Felix Salmon

Gretchen Morgenson’s bizarre defense of Ed DeMarco

Felix Salmon
Mar 25, 2012 06:59 UTC

Ed DeMarco, the regulator in charge of Fannie Mae and Freddie Mac, has many critics, myself included, who would love him to allow Frannie to do principal reductions where it makes sense. But now he’s managed to find a defender. In Gretchen Morgenson, of all people.

Morgenson’s column today is utterly bizarre. She starts off by painting DeMarco as a “career public servant”, “under fire” in a “thankless job”. This is a phrase she seems to reserve for DeMarco alone: she made sure to describe him as a “career public servant” in 2010, as well as in her book. And as far as I can tell, she’s described no one else that way. And there are many career public servants, up to and including Tim Geithner, who can’t stand DeMarco* and who think he is being deliberately obstructionist here.

Morgenson then defends DeMarco from critics like Barney Frank and Elijah Cummings:

What the proponents of principal reductions at Fannie and Freddie don’t talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent.

Morgenson is actually serious about this: the headline on her column is “A Bailout by Another Name”. And when she says bailout, she doesn’t mean a bailout of deadbeat homeowners, who would see their net worth jump overnight as a bunch of their obligations were written off at a stroke. No, she means a bailout of banks.

On the face of it, this makes no sense. How can reducing homeowners’ principal end up as a bailout of banks? And not just any bailout, either: Morgenson goes on to tell us that such a program “would constitute a direct and sizable gift from taxpayers to the largest banks”, “another backdoor bailout for the banks that brought you the mortgage crisis”, and “another stealth bank bailout, courtesy of taxpayers”.

Don’t worry, Morgenson does actually spell out her thesis here. In her 1,170-word column, she spends a full 65 words explaining exactly how principal writedowns are in fact a “direct and sizable gift” to banks. So I may as well quote those words in full:

Many banks hold second liens on the same properties for which Fannie and Freddie either own the first mortgage or have guaranteed. If principal amounts on these first mortgages are reduced while leaving the second liens intact, those seconds become much more likely to be paid off over time. With no principal reduction, the banks would have to write off many of those second liens.

That’s it. I don’t know what your idea of a “direct gift” is, but I’m pretty sure it’s not this. Even if Morgenson’s argument here made sense, which it doesn’t, the gift would at best be indirect. And there’s nothing here at all indicating that it’s sizable.

More to the point, Morgenson’s whole argument, such as it is, is based on a classic straw man — that the holder of the first lien would be perfectly happy to write down a large chunk of what they were owed without any kind of write-down whatsoever on the part of second-lien holders. As far as I know, nobody advocating principal reductions is proposing this.*

It’s worth remembering here, that the whole point of principal reductions is that when people are underwater on their homes, they’re much more likely to default than when they have equity in their homes. If you reduce principal to the point at which the homeowner has positive equity again, then you’re more likely to get repaid, and you can end up with a more valuable loan than one with a higher face value.

But if there’s a second lien on the house in question, then even if the first lien is reduced to less than the value of the property, the homeowner would still be underwater, thanks to that second lien. Which would quite literally defeat the purpose of reducing the principal on the first lien.

Banks holding first mortgages negotiate with banks holding second mortgages all the time. If the homeowner is in default, then the owner of the first lien is in a strong negotiating position: they can foreclose on the home, sell it, and take all the proceeds, leaving nothing at all for the holder of the second lien. And because the second-lien holder is well aware that the first-lien holder has that nuclear option, they’re normally well disposed to negotiate: they’ll accept $5,000, say, to write off their debt.

Why does Morgenson think that wouldn’t happen here? She doesn’t say — after all, her entire argument is just 65 words. But she does go on at some length about the loan modifications which we are seeing from Frannie — more than 1.1 million, to date, with an impressively low redefault rate. She writes:

This suggests that the types of loan modifications provided by Fannie and Freddie — reducing borrowers’ monthly payments — are working fairly well. Addressing borrowers’ ability to repay loans has been the focus, Mr. DeMarco said. At the same time, these changes in loan terms do not encourage people to default in spite of being able to pay.

What Morgenson doesn’t seem to realize, here, is that exactly the same argument that she’s marshaling against principal reductions could be used against loan modifications as well. If you reduce borrowers’ monthly payments, and increase their ability to repay their loans, then quite obviously you’re also increasing their ability to repay second liens as well. And if you do a loan modification rather than foreclose on the delinquent borrower, then the second lien holder isn’t wiped out and the homeowner can continue to pay off their second lien over time.

