has also increased Greece’s debt burden and hurt the credit quality of the debt that Greece owes the IMF, which is also a member of the Troika.

Go play Daniel’s game: if anything it’s an oversimplified presentation of the various ways that the Greek crisis might play out in the next few weeks. There’s nothing in there, for instance, about tensions between members of the Troika, or about bondholders holding out with a blocking stake and complicating things that way. Then, once you’re thoroughly confused and depressed, put yourself in the position of a European politician who has to make real-world decisions with real-world consequences. And ask yourself how predictable your actions might be. The endgame is approaching; but the only thing we know for sure about it is that anybody who thinks they know how it’s going to play out is delusional.


PSI and OSI with ecb participation is a must, there’s not enough money saved on the cut.

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A private stock market for small banks

Felix Salmon
Feb 16, 2012 21:28 UTC

SecondMarket is moving into regional and community banks — something which can’t possibly be bad and might well be very good for the industry.

Right now, if you’re a community bank and you need to raise capital, it’s not easy. Equity stakes in such banks are highly illiquid, and almost impossible to monetize, which means that when an owner of such a bank needs some money, they all too often have to sell the bank outright.

When I wrote about the Bank of Cattaraugus in December, I worried about the fact that it was hard to do community banking without the risk of the owners selling out. My proposed alternative was credit unions — and I’m still a big fan of those. But I can tell you, as a six-year credit union board member myself, that it’s hard to get the owners of credit unions engaged, partly because board members are unpaid and have no real stake in the bank beyond the single vote they have by dint of being a member.

I can think of a few socially-responsible double-bottom-line-style investors who might be interested in taking a minority stake in institutions like the Bank of Cattaraugus. Ideally they would see returns roughly in line with inflation, nothing special: the idea would be to encourage utility banking, rather than high-risk, high-growth strategies.

The need for equity capital at all levels of the banking world has never been greater. We learned two big lessons during the financial crisis: firstly that banks had too much leverage, and secondly that subordinated debt is all but useless in doing its job. It doesn’t provide a cushion against bankruptcy: if you’re forced to default on your subordinated debt, you will be shut down and sold off, in one way or another. Which is why regulators and analysts started concentrating much more on tangible common equity (TCE) instead.

Public banks can increase their TCE just by issuing new stock; with privately-held banks it’s much harder. And, truth be told, it’s still going to be hard even if and when the new SecondMarket exchange in bank equity gets off the ground. It’s not designed for capital-raising operations; it’s just designed as a way for existing shareholders to be able to sell their stock. Which funnels money to the shareholders, but not to the bank.

Still, raising capital is always easier if the person providing the money has some kind of possible future exit. So it stands to reason that if a bank’s equity is trading on SecondMarket, potential participants in a capital raise will be more likely to take part, just because they know that they have a relatively easy way of selling that stock in the future.

And some of these banks are going to turn out to be spectacular investments. SecondMarket calls it “exposure to hyper-local economic growth”, with an embedded M&A option: if small banks continue to struggle and get eaten by their bigger competitors, shareholders at least generally get to charge a premium when they sell. More generally, banks can provide massive returns just by dint of their embedded leverage.

There are massive risks involved here, too, of course. There’s no guarantee that investors will be willing to buy when you want to sell. The bank could get into trouble with the FDIC and get taken over, wiping out all its equity. Boards of community banks tend not to be particularly independent. Small banks have been shrinking, as a sector, for years, and there’s no reason to believe they’re going to stop doing so, the occasional populist campaign notwithstanding. Etc etc.

So the people investing in this market, quite rightly, are going to have to be accredited investors who can afford to lose their entire investment. And I’m a bit sad that the SecondMarket platform isn’t being tweaked a bit more, here: I’d love to see prices (but not the names of the buyers and sellers) being listed, in public, after every auction. After all, it’s not like the financial information about these banks is secret: go to the FDIC website, and you’ll find every last bit of information you could possibly want, on any bank in the country.

