Felix Salmon

How many insiders should sit on Goldman’s board?

Felix Salmon
Mar 28, 2012 15:03 UTC

What to make of the discussions within Goldman Sachs about splitting the jobs of chairman and CEO? Lauren LaCapra has the story:

Proposals to separate the CEO and chairman roles have long been sought by outside groups, but two people familiar with management thinking provided the first indication that internal discussions about such a move have taken place.

Under a restructure, President Gary Cohn would take the chief executive officer role and Vice Chairman J. Michael Evans would be elevated to president, leaving current CEO and Chairman Lloyd Blankfein with only the chairman role, the two sources said.

Things almost certainly won’t play out exactly this way: machinations at the top of Goldman Sachs are highly complex and unpredictable. But the time is clearly coming when Lloyd Blankfein is going to step back from his job as CEO, and like most powerful CEOs he’s likely to want to stay on as chairman when he does that. So while Blankfein has been understandably reluctant to split the two roles up until now, the idea is increasingly becoming aligned with his own interests.

If this plan were to go into effect, the number of current Goldman executives on the board of directors would technically remain flat at two: Evans would join Blankfein and Cohn, but Blankfein would no longer hold his executive role. However, as a non-executive former CEO sitting on the board, Blankfein would continue to wield a lot of influence, just like former Goldman president and current director Stephen Friedman does. As a result, the collective ability of the firm’s insiders to drive board decisions would, at least in theory, be strengthened.

Realistically, however, I think that this move would give the board more control over how Goldman is run, rather than less. The last two holders of the chairman-and-CEO position — Hank Paulson and Blankfein — have done an extremely good job of controlling the board. Indeed, in recent history the board has been more of a problem to be managed than a powerful entity to whom the CEO is accountable.

What’s more, Blankfein and Cohn have presented a united front: they don’t engage in the kind of Machiavellian infighting that we saw between Paulson and Corzine, for instance, or even between Cohn and Jon Winkelreid. As such, the executives on the Goldman board are both very much singing from the same songbook.

With Evans on the board, however, things change. He’s a banker rather than a trader, a clear alternative to the Blankfein-Cohn axis, rather than a reinforcement of it. More than anybody else on the board, he would have the inside knowledge and the credibility to push a real change in direction at the bank, if that was what he thought warranted.

So while at most companies having four insiders on the board would be considered a bad thing from a governance perspective, in this case I suspect that insiders are the only people with enough clout to actually effect any change at all. The non-Goldman directors on the board are a bit more than muppets, but not much more: their job is, ultimately, to rubber-stamp whatever Blankfein wants them to do, and they’ve been very good at doing that. If anybody is going to push back against that rubber-stamp role it’s likely to be Michael Evans, especially if he can bring Friedman onside.


Yeah, agree with the comment above. Goldman and their peers did tons of crap during the late 1920s before the Great Depression, and they were fully “found out” by the Pecora commission, which was far more aggressive than anything we’ve seen today, yet even at that time, they were allowed to continue (albeit under a strict regulatory regime), and customers continued to do business with them

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Mar 27, 2012 21:42 UTC

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Here’s what we know about the housing market: You need some place to live and you have increasingly crappy options.

Renting, it turns out, is basically still expensive. If you’re inclined to buy a home, first check out David Leonhardt’s fantastic rent vs buy calculator, and then gird yourself to contend with a stream of ominous news. You can start with today’s Case-Shiller results (PDF), which indicate that home prices fell back to 2003 levels in January.

Of course, you won’t make your home-buying decisions based on national averages. No, Discerning Potential Home Buyer, you know that all real estate is local and can see, for example, that home prices in Atlanta fell 14.8% in the last year and that even coastal-elite-friendly enclaves like New York and San Francisco fell 2.9% and 5.9% respectively.

There’s been no shortage of housing bottom calls of late, including from Calculated Risk, Barron’s, Karl Smith at Modeled Behavior and a sometime-this-year prediction from BofA Merrill Lynch. (Please ignore Jim Cramer’s housing bottom call from June 2009.)

A market bottoming-out never intuitively feels like a buying opportunity, certainly not with 28% of all mortgaged homes underwater, reports of rising foreclosures in some of the country’s most populous areas and Shiller himself recently saying he doesn’t see “any reason to think that prices are going to start heading up dramatically now.”

So renters can console themselves with the fact that homes could very well be terrible investments, especially if your beloved hometown has “insufficient permanent employment to justify a constant level of demand for new housing stock.” One man’s perfectly timed purchase is another man’s financially crippling, several-hundred-thousand-dollar money pit.

On that note of searing optimism, on to today’s links.

