Felix Salmon

Why I’m playing the lottery

Felix Salmon
Mar 20, 2012 04:34 UTC

Have you bought your lottery ticket yet? The jackpot’s up to $241 million!

An interesting thing happens, when the jackpot gets this big: if you actually believe the $241 million figure, the expected return on your dollar is positive. The mean player, it turns out, is going to get paid out to the tune of $1.553 for every ticket they buy. In reality, sadly, the cash option is $170 million, which brings the expected payout to $1.149 per dollar spent, which means that after taxes, you still have to expect to lose money.

But all of that is moot: realistically, your chance of winning the jackpot is zero. Technically, it’s one in 175,711,536, or 0.000000569%. Which is statistically the same as zero. But it’s not psychologically the same as zero — and that’s what counts. When you buy your lottery ticket, it’s impossible not to dream of all the things which might happen if you won. (My dream now has to include the inconvenient fact that my winning lottery numbers will have been broadcast on YouTube.) The dream is pleasant enough to be worth a buck — at least to someone with a buck to spare, like me. In fact, it’s so pleasant that sometimes I won’t even check my lottery numbers, because I don’t like the opposite feeling of finding out I haven’t won.

And the occasional wager on the lottery is a lot less expensive, and a lot less damaging, than attempts to get rich quick in the stock market.

Which doesn’t mean there isn’t a dark side to the lottery — there is. It’s a horribly regressive tax on poverty, for one thing. I’m one of those people who think that they should be paying more in taxes, and by far the easiest way to funnel more of your income back to the government is to buy lottery tickets. It really is a voluntary tax. But the problem is that it’s paid overwhelmingly by poor people who can’t afford it, rather than by rich people like me who can.

And if you move from lottery tickets to scratch cards, something else happens — they pay out with enough predictability that they can actually be used for money laundering. Take your dirty dollars, buy a bunch of scratch cards, redeem the winners, and you’ve got nice clean legitimate money. If the games weren’t so incredibly lucrative for the states, they’d be made illegal in no time just for this reason alone.

So from a public-policy standpoint, lotteries are a bad idea. Assuming that they’re here for the foreseeable future, however, I’m going to continue to buy myself a ticket now and again, if I ever find myself in a place selling lottery tickets when the jackpot goes above $200 million. I’m doing myself no harm, I’m doing the state and the vendor a little bit of good, and hey, you never know. This blog could turn into the diary of a lottery winner.


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Apple’s sensible dividend

Felix Salmon
Mar 19, 2012 19:20 UTC

Historically I haven’t been a fan of people saying that Apple should start paying dividends. I didn’t like it when Jon Fortt pushed it in 2007, and I didn’t like it when Arik Hesseldahl had the same idea in 2008. (Although by that point I did concede that “a modest dividend, tied to profits, makes perfect sense”.) Fast forward to 2012, however, and I think that Apple’s announcement is a perfectly sensible one, and if anything overdue.

The problem with most people asking for dividends and stock buybacks is that they generally have a pretty stupid argument, along the general lines of “If X declared a dividend, its stock would go up. Stocks going up are a good thing. Therefore, X should declare a dividend.”

That argument doesn’t even make much sense: if cash leaves the company and goes straight into shareholders’ pockets, the value of what’s left behind goes down, not up. If a company gives a bunch of money back to shareholders and its value goes up as a result, then it has much bigger problems than not paying dividends.

Apple’s stated reason to start paying dividends is simple: it has more money than it knows what to do with. Fortress balance sheets and strategic flexibility are all well and good, but there comes a point — around $100 billion, it would seem — at which you can buy anything you could conceivably desire, and still have more than enough money left over. So if Apple can’t use that money, give it back to shareholders, who surely can.

The stated reason for Apple’s stock buybacks makes perfect sense too. A large part of Apple employees’ compensation comes in the form of equity in general, and restricted stock units in particular. When those RSUs vest, all other shareholders get diluted. So to prevent that from happening, Apple’s going to buy back roughly as much stock as it’s issuing.

