Opinion

Felix Salmon

Elizabeth Spiers and the reinvented New York Observer

Felix Salmon
Feb 6, 2012 05:11 UTC

There are three main reasons that I like entering into bets with people. The first is, simply, that it’s fun. The second is that I love to win bets. And the third is that I love to lose them. I don’t ever trade the markets: all of my investments are strictly buy-and-hold, with a time horizon measured in decades. That rule has saved me a lot of money over the years, not that I ever had much inclination to trade in the first place. But it has also prevented me from learning the kind of lessons that all traders learn early and often.

For pundits, it’s easy to be wrong: in many ways, it’s what we’re paid for. If what you want is facts and certitude, stick to old-school journalism. But it’s much harder for us to learn from our mistakes, precisely because the cost of being wrong is in many cases negative. So when I get the opportunity to express a conviction in the form of a wager, I tend to jump at it, partly because it’s one of the very few ways for me to be forced to admit that I was wrong about something, and to ask myself what the lessons are.

All of which is a very long-winded way of saying that I’ve gone and lost another bet, much to the delight of Elizabeth Spiers. She’s firmly ensconced at the helm of the New York Observer, a year after being given the job; I said she wouldn’t be. I didn’t think that she was going to prove herself good at running a newspaper, and — more to the point — I didn’t think that her boss, Jared Kushner, would stick by her.

In point of fact, Spiers has not been all that great at running a newspaper. Over the past year, I can barely remember a single time I’ve even so much as seen a physical copy of the Observer; I certainly haven’t read one, and neither has anybody I know. And on the rare occasions that I’ve read an Observer story online, it’s seemed under-edited and rather lightweight, for a newspaper which fancies itself the house organ of the elite.

But the point of hiring Spiers was never to get a great newspaper editor, some kind of heir to Peter Kaplan who would burnish its reputation as the paper slowly dwindled in relevance and lost a few million dollars a year. Instead, making a virtue of necessity, Kushner decided to go as webby as he possibly could, with the newspaper quite explicitly in the position of an afterthought — the legacy brand upon which the new business was going to be built.

And Spiers — to her credit — has absolutely executed on that strategy. The Observer is now, first and foremost, Observer.com. (It’s a hugely valuable domain name, which, by some freakish accident of history, wound up getting snaffled by a dilettantish New York weekly before it could be claimed by the venerable newspaper in England.) There’s a slew of verticals, running the gamut of New York interests — Wall Street, media, art, real estate — as well as a bold attempt to break into the tech blogosphere with BetaBeat. Page design is sophisticated and effective, with all sites linking generously to all other sites, with the emphasis on dynamic headlines rather than bland navbars.

The Observer’s inimitable voice is gone, replaced by a barrage of bloggish posts by a group of writers so young that many of them can’t even remember a time before Gawker. (Which was birthed, by Spiers, in 2003.) The old Observer was edited, on a story-by-story basis, in a way that the new online Observer isn’t — Spiers doesn’t have either the time or the money to have a layer of experienced journalists reworking her bloggers’ prose before it’s published.

And so, in the proud tradition of good blogs everywhere, readers are left with a highly variable product. The great is rare; the dull quite common. But — and this is the genius of the online format — that doesn’t matter, not any more, and certainly not half as much as it used to. When you’re working online, more is more. If you have the cojones to throw up everything, more or less regardless of quality, you’ll be rewarded for it — even the bad posts get some traffic, and it’s impossible ex ante to know which posts are going to end up getting massive pageviews. The less you worry about quality control at the low end, the more opportunities you get to print stories which will be shared or searched for or just hit some kind of nerve.

Add in a few linkbait listicles, and you’ve got a recipe for a successful website — which can only be helped by its association with an honest-to-goodness print newspaper which, still, has extremely good name recognition with most New Yorkers and which we generally think fondly of. There are even nods to the old Observer’s buttoned-down worldview, here and there, if you look hard enough. For instance, there’s the way in which striking photos and videos are largely notable by their absence. The Verge this is emphatically not; while gorgeous design has its place in the Observer media empire, for the time being it seems to be confined largely to glossy magazines. Even hyperlinks are generally confined to web-first content: when stories from the physical paper appear online, they rarely have any at all.