But still, anything which increases the universe of options available to the owners of small banks is going to help them at some level compete with the bigger banks. And that’s got to be a good thing.


Thank you for linking the capital needs of small banks to an aftermarket for their shares. I’ve referenced your article in my online work, Bypass Wall Street. You can search for your name at bypasswallstreet.com. Most community banks were initially created by offering shareownership to individuals in their local communities, to comply with banking law requirements for a charter. But when they need more capital, they turn to Wall Street. It rarely occurs to them to offer shares directly within their service area, even when a local securities broker is providing a trading market.

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Target, Google, and privacy

Felix Salmon
Feb 16, 2012 18:38 UTC

The most interesting part of Charles Duhigg’s story about corporate “predictive analytics” is the reaction of Target’s PR department when they found out he was writing it.

When I approached Target to discuss Pole’s work, its representatives declined to speak with me… When I sent Target a complete summary of my reporting, the reply was more terse: “Almost all of your statements contain inaccurate information and publishing them would be misleading to the public. We do not intend to address each statement point by point.” The company declined to identify what was inaccurate. They did add, however, that Target “is in compliance with all federal and state laws, including those related to protected health information.”

When I offered to fly to Target’s headquarters to discuss its concerns, a spokeswoman e-mailed that no one would meet me. When I flew out anyway, I was told I was on a list of prohibited visitors. “I’ve been instructed not to give you access and to ask you to leave,” said a very nice security guard named Alex.

I’m sure that Target didn’t get its name from the way that it sends marketing materials and coupons customized to individual shoppers. But maybe the name is part of the reason why the company’s so wary about talking about the details of its marketing operations. A bigger part, though, is what I’ve called the uncanny valley of advertising — the way that we feel that we’re being spied on, when a big faceless corporation seems to know very intimate things about us. Like, for instance, the fact that we’re pregnant.

“If we send someone a catalog and say, ‘Congratulations on your first child!’ and they’ve never told us they’re pregnant, that’s going to make some people uncomfortable,” Pole told me. “We are very conservative about compliance with all privacy laws. But even if you’re following the law, you can do things where people get queasy.”

It’s incredibly important to Target that it have the ability to tell when you’re pregnant, before you have your child; Duhigg goes into great detail about why that’s the case, but it basically comes down to pregnancy being one of a very few opportunities for retailers to gain market share in the zero-sum game that is your basic household expenditure. As such, you can be sure that this kind of targeting is going to become increasingly commonplace, as retailers engage in a targeting war, trying harder and harder to capture the shopping dollars of new families and families-to-be.

And truth be told, it’s good for consumers to have lots of corporations falling over each other to offer us great prices and great, personalized, service. But while we love the prices and the service, we also like a little veneer which allows us to kid ourselves that we still have privacy:

“We have the capacity to send every customer an ad booklet, specifically designed for them, that says, ‘Here’s everything you bought last week and a coupon for it,’ ” one Target executive told me. “We do that for grocery products all the time.” But for pregnant women, Target’s goal was selling them baby items they didn’t even know they needed yet.

“With the pregnancy products, though, we learned that some women react badly,” the executive said. “Then we started mixing in all these ads for things we knew pregnant women would never buy, so the baby ads looked random. We’d put an ad for a lawn mower next to diapers. We’d put a coupon for wineglasses next to infant clothes. That way, it looked like all the products were chosen by chance.

“And we found out that as long as a pregnant woman thinks she hasn’t been spied on, she’ll use the coupons. She just assumes that everyone else on her block got the same mailer for diapers and cribs. As long as we don’t spook her, it works.”

This is going to be a very fine line, for years to come. So long as we don’t know that iPhone apps have access to our address book, everything’s fine — but then it’s revealed that Path has that information, and there’s a huge kerfuffle, and Apple ends up changing its policies.