So how is it that principal reductions are a giveaway to banks, but loan modifications aren’t? Morgenson even says that loan modifications don’t encourage people to default on their original loans, which would seem to be an argument for principal reduction: the moral-hazard argument, that such things only serve to give people an incentive to default, seems already to have been disproven with the loan-modification program.

Remember, too, that Morgenson said in her 65-word argument that “with no principal reduction, the banks would have to write off many of those second liens”. Something doesn’t add up here. After all, banks will never voluntarily write off a second lien if the homeowner gets a loan modification which increases their ability to repay their debts. So if Frannie is great at loan mods, then they must also be great at forcing second-lien holders to write off their loans at the same time. But if they can do that with a loan mod, they should be able to do it with a principal reduction, too. And if they don’t do that with loan mods, then the banks wouldn’t otherwise be forced to write off those second liens.

And we haven’t even touched, yet, on the most obvious and silliest part of Morgenson’s case — which is that most of Frannie’s delinquent mortgages don’t have second liens attached. DeMarco doesn’t like the idea of doing principal reductions on homes with second liens? Fine, don’t do it, then. But that’s no reason not to do principal reductions on loans without second liens.

More generally, DeMarco is just the regulator, here — he’s not actually running Fannie and Freddie. If he lifted his injunction on principal reductions, then we wouldn’t suddenly see a huge influx of the things overnight. These agencies move slowly and deliberately, and they’d almost certainly start small, and only on homes where there weren’t second liens. If that program worked, then they’d expand it, taking just as much care in doing so.

Morgenson’s argument implies that were it not for DeMarco holding back the floodgates, Fannie and Freddie would be doing principal reductions on a massive and reckless scale, without even trying to involve banks holding second liens. She has no reason to believe this, because it isn’t true. The agencies might be philosophically inclined — for good reason — to do principal reductions, but only when and because they make financial sense. DeMarco, on the other hand, seems to have some kind of quasi-religious belief that principal reductions never make financial sense. And his arguments to that effect are extremely weak.

But not as weak, it must be said, as Morgenson’s effort today. If principal reductions really would be “a direct and sizable gift from taxpayers to the largest banks”, then the largest banks would surely be pushing loudly for their implementation. But they’re not. Because the principle beneficiaries of principal reductions are not banks, but rather homeowners — the people whom Gretchen Morgenson wants to see continuing to suffer under the weight of mortgages worth far more than their homes. And all because of some inchoate and irrational animus she has towards Fannie and Freddie.

*Update: Anthony Coley at Treasury emails to say that Geithner “has tremendous respect for Mr. DeMarco”, even as he thinks “there’s a pretty strong economic case for principal reduction as part of a strategy to limit the future losses of the GSEs. What Treasury is trying to do is encourage Mr. DeMarco, who is fully independent, to take another look at the evidence because we think there’s a place to do more in a way that is consistent with the mandate that Congress gave him.”

And Shahien Nasiripour, who’s been getting the same line from DeMarco, points out that there is at least one person who thinks that principal reductions should be done absent write-downs on second liens: NY Fed president William Dudley.


eastcoastguy200, what objections?

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Muppet TV

Felix Salmon
Mar 24, 2012 00:56 UTC

You need this, after a day like today, I think.


Likewise filed under the label “predictable as night following day” –

Cashing in with a book contract, and Danny (“never shall be heard a discouraging word”) Black defending Wall Street.

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Chart of the day, flash-crash edition

Felix Salmon
Mar 24, 2012 00:51 UTC

ZeroHedge has the chart of the day:


What you’re seeing here is the price of shares in BATS, at 11:14 this morning. The white spots are trades: there are 176 of them altogether. They start just below the IPO price of $16, and then just fall lower and lower and lower until the stock is trading for mere pennies. But the key number you want to look at here is not on the y-axis. Instead, it’s the chart report at the very top:

Elapsed Time: 900 Milliseconds

This is what happens when stocks are traded by algorithms rather than humans. The parabolic trajectory of the share price is downright elegant; indeed, if you’re going to crash from $16 to 4 cents within 900 milliseconds, you could hardly do so in a lower-volatility manner. The scary thing here is the sheer speed involved, and the fact that no human intelligence was stopping to think whether these prices made any sense at all.

Of course it’s too early to work out exactly what happened here; a formal statement from BATS talks vaguely about “a software bug”. But the big picture is clear. Most people think there are only two stock exchanges in the US — NYSE and Nasdaq. And indeed those are the only two exchanges where stocks are listed. But there are more than 50 venues, including two different BATS exchanges, where stocks are traded; they all communicate with each other to work out what the best global bid and offer in any stock is at any given time. (This is known as NBBO, for National Best Bid/Offer.)

This fragmentation of trading venues is good for competition, but, as we saw first in the Flash Crash of May 2010 and then again today, when one of those venues encounters problems, very nasty things can happen.