Spiers’s Observer is not the one that her predecessor Tom McGeveran dreamed of when she was hired — one which serves to remind the rich of themselves, on which manages “to speak the patois that is being developed at Le Cirque at the table with Michael Bloomberg”. That kind of thing would always be too precious, too nichey, to work in a medium where the table stakes, in terms of reach and scale, are rising very quickly indeed. Instead, the new Observer is carving out new audiences, is aggressively embracing social media, and has much more attitude in common with HuffPo than it does with, say, the New York Review of Books. That’s something that Spiers is good at, and it’s something Kushner is happy to encourage.

I’m happy that I was wrong about the NYT paywall, and I’m happy too that I was wrong about the Observer. My mistake in both cases was to be too conservative: to think that change was probably going to be a bad thing, even in the context of a broader media world where change is the only possible alternative to death.

Both the NYT and the Observer threw out the old and did something brave and new; there are many people, in both cases, who preferred things the way they were. Myself included, truth be told. But it’s profoundly fallacious to believe that what you want is what should be, in some kind of normative sense. Spiers has come up with a formula which works, in practice, significantly better than its immediate predecessors. In the world of professional journalism, that’s something to celebrate. So, if she wants to join me and John Carney for our forthcoming lunch, she’s more than welcome. It’s on me.

Update: I should also have included the Observer’s traffic figures, which haven’t noticeably been improved much by Spiers’s arrival.

COMMENT

Hi I am an old fart who has subscribed to the physical paper for a few years. The paper has some interesting attributes, and is becoming less about stupid real estate transactions than the NYC Web scene, about which I am ignorant.
My only problem with the Observer is that some really good writers have gone missing – not Candace Bushnell, who has been gone for years, but Mike Thomas, the ex:Lehman curmudgeon and Simon Doonan, the Barney’s window man. If the good writers all go (and so far they haven’t) then I will too. Jim Hanbury

Posted by toaster1941 | Report as abusive

Fantastic news on jobs

Felix Salmon
Feb 3, 2012 13:56 UTC

What mean reversion? This is two fantastic jobs reports back-to-back, with the second even better than the first.

You thought the December jobs report was great? I certainly did — but it’s been revised, now, and it’s even better than was first reported. And the January report is positively glowing.

Unemployment was just 8.3% in January, marking three successive months where it fell by 0.2 percentage points. This time last year, there were 13.9 million unemployed; that figure has now dropped by 1.2 million people, or 8.3%. That’s really impressive for an economy which is hardly booming. And it’s a real decline, too: the employment-to-population ratio is just as high as it was a year ago, even as the total population has risen by 3.6 million people.

zNMMeC.jpg

One glance at these charts is enough to show that there’s still a very long way to go. Unemployment is far above where it should be; payrolls need to stay strong for a long time to make up for all the jobs lost during the recession; much more of the population needs to be working; and, most importantly, we need to do something about the stubbornly large ranks of the long-term unemployed.

But none of these things can be addressed in a single month: creating jobs takes time. And what we’ve been seeing over the past couple of months is an economy moving smartly in exactly the right direction.

And lookie here! If you check out Table A-5, and look at the unemployment rate for male Gulf War-era II veterans (that is, veterans of the wars in Iraq and Afghanistan), you’ll see that it’s fallen from 15.5% to 7.7% in one year. If that’s not great news, I don’t know what is.

So while there’s a lot of work to be done, let’s allow ourselves a bit of celebration today. For all the problems in the world — and the US economy could still be derailed if something nasty happens in Europe — things are moving very much in the right direction for the time being. Long may it last.

COMMENT

PS: I forgot to add, for those who are focusing on the word ‘fantastic, that besides possibly meaning superb or excellent (as most Americans might use it) it also means bizarre, fanciful, strange and unreal…

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The craven SEC, part 196

Felix Salmon
Feb 3, 2012 13:22 UTC

Edward Wyatt makes a very good point today — why is the SEC doing big favors for big banks, every time it slaps a fine on them?