Now the kind of people who look at Apple as a stock first and as a company second are not going to be happy about this. And weirdly, leading that charge today is the Wall Street Journal, and its Marketplace editor Dennis Berman. Shortly after Apple’s dividend was announced, the flagship @WSJ Twitter account, with more than 1.5 million followers, told them all that “Apple’s cash pile exceeds the GDP of more than two-thirds of the world’s countries.” That’s a classic case of comparing apples with oranges: the cash pile is stock, while GDP is flow. And it’s exactly the kind of unhelpful and misleading statistic that the WSJ should be trying very hard to avoid.

Shortly afterwards, the same @WSJ account retweeted SmartMoney:

Apple’s dividend looks so stingy, writes @jackhough, that the company belongs on “Hoarders.” http://t.co/2cgCC931
Mar 19 via TweetDeck Favorite Retweet Reply

And the griping didn’t stop there.

Apple’s 1.81% dividend yield is hardly exceptional. A comparison: AT&T: 5.61%, Verizon 5.09%, MSFT 2.42%, HP 2.01% http://t.co/JHBfcGDs
Mar 19 via TweetDeck Favorite Retweet Reply

It’s almost as if the WSJ doesn’t understand that Apple’s dividend yield is not under its control. Apple can set the level of its dividend; it can’t set the level of its share price. Is the WSJ really implying that Apple should wish for a lower share price, so that its dividend yield goes up? After all, at $10.60 per year, Apple’s dividend is fully 3% of where its stock was trading as recently as November. What’s more, at $9.9 billion per year, Apple’s dividend is very close to being the highest in the world. Here’s the league table, as of Friday:

Company Annual dividend
(billion US$)
AT&T 10.17
Telefonica 9.97
Exxon Mobil 9.02
Vale 9.00
PetroChina 8.41
Vodafone 7.08
Royal Dutch Shell 6.88
Total 6.77
General Electric 6.46
Pfizer 6.23
Johnson & Johnson 6.16
Chevron 6.14
Procter & Gamble 5.77
HSBC 5.59
Verizon 5.56

If you look down this list, it’s not really the kind of company that Apple particularly wants to keep. AT&T is returning more than $10 billion a year to its shareholders; I’m sure that all of us who use its service could think of a few areas that money could easily be put to good use. And five of the top eight companies on this list are in the commodities business; the other three are telecoms. Not a single company on the list could realistically be considered a growth stock or a hotbed of innovation.

But the people who prefer financial engineering to, well, real engineering are never going to be happy with Apple’s conservatism. Dennis Berman made his own Cracker Barrel barb, and then followed up with this:


There is no reason for Apple to issue debt: companies issue debt when they can invest it and get a good return on their investment. But as we’ve seen from Apple’s cash pile, Apple has essentially nothing to invest in at all. So long as there’s a cash pile, issuing debt would only make that pile go up, rather than down, while forcing the company to pay interest for no good reason. Having a cash pile and issuing debt is a bit like having a CD and running a balance on your credit card: idiotic.

And Berman’s wrong if he really thinks that Apple could issue debt cheaper than the US government. Companies which can borrow more cheaply than the US government are a bit like those faster-than-the-speed-of-light subatomic particles: if you look more closely, they turn out not to exist after all. The US Treasury can borrow more cheaply than anybody else just because the US Treasury market is much more liquid than the market in any other fixed-income name. Which in turn is a function of the fact that there are $11 trillion of Treasury bonds outstanding. I think we can safely say that Apple’s never going to borrow anything near that much money.

Now Apple could, if it wanted, declare a monster special dividend, get rid of all its cash, borrow lots of money, use that money to buy back stock, and generally lever up in the name of financial engineering. That would be rather worrisome, I think, to the vast majority of Apple’s shareholders — and it would certainly be worrisome to any potential buyers of Apple’s bonds. Basically, Apple has two choices when it comes to debt. It can issue debt while it’s already sitting on lots of cash, which is redundant and stupid. Or it can get rid of all its cash before it issues debt, in which case it could no longer borrow at ultra-cheap rates, and it would lose a lot of strategic flexibility at the same time.

So well done to Tim Cook for announcing a sensible dividend at a sensible time, when Apple’s throwing off enormous amounts of cash and there’s nothing obvious to spend the money on. And well done too for ignoring the noise coming from the financial media, who think that his company is simply a stock price. It isn’t, and I sincerely hope Apple never ends up that way.