Richard Falkenrath is pushing for a “right to be forgotten”, whereby individuals could ask companies to erase all the data and metadata that they possess about them. He says that it’s “essential to protect personal privacy in the age of pervasive social media and cloud computing”, but I think he’s importantly wrong. We’ve never really had personal privacy, we have less privacy than ever before, and extra legislation, while making a difference at the margins, is never going to return us to some mythical prelapsarian state where Big Brother knows nothing about us.

And indeed, few of us would want to return to that state. I get a steady stream of books and press releases here at Reuters, most of which I have very little interest in. But at least they’re a little bit targeted: they tend to be about business or finance, broadly. And some of them I actually like a lot, and end up in a blog post somehow. If I just got a random subset of all the books being published, or all the press releases being put out, my situation would be far worse than it is now. Because the people sending the books and releases know something about me, they attempt to send me only things I might conceivably be interested in. (At least in theory. Does anybody know how to unsubscribe to the TMZ mailing list?)

We’ve always lived in a world of personalization and targeting, from the maitre d’ who knows your name and favorite table at the fancy neighborhood restaurant, to the way in which corporations pay more money to advertise in the Wall Street Journal than they do to advertise in the New York Post, on the grounds that the Journal is more likely to reach rich professionals.

Nowadays, computers have made it increasingly possible to fine-tune personalization down to the individual level, where it can sometimes get “spooky”. (Although I’m convinced that spookiness increases with age: that in general young people are much less fazed by this kind of personalization than old people are.) If sophisticated corporations manage to make their marketing materials less spooky, I don’t think there’s going to be much popular opposition to continued targeting — at least not in this country. Germany is different: Germans care a lot about their privacy, and fight hard for it.

Here, however, I’ve never received a good answer to the “why should I care?” question — and certainly Falkenrath doesn’t provide one. All he does is hint at a vaguely dystopian scenario, and leave the rest to the reader’s imagination:

Picasa has a tagging feature that can tell Google where and when photographs were taken, and an advanced facial recognition feature that allows Google to identify individuals it has seen in one photo in any photo in the user’s digital library. Integrating just these three services with Google’s core search function could allow Google to locate individuals in virtually any digital photograph on the internet, and so derive where each user has been, when, with whom and doing what. Add YouTube to the mix, or Android smartphones, or whatever other database Google develops or buys – the implications are breathtaking.

If you’re pessimistically inclined, the breathtaking implications are negative. On the other hand, there are lots of positive potential implications, too. And the fact is that companies like Target and Google have no interest in becoming some kind of Hollywood corporate villain; that kind of behavior tends not to be nearly as profitable as screenwriters might think. So my feeling is that if they do become evil, we should cross that bridge when we come to it. As News International is discovering, genuine invasions of privacy can be fatal to any company. In the meantime, trying to legislate a “right to be forgotten” would probably cause much more harm than good.


I came home from work today and openend my mail and there is was “Congrat’s on saying I do” from target. I’m fuming! I’m not only 31yr old single female but I get enough hype that I’m still single and then have to come home to relax and I get slapped in the face by Target. If anyone has names at Target who I can contact I would love to know. I’m a marketing manager for a digital analytics company and I know more about privacy and what online information companies have access to but this is crossing the line when you offend people with your marketing materials!

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Why BofA can’t tell Merrill brokers what to do

Felix Salmon
Feb 16, 2012 00:38 UTC

Joe Giannone has scored a fascinating interview with Lyle LaMothe, the former head of Merrill Lynch’s Thundering Herd. As John Carney says, the interview makes it very clear, as was suspected at the time, that he left because he was very uncomfortable with edicts surrounding synergies and cross-selling and the like after Merrill Lynch was bought by Bank of America.

While Merrill Lynch and LaMothe said that brokers are not forced to pitch loans and banking products, a number of Merrill advisers complain of feeling such pressure at a company that emphasizes cross-selling, one reason many former brokers have said they left Merrill over the past two years.

LaMothe says combining bank and brokerage under one roof “makes perfect sense,” but there are limits. “You cannot pressure good advisers to sell a product: they simply won’t do it. It’s almost counter-productive.”