BATS was meant — if everything had gone according to plan — to be the first stock listed on the BATS exchange. They’re not going to try that stunt again in a hurry; as finance professor James Angel told Bloomberg, this was “like seeing an airplane crash on takeoff”. On the maiden flight of a new airline. You can imagine how much appetite anybody would have to fly that airline thereafter.

One obvious similarity between today’s events and what happened in the earlier flash crash is that both involved exchanges declaring “self help” — basically saying that the information coming from some other exchange was so delayed or otherwise unreliable that it couldn’t be used any more as part of the NBBO system. When that happens, you can find order flow sloshing violently around various different exchanges; such moves don’t need to be accompanied by extreme price action, but they make such action much more likely.

There is some good news here. The first bit of good news is that no one was really harmed today: the BATS IPO has been pulled, and the institutions which were trying to sell their shares — foremost among them the estate of Lehman Brothers — will just have to hold on to them for a while longer. And the second bit of good news is that we have a lot of valuable real-world information about exactly how markets fail in today’s high-frequency precincts. I just hope that we’re going to be able to learn from what happened today, and put in measures to prevent it from being much worse next time. Can anybody say Tobin Tax?


You are posting an important Penny Stock article. It’s most important for everybody.
Kamrun Nahar
“top penny stock picks”

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Mar 23, 2012 21:55 UTC

It’s been a long wait, but we’re finally getting around to sending out Counterparties by email every weekday afternoon. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. (See, you knew there was a reason you gave us your email address.) If you’re not registered, and don’t want to go through that process, email Counterparties.Reuters@gmail.com (which is also our tips line) and we’ll try to add you to the list manually. This is very much an experimental work in progress, so all feedback is greatly appreciated.

The presumed next head of the World Bank is not a replica of Robert McNamara, Paul Wolfowitz, or even Robert Zoellick. He’s a South Korea-born, MacArthur “genius” award winner, the co-founder of a ground-breaking NGO and holds an M.D. and a PhD. He’s been on a host of magazine lists of influentials and is the first Asian-American head of an Ivy League college.

He’s also, arguably, a triple-threat (rapping, dancing, singing):

There’s more triple-threating from Jim Kim here.

It’s a surprise pick. Kim, Felix warns, has no experience navigating the Game of Thrones-like structures of world geopolitics. But, there’s reason for a kind of measured hope. And not only because Jeff Sachs is on board.

Fred Hiatt notes, “Kim will be the first bank leader who has dedicated most of his professional life to working with and for the world’s poor.” Hiatt adds that Partners in Health, the NGO Kim co-founded, took a unique approach to public health: “One of its key innovations was to enlist the poor themselves into the health system, training community workers to make sure, for example, that patients take their TB or AIDS medicines every day.”

This could be significant departure for the World Bank, which controls some $57 billion in aid dollars. And Kim says some very encouraging things in this talk at Boston University. It stands to reason that a doctor-anthropologist might at least attempt to take a wholly different approach to the World Bank’s mission than a technocrat.

So there’s some reason for optimism. We would certainly not want to hear Bob Zoellick sing.

Today’s links:

Bank of America will now rent you the home you just lost – WashPo
Principal reduction for struggling homeonwers could actually save Fannie, Freddie money – ProPublica
This was an idea Felix proposed 2.5 years ago – The Atlantic

Stimulus spending can actually pay for itself – Economist
Related: The full Summers-DeLong paper – Brookings

MF Doom
John Corzine gave “direct instructions” to move $200 million customer funds – Bloomberg

The Supreme’s Court decision on healthcare will have nothing to do with law, everything to do with “optics, politics and public opinion” – Slate
Related: Why Obama’s health care bill will survive — even if conservative justices hate it – Reuters

Morgan Stanley wants buy back all of Citi’s stake in its joint venture – Reuters

An epic argument that Google is in very big trouble – Gizmodo

Bats Global Markets withdraws IPO on its own exchange after series of errors – Bloomberg

Krugman: The Macro wars are not over – NYT

The SEC is probing HFT, looking for unfair advantages – WSJ

____ is the next ____ – Buzzfeed

Fine Print
JPMorgan is being sued for a typo that overstated a trader’s salary by $3 million – Bloomberg

“We’ll fight this to the death” – Community banks and credit unions would rather fight than help each other – HuffPost

Tax Arcana
“The problem is not tax rates. The problem is the definition of income” – Aleph blog

Principal writedowns of the day, mortgage edition

Felix Salmon
Mar 23, 2012 16:35 UTC

It’s principal-writedown day today! Jesse Eisinger has uncovered a huge story: that internal analyses at both Fannie Mae and Freddie Mac show that reducing principal on troubled mortgages has a “positive net present value”. That of course directly contradicts the testimony of Frannie’s regulator, Ed DeMarco — but it’s now going to be much harder for DeMarco to maintain his position that principal reductions would never help Frannie’s finances.