A few months ago, Olympus fired their recently promoted CEO, and said he didn’t fit in with their culture, as he was British. But he claimed it was because he asked uncomfortable questions about where the company had been spending money, and it turns out they were falsifying their accounting, and had lost hundreds of millions of dollars (it might have been billions, but it was a very material amount). For example, they had bought a face cream company for over $700M, and it was worthless. Ultimately, the COB and other execs were fired, and the multiple governments are investigating. The scale of the cover-up was shocking, as it went far beyond expense account fraud.

Most telcos and carriers’ finances are scary, but you have to believe that people will keep their phone service even when the economy tanks. In addition to DT, I also have TEO, which is small but doesn’t seem to have a lot of debt, pays a big dividend (there’s a catch with it, and I don’t know it, but I don’t have a lot invested there).

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A top CDS trader quits the CDS market

Felix Salmon
Mar 19, 2012 15:00 UTC

Ben Heller, a man who’s been trading CDS since before they were even called CDS, is out of the CDS market.

There have been rumblings about this market for a while: an FT article from March 9 quoted a series of unhappy people on both the buy side and the sell side.

One banker working on the Greek bond deal says: “I almost wanted CDS not to be triggered just so it would kill off the instrument and then we could set about designing something better to replace it.”

But with Heller going on the record about this, the pressure on ISDA to fix what is widely seen as a broken system is surely going to increase. Because he’s not alone.

“Many of the people you know from EMCA,” he tells me at the end of this video, “are people who are very focused on this issue and who are not going to let this one go.”

The world has long forgotten EMCA, an attempt by investors in emerging-market debt to team up and provide a united front in the face of attempted sovereign debt restructurings. But back when it was founded in 2000, it included all the biggest names in the emerging-market debt world, including Heller, who was then at HBK; Mark Siegel, at MassMutual; Abby McKenna, at Morgan Stanley Asset Management; Mark Dow, at MFS; and Mohamed El-Erian, at Pimco. The membership of Dow and El-Erian was particularly important, because they had both worked for many years in the official sector (Dow at Treasury, El-Erian at the IMF), and were taken seriously by policymakers.

EMCA never really got off the ground as an organization, partly because it turned out that policymakers, and their advisers, were more likely to pay attention to individual members than they were to respond seriously to carefully-honed collective statements. But clearly these people retain a certain amount of power: you can see that in the way that Greece’s new 2042 bond got quietly split up into 20 different bonds, each maturing in a different year.

Why did that happen? Because to a certain extent, the market is valuing Greece’s debt by working out how much money Greece is realistically likely to pay its bondholders over time, and then divvying up that value among the bonds outstanding. If some of the bonds have earlier maturities and some have later maturities, then more of the value will end up in the early-maturing debt, and less of it at the end of the yield curve. And so the value of the new 2042 bond is going to be lower, this way, than it would have been if it was the only bond being issued.

Why would creditors want a bond to trade lower? Because this way the 2042 bond becomes the cheapest-to-deliver bond when the CDS auction is held today, and the lower the price of the cheapest-to-deliver bond, the bigger the payout for anybody holding credit protection, including basis traders like Heller.

It seems to me that there were two opposing constituencies in the Greek default. One group, led by European policymakers, were very happy to see the CDS market get broken — they hate CDS, in exactly the same way that CEOs hate short sellers. The other group, led by fixed-income investors, wanted to make sure that the CDS market operated relatively smoothly and that the payouts were fair.

In the end, it seems, the buy-side won — but with the vivid realization that they had gotten lucky. Fixed-income traders never want to rely on luck and fortune when it comes to things as important as default protection. And so Heller, for one, is out of the market completely — unless and until ISDA does a root-and-branch revamp of its documentation. Which, if it happens at all, isn’t going to happen any time soon.


@MrRFox on “nailing CDS writers with a big loss”.. dude you might want to read the introduction to CDS before making your comments. CDS is supposed to pay the amount of the loss an investor suffered. asking the CDS writer to make that payment is not exactly “nailing” them with a loss that would lead CDS to disappear.. @Danny_Black – thx for the link, but it’s not “another view”. it just says that the auction went smoothly, i.e., the cheapest to deliver bonds was identified and priced without any major disruptions. this has nothing to do with this article, which (vaguely) explained why it’s only by luck that the cheapest to deliver bond had the price that allowed the CDS payments to cover investors’ losses. @Felix Salmon: it might be helpful to give a bit more background, since it appears that none of the people who commented on your article actually understood what happened. and of course, no one takes 30-60 minutes it takes to educate themselves before posting comments; sad, but not surprising.