This is interesting to me because Merrill’s brokers charge their clients a whopping $13.5 billion every year, or 0.90% of their total assets. And that fee, of course, comes over and above the fees charged by the fund managers chosen by those Merrill brokers and their clients. If you’re using Merrill mainly just to invest in index funds, then there’s a good chance that your brokerage fee is five times the amount of money you pay to the institutions actually managing your money.

Sometimes, it’s very obvious when your Merrill broker is making money from you. But other times, it’s not obvious at all — fancy derivatives products, or principal-protection strategies, or front-end loads on hedge funds, or just about any fund-of-funds, or all manner of other products, involve secret or semi-secret kickbacks straight to the broker who buys them. And those kickbacks work: brokers really are more likely to sell products they get a commission for selling, and given the choice between selling different share classes of the same fund, they’re pretty likely to choose the class which rewards themselves the most.

Yet at the same time I think that LaMothe is at least partially right when he says that it’s hard to pressure good advisers to sell a banking product. How can that be, when incentives clearly work with respect to investment products? I think there are three dynamics at play here.

First is the fact that much of what Bank of America wants brokers to cross-sell simply doesn’t come with commissions at all. If you don’t pay brokers extra to sell BofA products, then they’re not going to do so.

Second is the fact that the brokers might be loyal to Merrill Lynch, but they feel no great love for Bank of America. Ask them to push BofA products without earning their loyalty first, and they’ll feel used. Brokers have a wide range of products to choose from, many of which carry high commissions. They don’t all flock to the same high-commission products, though: some love this one, others love that one. With BofA products, there’s not much love to go around — and as a result, the brokers tend to avoid selling them.

Finally, and most importantly, brokers feel that they’re working for their clients more than they’re working for their employer. Its the clients who ultimately pay them, and they generally have a great relationship with that client. What’s more, just like nearly everybody else, brokers feel that they earn a reasonable sum for the work that they do. When they get a nice commission on a trade, they don’t feel that they’re ripping off their client, they just feel as though they’re being paid for doing their job. After all, they have to get paid somehow.

In a broker’s mind, earned commissions are all part of the ecosystem of serving clients. Cross-selling, by contrast, sets up a conflict of interest — not between the broker and the client, but between the client and the broker’s parent company. When selling a third-party product, the broker is working wholly for the client. But when selling BofA products like banking or insurance, it’s less obvious who the broker is working for. Being a salesman for a product that you’ve carefully chosen? That’s fine. Being a salesman for a product that you’ve had thrust upon you and you’re being told to sell? You’re going to feel much less happy about that.

Which is one reason why brokers find it so easy to flit from shop to shop, and why it’s so hard to get them to sell your own company’s products in particular. Bank of America might paradoxically find it easier to sell its products through independent, third-party brokers than through its own Merrill Lynch salesforce — just because the Thundering Herd hates being told what to do. And if you push it, the guy in charge is prone to “retire” at age 49, rather than follow your edicts.


Some think those who sell investments to clients should not get paid; that’s only their greed talking. A good adviser won’t get it right 100% of the time, but he’ll get it right more times than not. He’s dealing with the vagaries of human nature, he has to interpret what the client wants, what the client needs, and find the best fit from what is available. Of course he should be paid.

I don’t agree with double charging fees though. We sell funds at NAV with no load on them. We refund any kickbacks we may be entitled to back to the client. We charge the client a straightforward and fully transparent fee. But then we are only in little old Switzerland. And we don’t deal with any Americans. The SEC are very strict about that and even Americans who have not lived in the US for 20 years and who have their centre of economic existence in Europe have to use a US broker to give them advice that mostly ignores the rest of the world.

Sometimes I think the US is screwed. But then I realise it’s just screwed up.

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Greece is broken, and can’t be fixed

Felix Salmon
Feb 15, 2012 17:01 UTC

As Mohamed El-Erian says, the broken dynamics surrounding Greece right now are extremely reminiscent of what was happening in Argentina in 2001. New money is necessary, but it’s also insufficient; it all feels like some kind of Samuel Beckett-style existential paradox. You must go on, I can’t go on, I’ll go on.