Meanwhile, Bank of America has launched a pilot scheme which is a variation on the theme of principal reduction. Remember that by far the most common form of principal reduction is the short sale — and it’s also the most damaging form of principal reduction, since homeowners invariably have to leave their homes when they do one. Under BofA’s new scheme, however, that’s not the case: the bank would buy the property from the homeowner, but would then immediately turn around and rent it back at a market rate.

This idea is hardly a new one. It’s known under many names, including Right to Rent, and dates back at least as far as August 2007, when it was proposed by Dean Baker. I’ve been bashing away at it for years myself, but I’d pretty much resigned myself to the idea that it wasn’t going to gain traction.

So what changed? The markets did. The WSJ’s charts show how home prices have been falling even as rents have been rising:


The left hand chart, here, shows why banks don’t want to foreclose: prices are still very depressed, making homes extremely hard to sell. The right hand chart, on the other hand, shows why banks might find the rental market rather attractive. Banks have no particular interest in being landlords, but if they can do right-to-rent deals with a large number of homeowners, they can bundle those deals up into a big package, and sell it off to investors searching desperately for yield. And that could make the banks much more money than trying to sell the houses off one by one.

The WSJ explains how the BofA scheme works:

Borrowers would agree to a what is known as a “deed-in-lieu” of foreclosure, where they essentially sign over ownership of the property to the lender. This is less costly to the bank and also does less damage to a borrower’s credit than a foreclosure.

In exchange, former owners would be offered one-year leases with options to renew the leases in each of the following two years at rents that the bank determines are at or below the current market price. Borrowers would have to demonstrate an ability to pay the market rent.

For example, based on a sampling of home values and rental rates in Phoenix recently, a consumer with a $250,000 mortgage and monthly payments of $1,600 could swap the house for a lease, renting the home for $900, depending on the condition of the property and the neighborhood…

Borrowers selected for the program must be at least two months past due on their mortgage and face considerable risk of foreclosure. Bank of America is reaching out to borrowers who have exhausted other alternatives to foreclosure or who haven’t responded to earlier solicitations. Homeowners with second mortgages or other liens won’t be selected.

This is a far cry from a right to rent a home that has been foreclosed, of course. All of these self-imposed rules seem silly to me: I would much rather see a scheme where BofA simply declares that anybody facing foreclosure will have the right to rent back their home from the bank at a market rate once the home is owned by the bank. If they fail to make their rent payments, then they can be evicted just like any other delinquent renter.

I’d also love to see BofA extend this scheme to include renters in houses being foreclosed. Rental homes are homes too, and people shouldn’t get kicked out, especially not if they’ve been making all their rent payments on time, just because their landlord had mortgage problems.

The real reason for this pilot scheme, I suspect, is just that BofA is very worried about its legal ability to foreclose on houses. The difference between a foreclosure and a deed-in-lieu operation like this one is that a foreclosure is involuntary on the part of the homeowner, who retains lots of legal rights. A deed-in-lieu, by contrast, is something the homeowner must agree to, and therefore doesn’t present nearly as many legal obstacles.

In any case, let’s hope that the pilot works, and is copied by other banks around the country. It’s about time.


http://www.calculatedriskblog.com/2012/0 3/lawler-on-possible-fannie-and-freddie. html

Some context on when it “makes financial sense” for Frannie to do principal writedowns.

Mr Salmon why, why, why do you keep quoting this guy as if he is an even vaguely serious source.

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Jim Kim!

Felix Salmon
Mar 23, 2012 14:15 UTC

So that was unexpected: the next president of the World Bank is almost certain to be Jim Yong Kim, the co-founder of Partners in Health and the current president of Dartmouth University College.

The news of Kim’s nomination has gone down very well among the punditocracy, and Jeff Sachs already seems to have withdrawn his candidacy in Kim’s favor.

I’m not going to pretend that I’d ever heard of Kim before this morning. But everybody who has heard of Kim seems to think that the choice is a wonderful and inspired one. Kim is a physician by training; he’s a co-founder of Partners In Health, one of the world’s most respected medical NGOs. He’s also a bit of a big-data geek, which is likely to delight the Bank’s wonky employees.

Kim’s prowess when it comes to navigating Washington’s labyrinthine power structures is unknown; I hope he’s up to the job. But he’s going to bring passion and dedication to his task of poverty reduction, along with a welcome bias towards bottom-up rather than top-down solutions. And I suspect that the World Bank’s board will find it easy to rubber-stamp his nomination.