Posted by Mx12 | Report as abusive

Did the market know about Apple’s announcement?

Felix Salmon
Mar 19, 2012 05:47 UTC

On Tuesday March 6, Apple shares opened at $523.66. On Thursday March 15 — eight trading days later — they opened at $599.61. Which means that over the course of those eight trading days, the market capitalization of Apple increased by more than 70 billion dollars.

Let’s put that in perspective: the market capitalization of Molson Coors is $8 billion. The market capitalization of Staples is $11 billion. The market capitalization of Yahoo is $18 billion. The market capitalization of eBay is $48 billion. The market capitalization of Nike is $51 billion. The market capitalization of Goldman Sachs is $63 billion.

Apple isn’t just worth more than those companies.  (In fact, it is worth more than double all those companies combined.) The point I’m making here is that if you take the amount that Apple was worth on Thursday morning, and subtract the amount that Apple was worth eight days earlier, the difference is more than the total value of any of those companies, up to and including Goldman Sachs.

To a first approximation, there was no news about Apple that emerged over the course of those eight days. The only real thing we learned was that the new iPad had sold out, which, well,  would have been more surprising if it hadn’t.

Now, however, there’s news — real, market-moving news, about what Apple’s going to do with its $100 billion or so in cash. As Chris Tolles drily puts it, that news is evidently “so huge that it propagated backwards in time”.

aapl.tiff Apple stock closed on Friday at $585.57 per share, after a run-up all but unprecedented in the history of mega-caps. Back in November, when I was remarking on how cheap Apple seemed, the stock was $363 per share; since then it has added $208 billion in market cap. That’s more than the valuation of Google. So one way of looking at the crazy price action of the past couple of weeks is to chalk it up to the astonishing power of momentum.

Alternatively, you could just say that the stock market has been slow to price in what has been clearly evident since February 23, when Apple CEO Tim Cook said at the company’s annual meeting that Apple has more money than it needs, and that he and the board were nearing a decision about what to do with it.

But still, it is a little bit suspicious that Apple’s big announcement is coming immediately after one of the largest and fastest rises in market capitalization that the stock market has seen since the dot-com bust. Or even during the bubble, for that matter. Look at Apple in the famous context of Amazon. On December 16, 1998, when the stock was trading at $242, Henry Blodget put a price target of $400 on the company. On January 6, 1999, Amazon hit $400. Amazon had grown its market capitalization by $13 billion in 14 trading days, which means that its market cap was increasing at a rate of just under $1 billion per trading day. If you look at those eight days of Apple trading, by contrast, the company’s market cap was increasing at a rate of $8.9 billion per day.

Given how unusual it is for a company to see its capitalization rise so astonishingly quickly, it’s reasonable to raise an eyebrow at the timing here. On Monday, Apple will make its announcement, and the stock will rise, or it will fall. But if it falls, that won’t necessarily mean that the market is disappointed in what Apple is announcing. It might just mean that the announcement got more than fully priced in, over the course of the past couple of weeks.


KenG_CA has a valid point, about actual ability to realize the full potential of wireless.

Regardless, I was just ruminating on Apple’s decision. Both parts: The dividend ($40bil? $45bil?) and the share buyback ($10 or $15bil? I’ve seen different breakouts). I couldn’t find any recent history of Apple stock repurchases. Given the company’s inclination to hold on to cash after the bad times in 1995, I suppose that’s consistent. There are various reasons to do a share buyback. Poor stock price performance clearly isn’t one of them for Apple! Is there any significance to this decision, the share buyback now?

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Fabulous journalism

Felix Salmon
Mar 17, 2012 20:27 UTC

Blaine Harden’s astonishing account of the life of Shin In Geun — a man born into a North Korean prison camp, who has lived pretty much the worst life imaginable — has received significantly less attention than the fact that This American Life has retracted its story about working conditions at Foxconn, which was based on Mike Daisey’s monologue. (If you don’t want to listen to the hour-long retraction, which is a masterpiece of the form, the transcript is available here.)