If a bank settles a fraud case, it automatically loses certain privileges, like the ability to issue debt securities opportunistically, without going through laborious SEC filings, and the ability to shelter forward-looking statements against lawsuits from investors.

It’s worth noting here that no company has any kind of right to these privileges. If a company tells lies to investors, those investors should be able to sue it. And if a company wants to issue securities to the public, it’s the SEC’s job to examine the proposed offering first.

But somehow, along the way, a handful of very big companies — especially banks — managed to persuade the SEC that they were trustworthy corporate citizens, and that they didn’t need to be bound by those rules.

That’s a little bit suspicious just for starters. But it gets much worse. The SEC, quite naturally, put in place a policy which said that if any of those companies ended up being fined by the SEC for violation of securities laws, then it would lose its special privileges.

And then the SEC proceeded to ignore that policy.

An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios.

JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.” Bank of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers.

Wherefore these waivers? Former SEC chairman David Ruder says that were it not for their privileges, these poor banks might have difficulty staying in business. Which, it seems to me, is a very good reason to remove those privileges. Too-big-to-fail banks should be rock-solid, with fortress balance sheets, able to withstand big and unexpected shocks. If their ability to operate as a going concern would be threatened by forcing them to comply with standard SEC regulations, then there’s something very wrong with them indeed, and they don’t deserve special waivers at all. Instead, they require extra-close scrutiny.

But in fact losing the privileges is not the end of the world for a bank. Look at Citigroup, which lost its privileges for three years in October 2010, and is certainly in poorer financial shape than, say, JP Morgan. It’s still chugging along quite happily, making a net profit of well over a billion dollars per quarter.

The SEC does seem to be far too cozy with America’s biggest banks, going soft on them when they commit fraud just because it fears for their livelihood if it gets tough. That’s wrong. America can live without big banks; what’s truly dangerous is a world where too-big-to-fail banks have de facto impunity and can do what they like. Right now, the fines banks pay to the SEC are like protection money: they pay a few million bucks here and there every so often, and in return get to continue doing whatever they like. It’s time the SEC put a stop to this. But I’m not holding my breath.

COMMENT

This point of view is much too simplistic. The SEC is obviously not perfect, but this is just overblown. Dealbreaker’s take on it is a good counterpoint.

http://dealbreaker.com/2012/02/if-the-se c-really-wanted-to-get-tough-on-securiti es-fraud-it-would-have-added-some-minor- inconveniences-to-its-multi-hundred-mill ion-dollar-fines/

Posted by pessimist2 | Report as abusive

NYT paywall datapoints of the day

Felix Salmon
Feb 2, 2012 22:39 UTC

Ken Doctor has a very smart and interesting take on the news that the NYT now has 390,000 paying digital subscribers — plus another 16,000 at the Boston Globe. It’s unambiguously good news, on many fronts.

First, and most importantly, digital ad revenues went up by 10% in the area of the business with the paywall, while plunging by 26% at About Group, which doesn’t have one. The big worry about the paywall was always that it would eat into ad revenues, and that really doesn’t seem to have happened. Of course, it’s impossible to know what the NYT’s digital ad revenues would have done sans paywall. But my gut feeling is that it’s a net positive: it allows for much more targeted advertising and therefore higher ad rates.

What’s more, the NYT still has massive reach outside the paywall: it has at least an order of magnitude more unique visitors each month than it has paying subscribers. The NYT can still sell those other visitors just as it always could; they certainly haven’t become less valuable since the paywall went up.

The only possible cloud in this picture is in overall traffic growth: the NYT doesn’t give pageview numbers, but sites like Quantcast and Compete say that they see no real growth in traffic to nytimes.com, and possibly a small decline. Again, the counterfactual is impossible to know: would traffic have been bigger had the paywall not been in place? I don’t think that the paywall has reduced traffic very much, but I do think that the amount of time and money and editorial effort which went in to constructing the paywall might well have found its way into other innovations, had the paywall not happened, which would have made the NYT an even better and more popular product.