That said, I very much doubt that Kim would stand a remote chance of getting the job in an open and merit-based competition. He has little if any experience dealing with countries at the head-of-state level, and the Bank has historically not been an organization with a particular focus on health initiatives. Cast your mind back just a few days, to when François Bourguignon, Nicholas Stern and Joseph Stiglitz published a piece in the FT calling for the best-qualified candidate to get the job: here are the criteria they listed.

Criteria for shortlisting candidates could be similar to those listed by the IMF board in the procedure that led to the appointment of Christine Lagarde: distinguished record as an economic policymaker, outstanding professional background, familiarity with banking and finance, diplomatic and managerial skills. In the case of the World Bank, solid knowledge and experience of development policy should be added to this list.

Kim has the requisite development-policy background, and also an outstanding professional background, but he’s not a banker, an economist, or a diplomat. It’s also worth looking at his nomination in the light of the stated reason why the head of the World Bank should be an American:

What matters for the World Bank is resources. And keeping an American in charge helps protect those resources.

The United States is the World Bank’s largest donor. That’s been true under both Democratic and Republican administrations. And one of the reasons it’s held so steady, some think, is that the World Bank tends to be led by a high-ranking American official who is able to persuade the White House and Congress to continue supporting the body.

The outgoing World Bank president, for instance, is Bob Zoellick, a highly regarded Republican who served in key positions under both George W. Bush and his father. He was preceded by Paul Wolfowitz, another key Republican policymaker. Many believe the two men played an important role in keeping American financial support for the bank high in years when Republicans controlled the government.

Kim doesn’t strike me as the kind of person who’s particularly great at wrangling Republican votes in Congress. Maybe that doesn’t matter, and all that Congress cares about is that the Bank is run by an American. But this nomination is ultimately a little disappointing, if only because it perpetuates the US hegemony at the Bank at a time when Obama could be opening up the leadership of the institution to a fantastic developing-world candidate instead.

That said, there is one advantage to the convention that the president of the World Bank is nominated by the president of the United States, rather than being chosen in some kind of international beauty contest: it allows POTUS to nominate exactly someone like Kim, a dark-horse candidate who could be wonderful in the job but who doesn’t have a strong international power base. I’m hopeful that Kim will turn out in hindsight to be a wonderful World Bank president, even if (or maybe even because) he couldn’t win the job under the kind of system that most countries want.


He graduated from Muscatine High School a couple years before I attended kindergarten in Muscatine.

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Bloomberg’s weird Buffett spoiler

Felix Salmon
Mar 23, 2012 07:56 UTC

Bloomberg and Fortune had weirdly competing stories Wednesday on the subject of Warren Buffett’s “million-dollar bet“. The bet’s duration is ten years from January 1, 2008; Buffett is betting a million dollars that the S&P 500 will outperform a fund of hedge funds.

Fortune’s Carol Loomis has unrivalled access to Buffett — she counts herself among his friends, and always helps him write his annual shareholder’s letter. So her report on the status of the bet, time stamped 8:30am, can be taken as definitive. Loomis doesn’t reveal the components of the fund-of-funds that Buffett is betting against, but she does reveal (“you are reading it here first”, she writes) the standings at the end of Year Four — that is, at the end of calendar 2011. The fund-of-funds has not done well over those four years: it’s down 5.89%. But Buffett’s index fund is doing even worse: it’s down 6.27%.

Loomis will always get these scoops, for as long as she’s close to Buffett. That’s fine. But then why did Bloomberg’s Katherine Burton decide to run a story on the exact same bet on the very same morning as Loomis’s scoop, under the headline “Buffett Seizes Lead in Bet on Stocks Beating Hedge Funds”?

The first effect of Burton’s story is simply to confuse everything. Fortune is saying that Buffett is behind; Bloomberg is saying that Buffett is ahead. If you read Fortune or the outlets which picked up Fortune, like the AP, then you’ll believe one thing; if you read Bloomberg or the outlets which picked up Bloomberg, like MSNBC, you’ll believe another thing. And if you read them both, you could be forgiven for thinking that someone is playing with your head.

A close reading of Burton’s story helps to reveal what’s going on here. For one thing, she’s reporting the status of the bet through February 29, rather than the status of the bet after four years. That is peculiar, not least because the fund-of-funds only reports annual results: Loomis was waiting to see what its 2011 returns were before she wrote her story. Burton, by contrast, despite being 25 minutes behind Loomis with her story, only knows what the fund-of-funds returned through the end of 2010. Here’s her explanation for how she calculates the performance of the fund-of-funds:

The hedge funds fell about 4.5 percent, based on Protégé’s index returns for the first three years and results since then for the Dow Jones Credit Suisse Hedge Fund Index, which has roughly tracked the group of unidentified funds when adjustments are made for extra fees.