Toobin: Obamacare “looks like it’s going to be struck down” – HuffPost
It’s up to Kennedy, and don’t rush to judgment on the court’s ruling – SCOTUS Blog
The small-business lobby’s million-dollar legal assault against Obamacare – WSJ

Since 1998, only 3 percent of hedge fund profits have gone to investors – FalkenBlog

Meet Romney’s hedge fund kingmaker, who says Argentina owes him $2 billion – Fortune
Related: Money Men – The 46 top Super PAC contributors – CNN Money

Private debt collectors made $1 billion working for the Department of Education last year – Bloomberg

Don’t build a paywall, just build a “velvet rope” – GigaOm

One drug to shrink all tumors – Science

DSK charged in French prostitution case – WashPo

Early retirement leads to increased mortality rates – VoxEU

Old Normal
Big and Cheap: How the Depression created 20th century American food – Bloomberg

EU Mess
There are now real worries that the European model of banking is fundamentally broken – WSJ

The Federal guarantor of $1.1 trillion in mortgages may need a bailout – Bloomberg

The Greg Smith Files
Help name a post-apocalyptic, dystopian coming-of-age thriller inspired by puppets – Dealbreaker

How the behavioral economics idea of the “nudge” could improve public policy – Economist
A great primer on Minsky’s “Financial Instability Hypothesis” – Economonitor

Popular Myths

Low taxes do not spur economic growth – Social Science Research Network

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“75 is not a realistic long term number here. If you assume housing prices follow general inflation it would put you at an index of 130 at the end of 2011. So on a real basis, we seem to have gotten back to trend.” (DanK)

Well, ‘long as you’re sure “Happy Days Are Here Again”, I guess we can all relax. And write puts against Cash-Shiller??

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How Damien Hirst recaptured his market

Felix Salmon
Mar 27, 2012 16:28 UTC

It should come as no surprise that the Damien Hirst retrospective at Tate Modern has caused editors across the UK to run articles about what it might mean for the Hirst market. After all, Hirst, more than any other artist, is famous in large part just because he’s expensive.

Thus do we get Sarah Thornton, in the Economist, writing that “many collectors of Mr. Hirst’s work hope that this show will reinvigorate his market”. Against that is Julian Spalding, who’s written an entire Kindle Single entitled Con Art – Why you ought to sell your Damien Hirsts while you can. And then there’s Hari Kunzru:

This isn’t just art that exists in the market, or is “about” the market. This is art that is the market – a series of gestures that are made wholly or primarily to capture and embody financial value, and only secondarily have any other function or virtue. Hirst has gone way beyond Warhol’s explorations of repetition and banality. Sooner or later, his advisers will surely find a way for him to dispense with the actual objects altogether and he will package concepts in tranches, like mortgage securities, some good stuff with some trash, to be traded on the bourse in Miami-Basel.

Kunzru starts off near the mark, here, but then veers wildly off course. What I think that all three of these writers are missing is the fact that the Damien Hirst market is largely nonexistent, and has been ever since the “Beautiful Inside My Head Forever” sale at Sotheby’s which was held the day Lehman Brothers filed for bankruptcy in 2008. Here, from Artnet, is Hirst’s annual sales volume at auction (the grey bars are all lots, the orange bars are the top ten lots):


What you’re seeing here is a speculative bubble in Hirst which grew right up until September 2008. After that, Hirsts became a luxury good, in many ways closer to a Prada coat or a bottle of Bordeaux than to artists with healthy secondary markets, like Gerhard Richter. For the past three and a half years, Hirsts have been something to buy, to consume: they’re no longer something that can be easily sold, let alone at a profit.

There is absolutely such a thing as the art market: a place where artworks are bought and sold, and where dealers and auction houses make money as the intermediaries finding the prices at which buyers and sellers can agree to transact. There isn’t, by contrast, such a thing as the Prada market: that’s a consumption market, where Prada makes goods, sets the prices unilaterally, and then sells them to as many people are willing to pay their price. (And given that Prada is in the Giffen Veblen goods market, often raising the price has the effect of raising the demand.)

Hirst, for better or worse, has moved himself out of the art market and into the consumption-goods market: he manufactures art works, sets the prices for them, and sells them to anybody willing to buy them. Once you have bought a Hirst, you then exhibit it as a way of displaying your wealth and, um, taste. Hirsts have not been a speculative investment since 2008, and I very much doubt the Tate retrospective is going to change that.

I don’t think this is a bad thing. Hirst, more than any other artist, has managed to capture the value of his works for himself. The global stock of Gerhard Richters is hugely valuable, and that value is at least one and possibly two orders of magnitude greater than the total amount of money that Gerhard Richter himself has made over his lifetime. The value of the art, in other words, has accrued to collectors rather than to the artist.

That’s not the case with Hirst: I suspect that of all high-profile artists, he has personally pocketed the greatest percentage of what you might call his global market capitalization. All too often, discussions of artists’ prices work on the assumption that higher prices, and higher dollar volumes, are always good for that artist. But I think Hirst has managed to disprove that rule. Collectors are not getting rich off his work. But he is.


two things. first, hirst’s total auction volume for 2011 appears to be at or slightly north of $25 million. i’d love to see you produce this chart for other artists, let alone living artists, to see who else sold $25 million in art in ’11. (i understand that these artnet charts are pricey, but it would give better context to your claim.) second, this chart is only about *auctions*. the whole reason ’08 shoots through the roof is because hirst sold the entire ‘beautiful inside my head forever’ exhibition through auction! but for this stunt, it would have been exhibited and sold through gagosian and the volume sold at auction would be materially smaller, much more in line with the other years on the chart. throwing in the downturn in the world economy and the art market during ’08-’11 you are really making a stretch here. feeding in to the easy obvious anti-hirst narrative rather than doing any sort of meaning research on the market.

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Sorkin’s disingenuousness on corporate taxes

Felix Salmon
Mar 27, 2012 14:26 UTC

Andrew Ross Sorkin has a mildly corrosive column on NetJets’ tax issues today:

At a time when the government is desperately looking to raise revenue, it is understandable that the I.R.S. would seek to wring additional dollars out of the private jet industry, but there has to be a better way than to do it through reinterpreting arcane rules in court. If Congress wants to apply the transportation tax to private jet owners — which would probably be applauded by many people — it should pass a clear law that says so.