That said, the paywall has probably paid for itself already, and with luck some of the extra cashflow it throws off will be reinvested in more consumer-friendly innovations.

The other big news today is this:

Churn is less with digital than print customers: Skeptics opined that people might sign up, but then flee after sampling the paid digital product. The opposite appears true: Smurl says digital churn is less than print churn.

I didn’t expect this, but I believe it, and it’s really great for the NYT. It’s easy to cancel a NYT subscription, but by the same token it’s easy to keep one, too. And it seems that once you’ve taken the plunge and started paying for the NYT, you keep on paying — even more than with a print newspaper.

The result is that the NYT’s digital subscribers are a bit like a bank’s depositor base: although in theory they could leave at any time, in practice they’re an incredibly stable funding source. Much more stable, to be sure, than any advertiser.

But while I’m happy about this state of affairs, I still don’t really understand it. Here’s Doctor, again:

It took about 12 seconds for Times’ readers to figure out the new subscription math, when the company when digital-paid last year. When they did the math and saw they could get the four-pound Sunday paper and “all-digital-access” for $60 less than “all-digital-access” by itself, they took the newsprint. Which stabilized Sunday sales, and the Sunday ad base. Then the Times was able to announce a near-historic fact in October: Sunday home delivery subscriptions had actually increased year-over-year, a positive point in an industry used to parsing negatives. Now, Sunday is emerging a key point of strategic planning.

This is great news for the Sunday newspaper, which is highly profitable for the NYT. But it also raises the obvious question: why are 390,000 NYT readers eschewing a Sunday paper they could get for less than nothing? Some are IHT subscribers who don’t have that option; others are naturally peripatetic. And the cheapest digital subscription is actually still cheaper than the Sunday-only delivery.

It seemed to me, when I entered into my ill-fated bet with John Gapper, that NYT readers would go for the free access bundled with the paper, rather than plump for digital-only access. But increasingly it seems that readers actively dislike having to manage a physical paper, and are willing to pay for making the whole experience virtual.

If that’s the case, then the least the NYT can do is to continue to invest in its iPad app. Right now the website is still superior to the app, except for offline reading. The app desperately needs search, and it needs to retain hyperlinks from the original articles, and it needs to somehow build in the sense of serendipity and of relative importance which newspaper readers love so much. It’s hard to tell what’s important, in the app, once you move off the front page. And it’s hard to have your eye caught by a great story you didn’t know you wanted to read. But those things will come, I’m sure. If only because there’s now a very healthy income stream — Doctor estimates it at more than $80 million per year — which can pay to help develop them.

COMMENT

Unfortunately, the Times doesn’t seemed to have plowed even a dime of this windfall back into proofreading and copy editing.

Posted by NoSix | Report as abusive

Why jobs require cities

Felix Salmon
Feb 2, 2012 12:15 UTC

Many thanks to Mark Bergen for finding me this data; I asked him for it because I thought that maybe we could learn something from the way in which China has managed to keep employment growing steadily through some extremely turbulent economic times.

industry.jpg

What you’re looking at here is total Chinese employment from the All China database. Primary industry is commodities, basically, including agriculture; secondary industry is manufacturing; tertiary industry is services.

It comes as little surprise to see that agricultural employment has been falling steadily for 20 years. But it is surprising to see that if you take out the services sector, total Chinese employment has been going nowhere, and basically falling, for the same amount of time.

Caroline Baum, using a different data source, says that China lost 15 million manufacturing jobs between 1995 and 2002; according to these figures, employment in “secondary industry” was flat in those years, going from 156.6 million to 156.8 million before starting to rise again and reaching 218.4 million in 2010. (It’s worth pausing here to appreciate the sheer scale of this chart: each horizontal line is another 100 million workers.)

Meanwhile, the services industry — tertiary industry — has been on fire: it now employs 263 million people, more than are employed in secondary industry, and has doubled since 1992. All this, remember, in a country with more or less flat population growth, thanks to the one-child policy.