In other words, when Burton’s story hit the web at 8:55am, it was already out of date: she extrapolated 14 months forwards from Loomis’s 2010 figures, rather than waiting for Loomis’s story to arrive and then extrapolating a mere 2 months forwards from the 2011 figures.

But in any event, Loomis was reporting the facts of the bet; Burton is just taking an educated guess. Hedge funds are by their nature unpredictable things. The fund-of-funds in this bet might have “roughly tracked” some hedge fund index for its first three years, but it can veer far off-index at any time, depending on how it’s put together. Which means that an unambiguous “Buffett Seizes Lead” headline is quite misleading.

That said, Buffett might well have seized the lead at the end of February, if Burton is right about the fund-of-funds tracking the Dow Jones Credit Suisse Hedge Fund Index. That index rose from 92.6 at end-2011 to 95.93 at end-Feb, a rise of 3.6%. We know from Loomis that at end-2011, the fund-of-funds was down 5.89%, which means that it stood at 94.11% of its initial value. If it grew from there by 3.6% in two months, it would have ended February at 97.5% of its initial value, for a loss of 2.5% overall.

The S&P 500, by contrast, rose from 1,257.6 at the end of 2011 to 1,365.7 at the end of February. That’s an increase of 8.6%, fully five percentage points greater than the rise in the hedge-fund index. We know from Loomis that Buffett was down 6.27% at the end of 2011; if his fund rose 8.6% from that level, it would have ended February at 101.8% of its initial level, for an overall gain of 1.8%.

It turns out, however, that even the Buffett side of the bet isn’t particularly easy to calculate: Burton reckons he was up 2.2% as of end-Feb, not 1.8%. But the 40bp difference there pales in comparison to what she’s estimating for the fund-of-funds: she says that it’s down 4.5%, rather than being down 2.5%. That difference, of 200bp, is really substantial.

Ultimately, the only thing we know for sure is that for four years in a row, the fund-of-funds has been in the lead, thanks to substantially outperforming the S&P 500 in 2008, the first year of the bet. At the end of five years, that might have changed: Buffett could well be back in the lead. And it’s even possible that someone with detailed knowledge of how the fund-of-funds is made up could trace the point at which Buffett took the lead back to February 2012. But no one has that information right now, or if they do have it, they’re not telling. The exact make-up of the fund-of-funds is a closely guarded secret.

In any case, the whole point of long bets is that they’re long-dated. This one has a ten-year maturity, and what happens even from year to year is not particularly important, let alone what happens from month to month. Yes, the S&P 500 had a very healthy run in January and February of 2012, and probably outperformed many hedge funds. But there are always going to be two-month periods where hedge funds underperform the index, and obviously the S&P 500 can’t rise by 4.3% a month for any sustained length of time.

So I’m a fan of the way that Loomis is reporting this, deliberately, using hard year-end numbers from the fund-of-funds, even if she has to wait 11 weeks from the end of the year before she gets them. Burton’s piece is significantly less informative even if it’s a couple months more up to date, and it’s also much less in sync with the underlying philosophy of the bet.

As for the decision to release Burton’s story on the exact same day that Loomis’s semi-official report came out, that just looks childish. It’s no secret that Loomis is very close to Buffett; let her have her scoop. It’s a perfectly good story, which in no way requires a Bloomberg spoiler.


@ dindjic Why? Surely anything can be a benchmark if you want it to?

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Larry Summers, the revolving door, and the World Bank

Felix Salmon
Mar 23, 2012 06:19 UTC

Remember Krishnan Guru-Murthy’s interview with Larry Summers in January? He asked about Inside Job‘s allegations that Summers was a clear beneficiary of the revolving door. Now see if you can spot a recurring phrase in Larry’s answer:

Whatever I did or did not do, right or wrong, in the Clinton administration, I had earned no significant sum of money prior to working in the Clinton administration, or, in association with the financial sector, for more than five years after I left the Clinton administration. And so any suggestion that what I did in the Clinton administration had to do with loyalty to the financial sector — I think is a bit absurd.

That’s four mentions of “the Clinton administration” in the space of two sentences. The idea, it seems, is that if you wait a few years before availing yourself of that revolving door, then that means you can’t have been conflicted in office.

This interview has new salience right now, not only because Summers is arguably the favorite candidate to be the next head of the World Bank, but also because John Cassidy has now confirmed what many of us predicted well in advance: Summers is back working at DE Shaw, and presumably making many millions of dollars per year for doing so. This time, he didn’t wait five years; he didn’t even wait one.