There’s a lot of disingenuousness packed in to this one short paragraph, so it’s worth going through it slowly.

First, Sorkin baldly asserts that “the government is desperately looking to raise revenue”, which I don’t think is true. It’s true in Greece, but it’s not true here: I can’t remember Barack Obama, Tim Geithner, or any other politician talking about the desperate need to raise tax revenues. (Although they should.) It’s fair to say that Democrats are less averse to tax hikes than Republicans are when it comes to reducing the deficit, and of course the Democrats do control the White House. But I see no indications at all of a desperate search for revenues.

Second, Sorkin is clearly saying that the IRS thinks that its job is to maximize the revenue it collects, rather than simply administering the existing tax code in a fair manner. And probably most people who have ever been audited would see it that way. But I genuinely don’t think that’s how the IRS sees it, or, more importantly, how it has been instructed. Indeed, there’s a strong case that the opposite is true: the IRS now has 5,000 fewer employees than it did a year ago, with the majority of those job cuts coming straight out of tax enforcement. When budget cuts get made, there’s never a more popular agency to cut than the IRS, even though, fiscally speaking, the lowest-hanging fruit of all is to increase the IRS’s budget and simply ensure that Americans pay a higher percentage of the taxes that they legitimately owe.

Third, Sorkin is also clearly saying that having decided “to wring additional dollars out of the private jet industry”, the IRS then went so far as to try to do so “through reinterpreting arcane rules in court”. This monstrously misrepresents the current court case, which was initially brought by NetJets, against the IRS. In November, NetJets sued the government for $642.7 million, saying that it had been charged too much in taxes; it was as a development in that case that the IRS decided to countersue earlier this month for a further $366 million. If there’s anybody here attempting to reinterpret arcane rules in court, it’s NetJets, not the government. As a close reading of Sorkin’s column makes clear, the government is attempting to apply tax law which has been settled since 2003; it’s NetJets which is challenging that precedent in court.

Fourth, if anybody’s contorting themselves to come up novel interpretations here, it’s NetJets, not the IRS. The law is clear: when you take a plane journey, you pay a 7.5% excise tax, plus $3.80 for each leg of travel. We all do it, every time we fly. Well, 99.9% of us, anyway. The exception is people with private jets, who argue that since they’re owners rather than passengers, they don’t need to pay the tax. And now NetJets is trying to piggyback on that argument, saying that even if you just have a Marquis Jet Card, that means you’re an owner and should be exempt from paying taxes.

To get a feel for just how much of a stretch this argument is, just look at Warren Buffett, the owner of NetJets, who told CNBC that he didn’t “really see where a business aircraft is different from a business locomotive”. I can think of a few ways, like the fact that business aircraft are used for passenger air travel, while business locomotives are used for freight transportation. But for the record, I’m all in favor of Buffett avoiding the excise tax by hitching a lift on one of his BNSF trains, next time he needs to travel somewhere.

Fifthly, Sorkin adduces no evidence that Congress didn’t want to apply the transportation tax to private jet owners. If you’re imposing a 7.5% excise tax on air travel, it probably stands to reason that you’d want to apply it to all passenger air traffic, rather then just to those of us waiting in snaking lines to have our shoes x-rayed. Did the private-jet lobby manage to carve out a loophole somehow? Or did they just get lucky with the way the law was drafted? Either way, if we’re working on the basis of Congressional intent here, then it behooves Sorkin to come up with some indication that NetJets’ interpretation of the law comports in any way with what Congress intended.

And sixthly, there’s Sorkin’s final rhetorical flourish — that if NetJets is challenging the law, then it’s incumbent upon Congress to clarify matters. Sorkin is in desperate need, here, of a primer on the three branches of government: it’s the judiciary, not the legislature, which is in charge of that kind of thing. And when Sorkin says that if the government wants to raise revenue, then Congress should pass a law — well, he’s doing the same kind of eliding. When he talks about “the government” in his first sentence he’s referring to the executive, but by the time he reaches his second sentence, he’s talking about the legislature.

The way that the US government is set up, it’s hard for legislation to get through both houses of Congress and then be signed into law by the president. That’s deliberate. And of course in the present political and economic climate it’s harder still for that to happen if the legislation in question takes the form of any kind of tax hike. Which means that it’s completely ludicrous for Sorkin to put the onus on Congress to clarify any question of tax law that a clever corporate lawyer in Omaha somewhere might be able to challenge. That’s simply not Congress’s job.

In SorkinWorld, any time that any rich individual or company didn’t want to pay a particular tax, all they would need to do is challenge that tax in court. At that point, Sorkin will come galloping to their defense, saying that it ill behooves any government to fight tax battles in the courthouse, and that really the tax shouldn’t be paid until a whole new piece of legislation has wended its way through Congress and the White House.

Well, I don’t want to live in SorkinWorld, and I suspect that even Sorkin doesn’t, either. But one thing’s for sure: by making these arguments in his prominent NYT column, Sorkin will certainly gain access and influence among the plutarchy.


Any tax hike is unpopular, regardless whether it is ultimately needed or not. Whether it is taxing the rich or poor, such decisions always come under fire. The politicians had better come up with a clear justification for the hike.