Of course it’s hard to find work in the services industry if you’re a rural peasant: tertiary industry is a fundamentally urban thing, which brings me to my second chart.

rural.jpg

It comes as no surprise to see that urban employment is growing incredibly fast — 13.7 million urban jobs were created in China in 2010 alone. What does come as a surprise is to see that urban jobs are still in the minority in China — which means that there’s a lot of room for growth going forwards.

In the U.S., we had a huge construction boom in the aughts, which was concentrated on building bigger suburban and exurban residential houses. That’s good for homebuilders and makers of granite countertops, but it doesn’t really boost the economy more broadly. The Chinese construction boom, by contrast, is building cities and roads and crucial infrastructure, which allows the service economy to keep on growing at a torrid place.

Realistically, there is very little chance that global manufacturing employment is going to increase in future at a rate which will provide jobs for a growing global population. If we’re going to find jobs in the U.S. and the rest of the world, they’re going to have to be found in exactly the area where China is finding them — tertiary industry, or services.

How do you create service-industry jobs? By investing in cities and inter-city infrastructure like smart grids and high-speed rail. Services flourish where people are close together and can interact easily with the maximum number of people. If we want to create jobs in America, we should look to services, rather than the manufacturing sector. And while it’s hard to create those jobs directly, you can definitely try to do it indirectly, by building the platforms on which those jobs are built. They’re called cities. And America is, sadly, very bad at keeping its cities modern and flourishing. 1950s-era suburbia won’t cut it any more. But who in government is going to embrace our urban future?

COMMENT

TFF – I agree with your overall vision of city design, with 1 tweak. Light rail makes sense sometimes, but I think that buses, in combination with bus/HOV lanes, are an important part of the mix that sometimes make more sense. Light rail is more effective if high enough ridership is there, but run more risk of being white elephant projects if built in areas that don’t justify it. Buses are easier to redeploy if future growth follows unanticipated patterns.

I’m cynical about the bias of local politicians – more ribbon cutting photos from light rail than bus system expansions. It’s not a phenomenon unique to light rail – see convention centers and sports stadiums.

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Broke bureaucrat of the day, St Louis Fed edition

Felix Salmon
Feb 1, 2012 17:54 UTC

Binyamin Appelbaum has helpfully aggregated all the Fed presidents’ financial disclosure statements in one place. The richest Fed president is Dallas’s Richard Fisher, who used to run an investment fund called Value Partners. And the legacy of Value Partners is still visible in Fisher’s statement: he owns more than $500,000 of stock in an obscure clothing company called Cherokee Inc, for instance, which was one of Value Partners’s biggest investments.

But the most striking disclosure comes at the other end of the scale, from St Louis Fed president James Bullard. Bullard’s a career central banker who has never had a lucrative private-sector career, but he’s still doing OK for himself: his annual salary is $281,300, which should be more than enough to bring up a family of four in St Louis.

Here’s the thing, though: Bullard’s disclosure form is completely blank. Which means that, except for his house and his Federal Reserve retirement benefits, he has no investments at all worth more than $1,000 — not even a savings account. Or, to put it another way, the president of the St Louis Fed, earning well over a quarter of a million dollars a year, is living paycheck-to-paycheck. Every two weeks, he gets paid $10,819, less taxes and deductions, and yet by the end of the year he still doesn’t have even $1,000 in a checking account.

Now there might be a good reason why Bullard was completely cleaned out for some reason and left with absolutely nothing but the roof over his head. Maybe there was a lawsuit, or medical bills, or something like that. But still, Bullard’s balance sheet is quite astonishingly bare, for someone in his exalted position.

Which makes a cynical old journalist like me start wondering about the revolving door. It actually makes perfect sense to live beyond your means when you’re in the public sector, if you know that you’re going to make a lot of money in the private sector later on. It’s called consumption smoothing, and it’s entirely rational. You might not be able to lavish money on your family from a cashflow perspective, but that’s fine, because you’re still a wealthy man if you take into account the present value of massive future earnings.

So James Bullard, regulator of financial institutions in the mid-west and across the country, has an incentive to be very nice to those institutions, since they’re capable of rewarding him with lucrative work if and when he leaves the Fed. Work which he’s likely to want, if he continues as broke as he is right now.