Now according to Larry’s own logic in the answer he gave to Guru-Murthy, it’s perfectly reasonable, given the alacrity with which he accepted DE Shaw’s millions, to ascribe his actions in the Obama administration to loyalty to the financial sector. We now know that when Summers was giving this interview, he was already back at work for DE Shaw. Which is why he was so careful to confine his answer only to his activities during the Clinton years. If accused of being a creature of the revolving door during the Obama years, he could adduce no such defense: he literally left DE Shaw to join the Obama administration, and then revolved straight back into that job when his temporary government gig was over.

Cassidy is right to point out that Wall Street ties are hardly unprecedented in World Bank presidents. But there’s still something opportunistic and sleazy here: Summers isn’t a banker, so much as he’s just selling the fruits of his government experience to the highest bidder, even as one of his rivals for the World Bank job, Jeff Sachs, is taking to twitter to remind anybody who will listen of even sleazier episodes in Summers’s past.

Sachs isn’t helping his cause with that kind of tweeting. But the truth is Summers can’t relish a contest between himself and Ngozi Okonjo-Iweala. Summers paid $31 million (Harvard’s money, of course, not his own) to settle a lawsuit over Andrei Shleifer’s disgraceful behavior in Russia, while keeping Shleifer at Harvard as a faculty member in good standing. Ngozi Okonjo-Iweala, by contrast, well, I’ll let her tell the story:

From 1967 to ’70, Nigeria fought a war: the Nigeria-Biafra war. And in the middle of that war, I was 14 years old… We were on the Biafran side. And we were down to eating one meal a day, running from place to place, but wherever we could help we did. At a certain point in time, in 1969, things were really bad. We were down to almost nothing in terms of a meal a day. People, children were dying of kwashiorkor. I’m sure some of you who are not so young will remember those pictures. Well, I was in the middle of it. In the midst of all this, my mother fell ill with a stomach ailment for two or three days. We thought she was going to die. My father was not there. He was in the army. So I was the oldest person in the house. My sister fell very ill with malaria. She was three years old and I was 15. And she had such a high fever. We tried everything. It didn’t look like it was going to work.

Until we heard that 10 kilometers away there was a doctor, who was able … who was giving … looking at people and giving them meds. Now I put my sister on my back, burning, and I walked 10 kilometers with her strapped on my back. It was really hot. I was very hungry. I was scared because I knew her life depended on my getting to this woman. We heard there was a woman doctor who was treating people. I walked 10 kilometers, putting one foot in front of the other. I got there and I saw huge crowds. Almost a thousand people were there, trying to break down the door. She was doing this in a church. How was I going to get in? I had to crawl in between the legs of these people with my sister strapped on my back, find a way to a window. And while they were trying to break down the door, I climbed in through the window, and jumped in. This woman told me it was in the nick of time. By the time we jumped into that hall, she was barely moving. She gave a shot of her chloroquine, what I learned was the chloroquine, then gave her some, it must have been a re-hydration, and some other therapies, and put us in a corner. In about two to three hours, she started to move. And then, they toweled her down because she started sweating, which was a good sign. And then my sister woke up. And about five or six hours later, she said we could go home. I strapped her on my back. I walked the 10 kilometers back and it was the shortest walk I ever had. I was so happy that my sister was alive. Today, she’s 41 years old, a mother of three, and she’s a physician saving other lives.

It’s almost inconceivable to me that Barack Obama, the proud African-American who wrote Dreams from My Father, could ever with a straight face claim that Larry would be a better choice to run the World Bank than Ngozi. Larry has made it abundantly clear that the only thing he values more than money is power. His decision to rejoin DE Shaw is what economists would call a “revealed preference”. And what it has revealed, as if there was any doubt, is that Summers is not the right person for the World Bank job. He wants to work for DE Shaw? Fine. Let him stay there.


Mr. Summers recently recently said that learning languages other than English was a waste of time: hardly an appropriate mentality for someone wanting to hold an international post.

Posted by logicus | Report as abusive

Get Counterparties by email!

Mar 22, 2012 22:32 UTC

It’s been a long wait, but we’re finally getting around to sending out Counterparties by email every weekday afternoon. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. (See, you knew there was a reason you gave us your email address.) If you’re not registered, and don’t want to go through that process, email Counterparties.Reuters@gmail.com (which is also our tips line) and we’ll try to add you to the list manually. This is very much an experimental work in progress, so all feedback is greatly appreciated.