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Mar 26, 2012 21:11 UTC

Welcome to the first official Counterparties email! The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Or you can email us at Counterparties.Reuters@gmail.com and we’ll add you to the list. (That’s also the address to send us feedback and story tips). And so to it:

Ben Bernanke and Larry Summers agree! We’re in the middle of a very long slog out of a very deep recession, and it’s going to take a long time before we get to full recovery. That’s bad, if unsurprising, news, but there’s also a silver lining here, according to Bernanke: It means that the unemployment crisis is cyclical, rather than structural.

If the recent increase in long-term unemployment were being driven by structural factors rather than, say, the severity of the recession, then the job-finding rates of the long-term unemployed should have fallen sharply relative to those out of work for only a few weeks. But that’s not what we’re seeing. Rather, as figure 13 shows, the job-finding rates of the more recently unemployed and the long-term unemployed all fell over the recession in roughly the same proportion, and they remain low. This pattern is consistent with cyclical factors accounting for the bulk of the recent increase in long-term unemployment. Similarly, the fact that labor demand appears weak in most industries and locations is suggestive of a general shortfall of aggregate demand rather a worsening mismatch of skills and jobs.

It’s striking, though, to see Bernanke use the word “puzzle” four times in describing the labor market. Here, he’s perhaps channeling Grep Ip, who used the very same word in an excellent recent post. Both Bernanke and Ip are asking why America’s unemployment rate is (shout-out to Okun’s law) falling faster than our relatively modest GDP growth suggests it should. (U.S. unemployment has recently fallen fast enough to justify 5.1% growth, Ip notes).

This time, it’s the good news that has a hidden downside: Ip suggests that the underlying reason is that our national potential output is significantly lower than the official statistics suggest. (Felix suggested this may have been because of our pre-crisis debt addiction. There’s also some nice stuff on the “output debate” at Seeking Alpha).

Today’s links:

The Supreme Court’s healthcare decision may be the most important ruling on state powers since the 1930s – SCOTUS blog

EU Mess
Mario Monti says Spain could start the EU debt crisis all over again – Bloomberg

How the Daily Mail became the most popular news site in the world – New Yorker

The Mail presents itself as the defender of traditional British values, the voice of an overlooked majority whose opinions inconvenience the agendas of metropolitan élites. To its detractors, it is the Hate Mail, goading the worst curtain-twitching instincts of an island nation, or the Daily Fail, fuelling paranoia about everything from immigration to skin conditions. (“WITHIN A DAY OF HIS ECZEMA BEING INFECTED, MARC WAS DEAD,” a recent headline warned.) A Briton’s view of the Mail is a totemic indicator of his sociopolitical orientation, the dinner-party signal for where he stands on a host of other matters. In 2010, a bearded, guitar-strumming band called Dan & Dan had a YouTube hit with “The Daily Mail Song,” which, so far, has been viewed more than 1.3 million times. “Bring back capital punishment for pedophiles / Photo feature on schoolgirl skirt styles / Binge Britain! Single Mums! / Pensioners! Hoodie Scum!” Dan sings. “It’s absolutely true because I read it in the Daily Mail.” The Mail is less a parody of itself than a parody of the parody, its rectitudinousness cancelling out others’ ridicule to render a middlebrow juggernaut that can slay knights and sway Prime Ministers.

A list of America’s ongoing, open-ended bailouts for big banks – Ritholtz

CEO pay now marginally more related to actual CEO performance – WSJ

Despite fairly significant gains in companies’ profit and revenue, total direct compensation for 65 CEOs in place at least two years rose just 1.4% last year, according to preliminary results from a survey by The Wall Street Journal and Hay Group.

That’s down sharply from an 11% increase in 2010, according to that year’s Journal/Hay Group survey of 350 companies.

Banks are winning the war against the Volcker Rule – Bloomberg

Bernanke needs less Eyeore and more Tigger – Slate

MF Doom
Newly unearthed email may give Corzine a pretty big alibi – NYT

The e-mail suggests that Mr. Corzine, a former governor of New Jersey, was unaware that the money had been transferred from a customer account. But it is unclear whether someone at the commodities brokerage firm told Mr. Corzine the origins of the money during a phone call or in person. Congressional investigators are interviewing MF Global employees to see whether Mr. Corzine learned that the transfer of $200 million came directly from a customer segregated account, one of the people involved in the case said.

Primary Sources
Ben Bernanke is not ready to declare a full recovery yet – Fed
: Bernanke’s hysteresis fears: “long-term unemployment may ultimately reduce the productive capacity of our economy.”

The multibillion Wall Street scandal that makes the mortgage scandal look like peanuts – Fortune
Related: Why the LIBOR scandal isn’t all that scandalous – Dealbreaker

New Normal
The WSJ offers its elite readers prison survival tips – WSJ

The schooling for incoming inmates includes lingo. A “cheese eater” is an informant. A “blanket party” is throwing a blanket over an inmate then beating him. “Diesel therapy” is when troublemaking inmates are shackled and driven around in the back of a prison bus. Misbehave often, and you risk taking a trip to the “SHU”—the Special Housing Unit—also known as “the hole” or solitary confinement.