To provide a bit of context here, look at the amount that the Greek economy has already shrunk: 16%. That compares to 20%, peak-to-trough, in Argentina, and 29% in the US in the Great Depression. But the big problem in Greece is that the worst economic effects of austerity haven’t even happened yet.

“On the current path – which is not sustainable in my view – we may very well see Greek GDP go down 25-30 percent, which would be historically unprecedented. It’s a disastrous crisis for them,” Dadush, a former senior World Bank official, said…

“They’re suffering. It’s nasty,” said Weisbrot, who has studied the lessons to be learned from economic crises in Latvia and Argentina. “If you could say with a reasonable probability that the worst was over, then that would be different. But you can’t say that. They’re in for a long nightmare.”

The point here is that both Europe and Greece need a light at the end of the tunnel. Without that, social unrest in Greece will only get worse, the credibility of its promises will continue to deteriorate, and the Europeans will be understandably reluctant to throw good money after bad. And right now that light does not exist. Greece probably can’t implement the austerity package it’s promising, and even if it does, GDP won’t start growing to the point at which its debt-to-GDP ratio will come down to a remotely sustainable level. Which brings me to El-Erian:

First, they should stop repeating the claim that there is no “Plan B.” Telling people that there is no alternative to a discredited policy merely pushes them either to resist an approach that does not work, or to opt for mayhem. Recent official remarks heard in Greece (“We must show that Greeks, when they are called on to choose between the bad and the worst, choose the bad to avoid the worst”) do little to engender hope.

The lesson of what happened in Argentina should be top of mind:

After the Argentine parliament approved yet another new austerity package, the IMF agreed to release its financing tranche. But it was too late to save a discredited approach, further undermining the Fund’s standing.

Indeed, rather than engendering confidence, Argentine citizens withdrew their bank deposits over the next few months. Capital flight accelerated. The government again failed to deliver on its policy commitments. Most important of all, social and political pressures mounted, reaching a tipping point.

One of the weirder aspects of the Greek crisis is the way in which deposits in Greek banks have not fled the country. Many have, but Greeks still have something in the region of €150 billion on deposit in Greek banks. (I’m pretty sure that non-Greek deposits in Greek banks are de minimis.) If history repeats itself — and there’s no reason to believe that it won’t — that’s going to change.

There will be some kind of muddle-through bailout deal which allows Greece to do a bond exchange before its €14 billion bond coupon comes due on March 20. But the new money coming into Greece from the Troika will be less than the amount of money flowing out of Greek banks, and the lack of credit and liquidity in the country will only exacerbate the current depression and increase the number and severity of riots. Eventually, Greece will tip, and will leave the euro in a chaotic manner. I’m thinking late summer.

That’s not a Plan B anybody really wants. Greece’s budget deficit doesn’t disappear when it exits the euro, which means that it will have no real choice but to print new drachmas to cover that deficit. (Certainly no one outside Greece is going to lend the government new money at that point.) As a result, there will be a spiral of devaluation and inflation in Greece. Nominal GDP growth never felt so bad.

Is there a Plan C? Is there a real alternative? I think that there probably isn’t. El-Erian talks in a vague way about “economic restructuring”, “institutional changes”, and “policy flexibility” — all of which is code for the kind of deep-seated economic reform that Germany went through under Gerhard Schroder. That involved a combination of falling real wages and popular unhappiness in the context of a fundamentally strong and growing economy running a large current-account surplus. It also took many years, without real guarantees that it was going to work.

Greece doesn’t have that kind of leadership, partly because its population has no good reason to believe that such reforms would work or be at all effective in increasing national competitiveness. On top of that, it’s trying to act from a position of weakness rather than strength, and in any case it simply doesn’t have the time to implement changes which involve a fundamental restructuring of the nation’s social compact, including the population’s willingness to pay taxes.