Wall Street’s pre-approved, 100% compliant social media presence (managed by committee):

IMPORTANT WALL STREET COMPLIANCE NOTE: This email does not contain any mention of furry animal characters commonly known by a name that combines “M” and “uppets,” nor should this email be interpreted as the an endorsement of the aforementioned term as a rhetorical signifier of anything other than a furry, arguably adorable and/or hilarious group of animal characters.

Goldman Sachs employees will now find it impossible to discuss their favorite children’s television show over company email, thanks to the linguistic scrubbing Reuters’ Lauren Tara LaCapra reports on today. The bank’s metaphor crackdown — no using colorful language for your own account — makes a certain amount of sense. After all, when Goldman attempted a private offering for Facebook stock last year, it had to give staffers a private tutorial in how to explain it to older clients, since they’re prevented from viewing the site at work. Due diligence was done in coffee shops, we suppose. Which brings us to Wall Street’s latest halting, mind-numbingly boring attempts to use social media. One Morgan Stanley Smith Barney account, @InvestFayMSSB, has now been deleted, after putting out immortal tweets like “Next stop Dow 57,757? Don’t count on it but Tuesday’s bullish session is in the books.”)

This, as the NYT’s William Alden describes, is Wall Street’s pre-approved, 100% compliant social media presence (managed by committee). If you’re a financial professional, do not expect to have your market-making insights unleashed upon the Twitter-sphere any time soon. Alden notes that Deutsche managing director Ted Tobiason has been allowed to tweet by the company’s corporate brand police, but he seems to mostly read out data to his followers:

Pandora down 24% day after rpting weak qtr/guid. Some small impact on other recent Internet IPOs. #P down 32% from IPO #IPO
Mar 07 via Arkovi Social Media Archiving Favorite Retweet Reply

This is the kind of twitter user to which we’d politely suggest “You’re doing it wrong.” It’s unclear, given the regulatory concerns of having financial advisers tweet, what Wall Street’s “value-add” is in social media.

Or, it could be, as Felix suggests, that the social media conversation has just become “less of a wunderkammer, and more of a regrettable necessity.” Which actually sounds like a pretty apt description for today’s Wall Street banks.

And now for today’s links:

Cut the Check
Meet the conservative Texas billionaire who’s the election’s biggest campaign donor by far. He wears $3,000 Brioni suits and Wal-Mart underwear. And he’s given $18 million to date – WSJ
Related: Obama’s largest campaign donors include Goldman, JPM employees – Bloomberg

Nannies who earn $180,000 per year — the economics of childcare by the super wealthy – NYT Mag
: Don’t forget the opportunity cost of staying at home to look after your kids – Forbes

Here’s Adam Davidson, in the NYT:

Alas, it seems that there just aren’t enough “good” nannies, always on call, to go around. Especially since a wealthy family’s demands can be pretty specific. According to Pavillion’s vice president, Seth Norman Greenberg, a nanny increases her market value if she speaks fluent French (or, increasingly, Mandarin); can cook a four-course meal (and, occasionally, macrobiotic dishes); and ride, wash and groom a horse. Greenberg has also known families to prize nannies who can steer a 32-foot boat, help manage an art collection or, in one case, drive a Zamboni to clean a private ice rink.

How payday lenders hide their Super PAC contributions by creating shell companies – Bloomberg

The academic argument that the good times are not coming back – NYT
And the academic argument that fiscal stimulus pays for itself — Economist

Deutsche Bank dodges Dodd-Frank by “de-banking” itself – WSJ

Your Hours Are Not Wasted
The Reddit comment that landed its writer a gig writing a major motion picture – Wired

A handy guide to the highly flawed JOBS Act which Congress just passed – Fortune

Must Read
“The White Savior Industrial Complex”  – @TejuCole on Kony2012 – Atlantic Wire
How income inequality undermines our democracy – NYT

Why Larry Summers lost the presidency of Harvard – Mathbabe
: ForgetLarry.org

EU Mess
The euro zone may already be in a technical recession – FT Alphaville

Consumer credit is growing faster than any time in the last decade – Daniel Alpert

It’s About Time
Chrome is overtaking IE as the most popular browser in the world – The Register

The Oracle
The Buffett Rule would raise about $31 billion over 10 years – Reuters

Economics Everywhere
Cold-brewed coffee is “no longer a trend. It’s mandatory” – NYMag

The war on universal grammar — and Chomsky’s research – The Chronicle

And, of course, there are many more links at Counterparties.



The snark about Wall Street’s lack of social media use needs to be dialed way back, or at least qualified with an informed mention of the reasons behind it. Securities regulations are riddled with requirements for disclaimers and a fair number of situations where telling the truth is not a defense in and of itself, as in this example – http://dealbreaker.com/2012/03/investmen t-manager-stands-up-for-truth-and-the-am erican-way/

Posted by realist50 | Report as abusive