Reuters Opinion
It’s too early to return to normal policies – Lawrence Summers
Trickle-down consumption – Chrystia Freeland
After the Robin Hood Tax – Hugo Dixon
Who’s to blame when an injured soldier kills civilians? – Mac McClelland
Ryan’s budget frames election around Medicare – Christopher Papagianis

Benedict Arnolds
Steven Rattner: Income inequality is terrible and getting worse – NYT

Fab Fab
Fabrice Tourre is now living in Rwanda – NYT

Mild Rebuke
Yahoo appoints 3 new board members, disses Dan Loeb – All Things D

Barro: Paul Ryan’s budget is “vacuously vague” – Forbes

“Smart money” joins the long crowd – Bloomberg

Sounds Painful
Your handy guide to the world’s obsession with “financial repression” – VoxEU

EU Mess
The Irish house built with shredded euros – NYT

Self-Inflicted Problems
Morgan Stanley: Banks will shed $1 trillion from their balance sheets in the next 2 years – FT

Study: Financial advisers encourage exactly the bad choices individual investors should avoid – NBER
Leveraged ETFs: Frighteningly volatile and 90% owned by retail investors – Zero Hedge

Court rules in JPMorgan’s favor over $3 million typo – Bloomberg

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“Tourre is a U.S. resident studying for a Ph.D. in economics at the University of Chicago,” his lawyer, Pamela Rogers Chepiga, said in a statement March 21. Steve Koppes, a university spokesman, said Tourre has been enrolled in the program since September.

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Strange bedfellows: Gretchen Morgenson and Patrick Byrne

Felix Salmon
Mar 26, 2012 15:44 UTC

Today’s story from Gretchen Morgenson, about Goldman Sachs and short selling, is notable for two things. One one front, it fails to deliver: Morgenson seems to be trying to make a case that Goldman might be guilty of naked shorting, but she doesn’t really come close. On a second front, however, it’s a great leap forwards for Morgenson.

The whole article is based on the transcript of a deposition given by a hedge-fund manager turned chicken farmer named Marc Cohodes. “His testimony, which has not been made public, was obtained by The New York Times,” writes Morgenson — and indeed “Mr. Cohodes declined to comment beyond his deposition”, which means that the deposition is the sole source for Morgenson’s story. Wonderfully, for the first time that I can remember when Morgenson was working off a non-public primary source document, she has actually posted it online.

As a result, it’s possible to read the full testimony of Cohodes, which turns out to be a very long way from a damning indictment of naked shorting on the part of Goldman Sachs. Here’s how the subject is initially broached:

Q. And did you ever come to believe that Goldman Sachs had not been borrowing stock when you were short selling stock?

MR. FLOREN: Objection, vague and ambiguous.

MR. SHAPIRO: Objection, lack of foundation.

THE WITNESS: That’s just speculation on my part at this point in time.

BY MR. SOMMER: Q. Well, I’m asking for your belief, so just tell me what your belief is one way or the other.

MR. FLOREN: Same objection.

MR. SHAPIRO: Don’t speculate; just say what you — answer the question about what you know. You’re here to testify, as a fact witness, what you know from seeing, hearing –

THE WITNESS: I don’t know. I just don’t know. I mean, I just — I don’t know.

This sets a pattern. Questioners representing Overstock — a company extremely hostile to short-sellers of any stripe — will try to ask Cohodes whether there was naked shorting going on; Cohodes will say, at best, that he talked about the possibility, but that he had no evidence of such activity at all. Or, to put it another way: Cohodes is angry at Goldman, and Overstock is trying to use that anger to get him to accuse Goldman of naked shorting. But he never actually does so.

Indeed, it turns out that the allegation that Goldman Sachs might have been engaging in naked shorting doesn’t really originate from Cohodes, or his deposition, at all. Instead, it’s contained on page 300 of a book by a former colleague of Cohodes, Richard Sauer, which was published in April 2010. Here’s the excerpt:


This is actually a vastly better explanation of the highly-circumstantial “evidence” of naked shorting than that provided by Morgenson. Here’s her attempt:

Failing to borrow shares on behalf of customers is illegal because of concerns about market manipulation. But it can also leave a brokerage firm’s client who is short a stock dangerously exposed to an escalating price in the shares. If a stock shorted by an investor began to trade higher and the shares were not borrowed, closing out the transaction would require the fund to buy them in the open market. That could propel the already rising price of the shares even higher, adding to the costs of the trade.

This doesn’t really make any sense. If a fund which is short a certain stock needs to cover that short, then it needs to buy those shares in the open market. That’s true whether the short is naked or not. And yes, when shorts are forced to cover, that can force the price up even further. That’s known as a short squeeze, and it’s exactly what caused the downfall of Cohodes’s fund. And again, you absolutely don’t need naked shorting to have a short squeeze.

Reading the deposition, it’s clear that while Cohodes is furious at Goldman Sachs, his fury has essentially nothing to do with naked shorting. This is absolutely not clear from Morgenson’s characterization of the deposition, which is why it’s so great that she uploaded the deposition so that we can see for ourselves. Cohodes is furious at Goldman for one main reason: that after Lehman Brothers went bust, there was some very crazy price action in the market. Most stocks were plunging, but a handful of stocks — the ones he was short — were going up, rather than down. It was a classic short squeeze.