Which is why I feel that what we’re seeing right now is the playing-out of the endgame in Greece. It reminds me in a way of the fiscal debate within the Obama administration, where the Christy Romer faction wanted “naked stimulus” without worrying too much about cuts down the road, while the Peter Orszag faction wanted “coupled stimulus” where short-term spending was offset by long-term budget cuts and revenue hikes. Basically everybody in the administration wanted stimulus, of one form or another — but that’s exactly what they didn’t get.

Similarly, in Greece, if you look at the various players — bondholders, the European Commission, the Greek government, the Greek population — all of them want Greece to stay in the euro. I have a feeling they’re all going to be very, very disappointed.


Greece can recover soon from financial crisis.

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Journalism’s welcome longevity

Felix Salmon
Feb 14, 2012 22:59 UTC

This week, Significance magazine (“statistics making sense”) reprinted a three-year-old article of mine about the Gaussian copula function. That story has had an impressive shelf life, and I’m incredibly happy that it will continue to be read for years to come. Sometimes it will be read in print publications, like Significance or book anthologies. But many, many more people will read it online. That’s great for Wired, both in terms of ongoing ad revenues (which are pretty small at this point) and in terms of its reputation for printing high-quality journalism with lasting value. (That value isn’t just journalistic, either: Wired’s parent, Conde Nast, is being very inventive in terms of monetizing old content.)

The fact that the internet has a long memory is wonderful for magazines online, as Tom Standage of the Economist recently noted.

After years of locking the search engines out, now suddenly their whole archive is available. A three year old article about Iran, he said, does just as good a job of advertising what they are about and why you should be reading them as the ones form this week. He said it was “crucial” that content could be “sampled and shared on social media.”

Matt Yglesias, however, sees a downside here, as more and more great magazine pieces are available online, for free, in perpetuity:

The existence of this deep back catalog is great for readers, but not necessarily as rewarding for the forward-looking production of longform pieces. Each day—each hour, even—all previous “newsy” items become obsolete and the demand for new newsy items is robust. But the existing stock of well-hewn blocks of substantial prose is already very large and it no longer depreciates the way it did in print.

I don’t buy it: the long-term upside, to any publication, of producing more well-hewn blocks of substantial prose is real, and, well, substantial. Meanwhile, Yglesias’s downside is that there’s already so much good stuff out there that it’s somehow satiating demand for such material.

In reality, of course, the supply of attention, when it comes to long magazine articles, is far from fixed. Nowadays especially, in the days of Instapaper and Longreads, people are reading more long-form journalism, from more outlets, than they ever did before. And there’s no indication that the rise in long-form consumption will level off any time soon. The more that magazines feed that demand, the more the demand will rise, in a virtuous cycle. Meanwhile, people will read less SEO-optimized crap from Demand Media. This too is a good thing.

One of Nick Denton’s less celebrated innovations was the creation, with Lifehacker, of a blog which lives more through its archives than through the new content that it puts up every day. Yes, Lifehacker has many loyal readers keeping an eye on its new posts. But the real value there is in what you might call the back catalogue — all those timeless posts which get steady pageviews for months or years.

It’s the difference between recording a throwaway pop song and recording a Beethoven symphony — the symphony is a much more laborious and expensive proposition, but it will sell for years to come. Orchestras don’t stop recording Beethoven symphonies just because lots of other orchestras have been there already. And the difference between new long-form journalism and old long-form journalism is a lot bigger than the difference between a new recording of Beethoven 5 and an old recording of Beethoven 5.


Yglesias appears to have fallen for the lump-of-paper fallacy.

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What’s bad for JP Morgan isn’t bad for America

Felix Salmon
Feb 14, 2012 17:55 UTC

I’d recommend that you at least glance at the Occupy the SEC letter about the Volcker Rule before attempting to digest Andrew Ross Sorkin’s column on the same subject today:

The Volcker Rule is a noble and thoughtful effort to make the banking system safer in the long-term postfinancial crisis. Critics in the banking industry, however, say the new regulation comes with many embedded costs for the national and global economy.