Bullard, at just 51 years old, has a pretty long and lucrative private-sector career ahead of him, should he be so inclined. And when he filed that financial disclosure form, I wonder if he was thinking about the day when he would be able to fill it out with more than nothing.

Update: The instructions do say that Fed presidents should “exclude any personal account”; I’m unclear on what that means. Certainly other Fed presidents include checking accounts in their disclosures; Richard Fisher’s contain more than $500,000 in aggregate, on top of various money-market funds and the like, one of which contains more than $1 million.

COMMENT

Fischer seems to have an even stranger approach to money demand than to money supply. If my eyes don’t deceive me and I understand correctly he has $500,000 in checking accounts ? Why ? Is he preparing for a possible impulse purchase of an Island somewhere ?

It seems to me to be crazy to hold so much wealth in an account which pays near zero interest (my US checking account pays exactly zero, but I guess if you have a balance of hundreds of thousands you don’t focus on avoiding fees).

Fisher has a strong personal interest in low inflation since so much of his wealth is, for some incomprehensible reason, not in TIPS. This creates conflict of interests. I strongly suspect that he feels that he should, perhaps that he must, make sure that inflation is costly to him personally. I suspect that he would consider shielding himself from inflation to be immoral. That is, he feels morally obliged to have a personal interest at stake when making policy decisions. I guess this because I guess he considers inflation to be absolute evil (the way the Pope views birth control pills) so he considers having a personal interest in low inflation virtuous.

Posted by robertwaldmann | Report as abusive

The true costs of prepaid debit cards

Felix Salmon
Feb 1, 2012 13:48 UTC

Anisha Sekar of Nerdwallet has officially launched a comparison tool which allows you to work out which prepaid debit card might be best for you — and, crucially, allows you to compare the cost of a prepaid debit card to the cost of a bank account. Nerdwallet has run the numbers about as many ways as is humanly possible, and has come to the empirical conclusion that it “is very rarely the case” that prepaid debit is cheaper than checking.

Suze Orman and other prepaid-debit apologists, of course, won’t agree with Anisha here. They’re all convinced that even if checking accounts don’t have higher-than-prepaid-debit fees now, they will in future. And that therefore it’s a good idea to switch to prepaid debit now, before you get hit with those hypothetical future fees.

But the fact is that checking accounts, now and for the foreseeable future, are nearly always the best bet for people who want to maximize the number of things they can do with their money, while minimizing the amount of money they’re paying for the privilege.

I encourage you to use the Nerdwallet tool yourself. It has a bunch of default settings which may or may not correspond to your own particular circumstances, but even those are very interesting. For instance, Suze Orman, pushing her card, says you should never pay more than $36 per year in fees. But under Nerdwallet’s defaults, her card ranks 11th out of 46 cards, with fees of $192 per year.

How come? Well, the one thing that everybody needs is cash — and so Nerdwallet assumes that you’ll make two ATM withdrawals per month. And it also assumes that you need to put cash onto the card as well — and that you’ll be doing that by reloading your card twice a month at $125 a pop. All of those transactions cost money. In order to bring Orman’s card down to $36 per year, you have to never reload your card; instead, you have to set up a direct-deposit operation where your paycheck gets automatically deposited onto your card. That, in turn, allows you to use in-network ATMs at no cost.

Are you willing to do all that? In that case, push the “cash reload” slider down to 0, and switch the answer to “Will you use direct deposit?” to “Yes”, while selecting some non-zero amount for that deposit, say $1,000 per month.

Now, Orman’s card looks much better — and does indeed charge only $36 in fees. But that’s still only good enough for 5th place. The Green Dot card is the cheapest, at $5 per year, while Capital One and American Express both have options running about $2 per month.

Then, click on the button saying that you want to compare debit-card options to checking-account options. At that point, Perkstreet’s checking-account debit card immediately tops the list, costing absolutely nothing; indeed, its cost is negative, since it rebates money back to you every time you use the card. Capital One and Bank of America, too, offer online checking accounts which are genuinely free. And the Suze Orman card is now down to 8th out of 57 options.