In a short squeeze, the fight is simple. The fund which is short tries to stay solvent, while the market drives up the price of the stocks in question so much that the shorts are forced to sell at the top of the market. Once they capitulate in that way, the stock tends to plunge. A fund like that being run by Cohodes, which was massively short going into Lehman’s bankruptcy, should by rights have made a lot of money: Cohodes calculates it at a cool billion dollars. All he needed to do was wait for his stocks to plunge, and then cover his short positions.

But that’s not what happened. Instead, Goldman presented him with a huge and unprecedented margin call — not the kind of margin call required by federal regulations, mind, but rather a “house call” declared unilaterally by Goldman Sachs over and above what the regulations require. As a result of that call, his fund went bust, just days before it would have made a fortune. Here’s Cohodes’s deposition:

A. I can remember Goldman closing us out of American Capital Strategies at $33 on that Monday, and when they stopped doing whatever they had to do, when the smoke cleared, we finished covering the thing four weeks later at 2, something like that. We finished covering it at 2 but they took us out of eighty percent of our position in the thirties, and when they were done, we covered at 2. They took us out of Tempur-Pedic at 16, covered that, the rest of it four weeks later, at 3. I mean, it was insane.

So it’s kind of like I played the entire thing for a complete collapse, got the collapse and was closed out, closed out right before and during.

Q. If Goldman Sachs & Co. had not made these house calls and had extended you more credit during this time period –

A. We didn’t need more credit. All they had to do was not make the house calls.

Cohodes feels, then, with some reason, that Goldman Sachs did him in by foisting huge house calls on him during a point at which the stock market in general was going down rather than up. To make matters worse, when he tried to get out of the calls by moving his entire account to a different prime broker, UBS, Goldman wouldn’t let him do that. And when he tried to move his positions to a hedge fund with deeper pockets, Farallon Capital, he says that the CFO at Farallon got a phone call from Goldman warning him off.

So it’s easy to understand why Cohodes is very ill-disposed towards Goldman Sachs, and even suspects that Goldman’s prop desk might have been orchestrating the short squeeze. But there’s really nothing here at all to indicate that Goldman was engaging in any kind of naked shorting.

This testimony is mildly embarrassing for Goldman: no one likes seeing their former head of prime brokerage being described as “just a motherfucker”, as Cohodes describes Ravi Singh in this deposition. But Goldman’s argument for keeping the testimony sealed — “that their release would disclose trade secrets about the business” — is extremely weak. And Morgenson’s case that the deposition somehow indicates that Goldman might have been involved in naked shorting is even weaker.

Naked shorting is likely to become something of an issue in the news again soon, now that a documentary on the subject, called The Wall Street Consipracy, is being screened quite widely in finance and media circles. The documentary, like the deposition, is all part of a campaign by Overstock CEO Patrick Byrne against what he’s convinced is a massive conspiracy to bring down his company through illegal means.*

And that’s the main reason why I’m uncomfortable with Morgenson’s story: it seems to play far too neatly into the hands of Byrne, who’s really completely bonkers. But at least she posted the primary document, which is great, because it means that the rest of us can see much more clearly what the truth of the matter is.

*Update: Lewis Goldberg, the PR guy for The Wall Street Conspiracy, tells me that Patrick Byrne did not fund the movie, he just appears in it.


Wouldn’t these clowns have been lynched or shot by now in a different era (if not in a different country today? Even China executes financial criminals) ? It seems “rule of law” lacks meaning in the absence of morality.

Life is truly absurd.

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The case of the $400 million bike lane

Felix Salmon
Mar 26, 2012 07:24 UTC

Everybody’s favorite transportation geek, Charles Komanoff, has a fascinating new paper out on the economics of New York’s new Tappan Zee Bridge. The old bridge is decrepit, and needs to be replaced — everybody agrees on that. And the replacement is now in the works, at a cost of $5.2 billion. But does it need to cost that much? Komanoff makes a strong case that it doesn’t.

I won’t try to summarize Komanoff’s paper here. Instead, I’ll just point to one fact which is buried there. The new bridge comes with a combined bike/pedestrian lane, 12 feet wide. And the cost of building that lane — the amount that the cost of the bridge would decrease if you simply built it without that lane — is an astonishing $400 million.

To put that number in perspective, Komanoff tells me it would cost roughly $40 million, in the same 2015 dollars, to build two bike/pedestrian lanes on the Verrazano Narrows bridge — lanes which would get vastly more traffic than the one lane on the new Tappan Zee.

As for the cost of the first three years of New York City’s ambitious bike program under transportation commissioner Janette Sadik-Khan, that was just $8.8 million, 80% of which was paid by the federal government.

In other words, for the $400 million which governor Andrew Cuomo is planning to spend on a white-elephant bike lane almost nobody is going to use, you could utterly transform the bicycling infrastructure for millions of New Yorkers in all five boroughs.

Oh, and I almost forgot — it looks as if the old Tappan Zee bridge is going to be converted into a bike/pedestrian walkway anyway, making such a facility on the new bridge even more superfluous.

But this is how big projects always work: it’s weirdly easier to raise billions for something huge than it is to add millions to an annual budget somewhere. “Gridlock” Sam Schwartz, for instance, in his clever new congestion-pricing plan, is proposing three new massive bike/pedestrian bridges: one from Jersey City and Hoboken, in New Jersey, would span the Hudson River and land just north of Chelsea Piers. A second would go from Long Island City and Hunter’s Point, in Queens, and would cross the East River to midtown Manhattan. And the third, and most ambitious, would start in Red Hook, in Brooklyn, head over to Governor’s Island, and then continue on to the Financial District.