Here’s where Mr. Volcker and I differ. He says: “Not so.” I say: “C’mon. It’ll cost the economy, at least in the short term.”

I’m with Volcker here. And the fallacy in Sorkin’s thinking is easy to see: he’s essentially eliding big banks, on the one hand, with the broad economy, on the other. Yes, Sorkin is right that the Volcker Rule comes with “significant costs”. But there’s a difference between costs to a handful of banks, and costs to the economy.

If and when prop trading leaves the big banks, those banks will make less money. That’s by design. But the money doesn’t just disappear. Insofar as trading is a zero-sum game, and it certainly has that component, lower profits at the big banks mean higher profits everywhere else. And insofar as trading takes place outside regulated banks, at hedge funds or small broker-dealers without access to the Fed discount window, some of the profits will simply move there, to small-enough-to-fail institutions.

In other words, there is a list of institutions which will be harmed by the Volcker Rule. Here it is: JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley. These institutions should get smaller. These institutions should be less profitable. There’s no reason to believe that when that happens, the economy as a whole will suffer.

There’s also the question of whether the Volcker Rule will hurt liquidity, and whether that would be entirely a bad thing. Sorkin happily parrots the rather ridiculous Sifma number saying that the costs of the rule could reach $350 billion. “Even half that number has to be considered substantial”, he writes, as though the best way of making a ridiculous number accurate is to simply divide it by two.

Sorkin quotes Volcker on the baseless “presumption that ever more market liquidity brings a public benefit”, but he shares that exact presumption, for no good reason. Where, exactly, is the public benefit in me being able to buy and sell stocks hundreds of times per second? Where is the benefit in bringing down trading costs to the point at which people stop thinking before they act? Liquidity is like a safety net: it allows people to feel free to make potentially stupid decisions, because they know they can always change their mind and reverse those decisions at any point. Until, of course, there’s a crisis, and correlations spike, and the safety net, just when you need it, isn’t there.

Sorkin worries that it will become “impossible, or at least, impossibly expensive” for banks to warehouse merchandise in the form of securities available for sale. He doesn’t, on the other hand, explain why that’s a bad thing. Why should commercial banks be America’s largest market-makers, with enough clout within Sifma and other industry forums that they can set the broad anti-Volcker agenda? There’s no good ex ante reason why that should be the case, and indeed commercial banks have only truly dominated the market-making world in the past few years, since Goldman Sachs and Morgan Stanley converted after Lehman went bust in 2008.

If you dig deeper into the complex needs of global corporations that are the clients of big banks these days,” writes Sorkin, doing his best Jamie Dimon impersonation, “they sometimes seek banks to make proprietary bets to help them.” Unpacking the pronouns here, I think that what Sorkin is saying is that somehow big corporations want banks to make proprietary bets, because banks’ proprietary bets somehow help those big corporations. I don’t see it — and neither does Volcker.

Yes, the Volcker Rule would hurt America’s biggest banks — and yes, those banks do have extremely large corporations as clients. Once the Volcker Rule is implemented, those extremely large corporations might find their Treasury needs best served by smaller brokerages. They might even see more competition for their dealflow, once the bigfooted giants are forced out of the game. There’s no reason to believe that the extra competition would also mean higher prices or wider spreads. So let’s concentrate on making the Volcker Rule as tough as possible, and stop worrying about its effect on Jamie Dimon’s annual bonus.


I think a large part of the problem pre-cris is that debt markets were actually too efficient. With widespread use of CDS and other techniques to mitigate risk, banks lost the discipline required to underwrite credit properly. If Volcker makes the debt markets less efficient we’ll probably all benefit.