The fact is that debit cards, just like checking accounts, will happily let you run up enormous fees if you’re not careful. And they never allow you to do simple things like deposit checks or cash at no fee — something that all checking accounts do as a matter of course.

In principle, it shouldn’t necessarily be this way. Checking accounts are inherently quite expensive things, involving statements and branches and a lot of bank infrastructure which prepaid debit cards don’t need. On top of that, prepaid debit cards get much more interchange income for their issuers than checking-account debit cards do, since they’re not subject to Durbin Amendment caps.

Certainly there are bad-deal checking accounts out there, and if you have one, you should close it. But between online bank accounts and your friendly neighborhood credit union, it’s extremely unlikely that a prepaid debit card is your best option. Being banked is nearly always better than being unbanked. So move your money to a bank which doesn’t charge you fees, rather than moving to a prepaid debit card.

Prepaid debit cards can be useful for purposes other than replacing a checking account, of course, but they still charge fees. So if you’re thinking of using a prepaid debit card as a way of paying your child’s allowance, then fire up that Nerdwallet tool, and work out which one is cheapest. And, at the same time, ask yourself whether a checking account might not be better in that case, too. Not all checking accounts are good. But many are. And most prepaid debit cards are pretty bad.

COMMENT

I have just stumbled upon yet another questionable payment product, one called Shazam. It is a mobile payments platform that would enable a cardholder to make a payment, but only after the cardholder first receives a call from the payment processor to confirm her identity.

It seems to me that that the Shazam guys have completely missed a very important point when designing their service. It is that that convenience is valued extremely highly by consumers. I mean, do they really have to call us before each single payment is processed? http://blog.unibulmerchantservices.com/m -payments-provider-wants-to-talk-to-you- before-accepting-your-payment

Posted by D.D.D. | Report as abusive

Freddie Mac and the inverse floaters, cont.

Felix Salmon
Feb 1, 2012 10:44 UTC

Jesse Eisinger is back with a follow-up to his original piece about Freddie Mac and the inverse floaters; he’s also left a long comment on this blog, responding to various criticisms of his story which appeared in the blogosphere.

There are two main pieces of new information in the update. The first is that the size of Freddie’s inverse-floater position is even greater than we previously thought — $5 billion, rather than $3.4 billion. And the second is that the FHFA forced Freddie to stop making these trades last month, before the original ProPublica piece appeared. Now the FHFA, under Ed DeMarco, is a highly obstructionist agency which will always protect Frannie’s short-term interests over the broader health of the housing market and American homeowners. If even the FHFA was expressing serious concerns about these deals, that’s very strong evidence that something fishy was going on.

To get a feel for the tenor of the debate, check out the official FHFA response to Eisinger’s story:

The inverse floater leaves Freddie Mac with a portion of the risk exposure it would have had if it simply held the entire set of mortgages on its balance sheet. The CMO structuring activity results in some portion of the mortgage cash flows being sold off and a smaller amount needing to be financed by Freddie Mac with debt securities. It also results in a more complex financing structure that requires specialized risk management processes.

And here’s Eisinger, in his comment on this blog:

[Freddie] could have sold MBS on its portfolio outright and rid itself of the prepayment risk. The market for simple MBS with a government guarantee attached is liquid and deep – and certainly was then, in late 2010 and early 2011 when Freddie’s inverse floater bets ramped up.

Instead Freddie had the securitization structured, then retained the inverse floater portions. In other words, Freddie undertook transactions in which it retained a piece of a newly created deal that has basically the same risk profile as the original holdings. And what Freddie retained carried new risks: liquidity and LIBOR risks. Freddie engaged in reverse alchemy: it turned a position of gold into lead.

Moreover, these trades didn’t happen in a vacuum. Freddie is under a mandate to sell down its portfolio. Implicit in that mandate is that Freddie reduce its risk. In these trades, Freddie sells something notionally, so that the assets on its balance sheet fall, but it keeps most of the risk — and adds new risk. That raises the question of whether it is subverting the spirit, if not the letter, of its agreement with the U.S. Treasury.