These are utterly wonderful ideas. If beautiful new pedestrian bridges can be built by Santiago Calatrava in Venice or by Norman Foster in London, there’s no reason New York can’t follow suit. Still, it’s a bit depressing that we don’t seem to have the mechanisms to take the billions available for vanity projects, and use some small fraction of that money for things which would make a huge difference to the daily lives of millions of New Yorkers.

This phenomenon isn’t confined to government, of course: anybody working in a big corporation has seen some huge acquisition made, using money which was never available for smaller projects from existing teams which had much clearer benefits. And there are hundreds of museums around the world which never have money for important things like conservation, but which somehow manage to find enormous sums for glossy new starchitectural projects. Basically, people want to be able to see where their money is going, in the form of something large and grand and headline-grabbing. Even if there are much more sensible uses for it elsewhere.


What the lane looks like is only half the story?

Whether car drivers drive like steroid-charged idiots,
and whether bikers cycle like methamphetamine-charged teenagers and terrorize pedestrians — those are common realities why responsible cyclists avoid certain streets in cities.

I know a bike lane which abruptly ends half a block before a busy intersection, and where the pedestrian sidewalks narrow to half its size. The result: cyclists go up the sidewalk and literally terrorize pedestrians,
and the police turn a blind eye. As a result, some residents of that block have to resort to driving, instead of walking, even for just a few short blocks, to avoid getting run over by bikes! Now tell me, does that save gasoline, or the environment. Worse, how many more anxiety stricken residents have to talk to their doctors for medications or lack of exercise because they don’t feel safe enough to walk to the park!

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The avoid-brands wine strategy

Felix Salmon
Mar 26, 2012 06:04 UTC

The best bit about wine is drinking it; the worst bit about wine is buying it. You walk into a wine store, or a supermarket, and you see hundreds of different bottles, most of which you’ve never heard of. And you’re then expected to somehow pick exactly the right one, in the knowledge that if you get it wrong, both your meal and your wallet are likely to suffer the consequences. So it’s hardly surprising that most people go with what they know, and end up buying something adorned with a well-known brand.

My taste in wine has evolved enormously since I started buying it regularly when I was at university. What I like now I wouldn’t have liked then, and what I liked then I wouldn’t like now. But one thing has stayed constant: I’ve always had a gut-level prejudice against big wine brands. Once I see a wine advertised anywhere, I’m pretty much guaranteed never to buy it. The only brands I ever respect or seek out are importers — especially when it comes to French wine from outside Bordeaux, you can save yourself a lot of trouble by getting a feel for which importers are generally trustworthy and reliable when it comes to picking great wines.

My intuition about such things was always that if I bought a wine with a nationally-known brand, I was essentially paying for the branding campaign at least as much as I was paying for the wine. On top of that, I felt that a wine made in such volume could never really be the unique and wonderful living thing that I’m always looking for in a wine: that its character would have to be ironed out in the service of homogeneity and predictability.

Besides, the whole world of wine-branding is just incredibly distasteful.

And so, when I found myself having to buy a bottle of wine in a supermarket in Chesterfield, Missouri, I spent a long time walking up and down the vast selection of California wines, and much tinier selection of everything else, looking for anything which didn’t come from some huge and faceless international conglomerate. Let’s just say that the store’s (or the chain’s) wine buyer wasn’t buying with me in mind. Just like big brands like to be able to deal with as few media outlets as possible when they buy media for their advertising campaigns, so do supermarkets (with a few notable exceptions) like to deal with as few vendors as possible when they buy wine for their stores. And given the number of Americans who buy their wine wholly or solely in supermarkets, the result is that a large chunk of the country essentially lives in a world where wine is branded juice from some huge company.

At the same time, however, most of us do still have a choice as to what we buy. So long as we’re not in a supermarket or chain restaurant, there’s bound to be a little bit of character in the choices available to us. And going off-piste, as it were, is fun, even as it does carry obvious risks. As a basic rule of thumb, simply avoiding big brands works surprisingly well.

Importantly, this is true at every price point, not just at the supermarket level. A few days ago, the NYT ran an article headlined “Bulgari Family Tries to Become a Name in Wine”:

A new wine venture by two members of the Bulgari watch and jewelry dynasty, Paolo and Giovanni Bulgari, will release its first three wines this weekend…

“My father taught me how to handle stones, to hold them in my hands without looking at them to get a sense of their temperature, and then to observe how light plays off them,” he said. Wine also called for an intuitive perspective: “how it reacts to light, how the color moves in a glass.”

And as if that wasn’t gruesome enough, today brings even more egregiousness from Vinitaly:

“As soon as you say ‘Prada and brunello’, ‘Ferrari or Maserati and brunello’, it makes a very vital association, especially for consumers around the world that might not know the differences in the wine,” said Cristina Mariani-May, co-CEO of Banfi, makers of the full-body brunello red.

Happy to promote Italy’s image as a source of all types of quality goods, members of Italy’s luxury industry body Altagamma have agreed to accompany their shows and other high-profile events with Italian wines.

Banfi do indeed make brunello; they also make Riunite.

The fact is that high-end branded wine, from Tignanello to Opus One to Chateau Lafite, is generally about as good value for money as anything from Prada or Bulgari. If you’re the kind of person who would rather spend half as much money on a perfectly-fitting bespoke suit from a no-name tailor than buy something off the peg from Prada, you’re definitely the kind of person who should avoid expensive branded wines.