Too-big-to-fail banks also distort the free markets that most people within these banks advocate so much. Let’s say I want part of my savings invested in dividend paying income stocks but with an allocation to more risky growth asset classes. In days gone by I’d have invested in boring bank stocks and maybe given some money to a hedge fund to use its expertise in a sector such as commodities. Now what I’m expected to do is just invest in a bank for a combination of these – or conversely, bank stocks no longer offer me the option of choosing a utility-like stock as the risky business is thrown in too. The bank’s management will take my unit of equity and allocate it where it decides, but this decision process is biased due to agency issues.

The unfair subsidy that allows these banks a higher counterparty credit rating and a cheaper cost of capital and broader access to funding than a hedge fund or other asset manager distorts competition.

Let banks return to being boring utility stocks and let private capital migrate to riskier activities. If the market decides that these activities are worth supporting on their own merits then they’ll be funded, and the protagonists will continue to be well paid if they’re successful. If capital doesn’t flow to these projects and the prop traders have nowhere to go, then they’ll have to do something else.

I’m not saying that markets are always right, and they’re certainly not always efficient, but I’d prefer capital allocation to be made on this basis rather than by banks’ management who are motivated by short-term incentives and who are not necessarily aligned with shareholders’ interests.

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Chart of the day, Facebook IPO edition

Felix Salmon
Feb 14, 2012 16:49 UTC

There are two ways of looking at the $5 billion or so that Facebook is going to raise in its IPO. One is to ask what on earth the company is going to do with all that money: it’s already making substantially more in the way of profits than it is likely to want to spend, and the chances are that the $5 billion is just going to go straight into the bank, where it will earn roughly 0.77% per year. This is not the best use of shareholder funds, and it’s hard to see why Facebook’s CFO would want the cash pile to be any bigger.

On the other hand, $5 billion is very small as a percentage of Facebook’s market capitalization. Here’s Allan Sloan:

If Facebook’s offering ends up being the advertised $5 billion, and the company’s stock market valuation is in the expected $75 billion to $100 billion range, it means that only 5 to 7 percent of the company’s shares will be available to public investors.

While there are all sorts of rationalizations for having such a small public offering relative to a company’s size, the real reason, as any Street insider will tell you, is to create an initial shortage of stock so that the share price runs up when public trading starts.

It’s not enough for Mark Zuckerberg & Co. to have created an amazing, incredibly valuable company over an incredibly short period. They feel the need to use this tacky market trick to drive up Facebook’s value even more.

Sloan has a point, here: it’s very rare for companies to go public while selling less than 10% of their stock. Here’s a chart from Thomson Reuters, showing the free float at IPO for all US issues from 1/1/2000 onwards which had a market capitalization at IPO of more than $1 billion.


As you can see, it’s very rare to go public with a float of less than 10% of the company: the average for tech companies is 19%, and the overall average is 26%.

And if you look at IPOs which raise more than $500 million, the percentages get bigger still: if you’re raising more than half a billion dollars, then tech companies end up with a free float of 34% of their company, on average, while overall, companies float 43% of their shares.

So, is Sloan right? Is Facebook’s small free float a “tacky market trick”?

My feeling is that it isn’t — and that it’s rather a function of the way in which Facebook stock is distributed. Since the company doesn’t really need to raise equity capital, the only other way to increase the free float is to persuade existing shareholders to sell their stock into the IPO. Mark Zuckerberg certainly doesn’t want to do that — to the contrary, he wants to retain as much stock and control as possible. And most of his fellow shareholders are similarly rich and fond of their stock, preferring to wait a while before selling.

In other words, what we’re seeing here is the natural consequence of what happens when the stock market essentially forces companies to be profitable before they go public. In the olden days, when companies went public because they needed the money, they would sell quite a lot of stock. Today, that’s no longer the case, especially in Silicon Valley, where capital-raising rounds are generally done privately, with VCs. If Facebook hadn’t been able to raise well over a billion dollars privately, then it might have gone public earlier, selling more of its stock in the process. But given the way that equity investing in early-stage companies has moved from the public to the private markets, what we’re seeing is pretty normal, and not really a tacky market trick at all.


Anybody who buys stock in a company where the founder retains voting control and ivnestors have no ability to oust management is a fool…

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