I’m with Eisinger on this one. Let’s say you own a big house with a cottage in the back, which you’re renting out to tenants. And let’s say that you’ve been ordered to sell as many assets as you can. You can sell your property easily to homeowners who will be happy to take the rental income on the cottage. They know that the tenants can move out any time, so they won’t pay a huge premium for the cottage, but they will pay you extra for it.

Instead, you go to a very expensive lawyer and you carve your property up into two pieces. You then sell off the house, but hold on to the cottage yourself. You get less money for the house than you would have done if you’d simply sold the whole property. And what’s more, you now own a cottage, on its own, which is much harder to sell than either the house was, on its own, or the big house-plus-cottage property was before you split it into two.

The FHFA’s argument is, basically, “look, the cottage is smaller than the original property and the total risk associated with the cottage is, by definition, lower than the total risk associated with the cottage-plus-house original property. So we’re selling off assets, just like you asked.”

But this doesn’t make sense. Why go to the trouble of breaking the property up into constituent parts, at non-negligible expense, only to hold on to the more illiquid of those parts? If the sum of the parts were worth more than the whole, I could see it: breaking the property up makes sense if you sell the house to one person, the cottage to another person, and end up with more money than you could fetch for the property as a whole.

But that’s not what happened, because of the simple arbitrage in the markets: there are lots of traders out there happy to break up mortgage securities if doing so is profitable. There’s no need or reason for Freddie to start doing that itself.

It seems to me that Eisinger is right and that Freddie is violating the spirit of the Treasury’s instructions. Treasury wants Freddie to sell down and derisk its balance sheet. Freddie, in response, started selling down its balance sheet, but kept as much risk as it possibly could, in the form of inverse floaters.

And does anybody really believe that Fannie and Freddie should be taking on more risk, in relation to the size of their balance sheets? I’m sure that doing so is good for the annual bonuses of someone getting paid $2.5 million a year to run Freddie’s mortgage portfolio. But it’s unlikely to be a good idea for anybody else.

As for the now-famous Silversteins, the couple who aren’t being allowed to refinance their property — well, that addresses the one case where it does make sense for Freddie to be taking on this prepayment risk. And that’s the case where Freddie itself controls the rules as to whether or not homeowners are allowed to refinance.

To go back to that property with that cottage, suppose that if you sold the property with cottage attached, the new owner would have no control over whether or not the tenants in the cottage moved out. But you, the seller of the property, do have control over the tenants — you can force them to continue paying rent in a manner that the new owner can’t. In that case, it makes sense for you to hold on to the cottage, because it’s worth more to you than it is to anybody else.

And that’s what Eisinger was alleging in his original piece. That the only reason it makes sense for Freddie to do these complex trades which leave it with significant holdings of inverse floaters, is that Freddie actually controls whether or not people like the Silversteins are able to refinance and thus prepay their mortgage. And because Freddie has that control, inverse floaters are worth more to Freddie than they are on the open market.

Basically, Freddie can’t have it both ways. Either it is preventing the likes of the Silversteins from refinancing so that it can maximize the value of its inverse floaters or it has no particular reason to carve up its mortgage securities and retain an illiquid inverse-floater tranche. Which is it to be?

COMMENT

Danny_Black, you seem to be a brash know-it-all; an unapologetic insulting cretin. Perhaps you might actually make some intelligent comments yourself, and not suggest that one, including the SEC, might actually be able to look at anyone’s mortgage and see what has actually transpired being that is what is being hidden in the shell game.

A forensic analyst took over a year to audit ONE mortgage to find all the layers of fraud and illegalities and there are layers of opaqueness deliberately designed to ensure one might never be able to get the true background, but go ahead and suggest it might be done.

Deny it all you wish, but the housing market will never stabilize nor become healthy, as long as past problems are not fixed, and mortgages are used as pawns to the detriment of all homeowners and the economy.

While in England and as a former banker, do you live in a flat or a home? Do you even have a mortgage? I know a favourite comment I get from my English friends is that ONLY bankers can afford a home in England. I suppose that may be where your distaste of anyone beneath you owning one might come from…

PS: you need not engage.

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