But, there are exceptions to this rule, or at least there’s one big exception: Iberia. In Spain, at least in my experience, I often find that the bigger the company and the brand, the more delicious and characterful the wine — and the cheaper it is, to boot. If you want a great Rioja, for instance, you can never go wrong with one of the grandest brands of them all, Lopez de Heredia, which often costs much less than Parkerized cult wines from Spanish garagistes. Similarly, there’s no good reason not to go with the big names in sherry, or port, or madeira. The big old brands know what they’re doing, know how to take their time, and are continuing to do what they’ve always done, rather than trying to follow international taste. (The same is true of Chateau Musar, in Lebanon.)

As a general rule, however, mass-produced wine will always taste mass-produced, and if you’re looking at an expensive branded wine, you’ll nearly always find something better at the same price from a lesser-known vigneron. Which doesn’t, of course, alter the fact that the branded wine will still probably be the safer choice.


I’d like to point out a mistake by the author. Banfi does not make Riunite, never had, never will. Banfi before they were a producer was a wine importer and they still are. Riunite is one of the many brands they import and or sell in the USA along with Travento, Walnut Crest, Bola, Choncha y toro and now Kenwood vinyards from the US. Fiat is closer to a Ferrari then Banfi is to Riunite.

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The problem of fake gold bars

Felix Salmon
Mar 25, 2012 20:19 UTC

You don’t need to be a conspiracy theorist to find this worrying: a 1kg gold bar, certified as 99.98% pure by XRF (X-ray fluorescence) tests, turns out to have been drilled out and largely replaced with tungsten. This bar was discovered only because it was 2 grams lighter than it ought to have been: the forgers failed to add quite enough gold to the outside of the bar to make up for the weight lost when they replaced gold with tungsten. But if they’d gotten the weight right, it would probably still be circulating today.

Of course, there are means of testing gold bars beyond just weight and XRF. If you can weigh the bar accurately, then you can test for purity by essentially dropping it in a bucket of water and seeing how much the water level rises: a gold-covered tungsten bar will displace more water than a pure gold bar. Alternatively, for $3,000 or so you can buy a micro ohm meter, which is easily sensitive enough to tell the difference in conductivity between a pure gold bar and one which is largely tungsten.

But as far as I know, these tests are not particularly commonplace among gold dealers, and in any case only a minuscule fraction of the gold bars in the world are physically traded, changing hands from one owner to the next — the obvious point at which tests like these would be conducted. If you own gold — if you’re a central bank, say, or a physical-gold ETF, or even if you’re just a Ron Paul or Glenn Beck type with your own personal stash — then there’s no realistic chance at all that you’re going to go bar by bar through your own holdings, testing each one.

In the case of gold, then, what JK Galbraith famously called “the bezzle” — the amount of wealth that people think they have, which in fact they don’t have — could be truly enormous. If there are 1.3 million salted 400 oz bars in existence, and each one is 75% tungsten, then that makes 390 million ounces of gold which in truth isn’t there. At $1,660 per ounce, that’s over $600 billion which people think they own but don’t. To put that number in context, it’s roughly half the total quantity of subprime mortgages which had been issued at the height of the housing bubble.

On the other hand, it’s also possible that the number of salted 400 oz bars is zero, that the 1 kg bar recently discovered was an amateurish aberration, and that there’s nothing to worry about at all. But the economic incentives here are so enormous, for people looking to make a fortune in the fake-gold-bar industry, that I very much doubt no one has tried. And statistically speaking, if a bunch of people have tried, then some subset of those people will have succeeded.

So what to make of the fact that no salted 400 oz bars have yet been found? On the one hand, it can be viewed as very worrying — as being an indication that the gold markets are very bad at uncovering such things. On the other hand, you’d think they’d be good enough at it that they would have uncovered at least a small percentage of the salted bars outstanding — and if they’ve uncovered no such bars at all, then that can be taken as an indication there aren’t any salted bars outstanding.

In any case, there’s clearly now serious tail risk for anybody in the physical-gold market. And like most tail risks, measuring and/or insuring against it is extremely difficult. Any store of value has problems, be it fiat currency or sovereign debt or bitcoins. This latest discovery just goes to show that the problems with gold aren’t just the obvious ones surrounding things like the risk that the price of gold might plunge. There are non-obvious ones, too, which have the potential to be even bigger.

Update: Thanks to smart comments from BronSuchecki and Tim Worstall. I forgot that gold is actually used, once in a while, to make things like jewels — which means that bars are melted down pretty frequently. If there was a significant number of salted bars out there, we’d know about it, since you’d notice when one of them got melted down. Which isn’t to say that there are no salted bars at all, but it certainly does seem to imply that there’s nowhere near 1.3 million of them.


The best solution to remove the doubt is to control the ingots by a rapid and accurate method.
The best method of detection is to measure the actual conductivity of ingots.
for this, it is necessary to measure the electrical resistance and the geometric dimensions of the object, and this with extreme precision. The scanner CHECK GOLD developed by the firm JC-Engineering meets the requirements of control. In particular, the measurement when the tungsten content is in powder form, does not detect that the processes using the ultrasonic reflections.
visit http://www.jc-engineering.net for more information.

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