Daisey has attempted to defend his actions, using an end-justifies-the-means argument:

What I do is not journalism. The tools of the theater are not the same as the tools of journalism. For this reason, I regret that I allowed THIS AMERICAN LIFE to air an excerpt from my monologue. THIS AMERICAN LIFE is essentially a journalistic ­- not a theatrical ­- enterprise, and as such it operates under a different set of rules and expectations. But this is my only regret. I am proud that my work seems to have sparked a growing storm of attention and concern over the often appalling conditions under which many of the high-tech products we love so much are assembled in China.

Kevin Slavin has defended Daisey, too:

His skill in telling the story he told is responsible for the phenomenal amount of media around Chinese factory labor practices. Not the New York Times’ China bureau. Not Bloomberg Businessweek. Show me some reporters who were able to generate the same cultural engagement with the issue, will you?

Stories aren’t made out of facts. Storytellers use facts to reveal truth but they use a lot of other things too. And if ever I have to choose between facts and truth, I’ll take truth. It’s always a great story, and stories are the life inside the human mind.

It’s a lot easier to tell a great story if you don’t also need to be factual about things. Romeo and Juliet and Hamlet are fiction; Richard III and Henry V are mostly fiction, albeit based on historical events. And it’s precisely because they’re fictional — because Shakespeare was always storyteller first and foremost — that they’re still performed so regularly, all over the world, and that they have had such powerful emotional resonance with billions of people over the centuries since they were written.

But here’s the thing: Shakespeare never lied. He never sat down in front of thousands of people to tell a first-person story, over and over again, about events which he had simply invented. He never ended that story with an exhortation which would carry no weight if his audience thought the story was fiction:

When Apple would call journalists who had spoken to me, and tell them, “You know, I don’t know if you want to be associated with him. He’s kind of unstable. You know, he does work in the theater.”

I would keep my head down. And I would tell my story.

And tonight—we know the truth.

At the end of Daisey’s show, every member of the audience is given a sheet of paper with the heading “CHANGE IS POSSIBLE”. It includes Tim Cook’s email address, and urges the audience to, among other things, “think different about upgrading”. And one of the reasons why Daisey’s show has proved so popular — his This American Life episode was the most downloaded in the show’s history, even more than the squirrel cop — is that it combined great storytelling with a feeling that this is happening now and we should do something about it. It’s exactly the same formula used by Kony 2012, a project which is equally problematic.

My friend and Reuters colleague Rebecca Hamilton has written a great book, Fighting for Darfur, which should be required reading for anybody who has been drawn in by the Kony 2012 campaign. Or, for that matter, by Daisey’s monologue. Here’s what she wrote to me:

To build a mass movement quickly, it helps to have an over-simplified, emotive narrative with a single demand. It also helps to tells people that by doing easy tasks – sharing a link on Facebook, buying a bracelet — they can save lives. Central to the formula is that the agency of local actors gets downplayed to hype up the importance of action by outsiders. But all those ingredients inevitably lead to eventual failure when the simple solutions can’t fix the complex reality. The movement walks away, disillusioned. And in the meantime untold resources have been expended on solutions that have been out of step with what local activists need.

The fact is that the chief beneficiary of the success of Daisey’s monologue has been Mike Daisey, much more than any group of factory workers or underground trades unionists in China. Similarly, the chief beneficiary of the success of Kony 2012 has been Invisible Children, a US non-profit which spends its money mostly on making movies.

And this is where the justifications coming from Daisey and Slavin really fall down — in the idea that if you get a lot of westerners riled up about what’s going on in some far-flung part of the world, then that is in and of itself a Good Thing. Daisey has managed to convince himself that his interests are perfectly aligned with those of the workers at Foxconn. Even when he presents himself as some kind of savior in a Hawaiian shirt, bringing wisdom to the workers just by asking the right questions:

I’m just ad-hoc-ing questions, I’m asking the questions you would expect: “What village in China are you from? How long have you been working at Foxconn? What do you do at the plant? How do you find your job? What would you change at Foxconn if you could change anything?”

That last question always gets them. They always react like a bee has flown into their faces and then they say something to Cathy and Cathy says, “He says he never thought of that before.” Every time. Every time.

Of course it’s ludicrous to believe that someone working 12-hour shifts at a Foxconn plant wouldn’t start thinking about how the plant might be better run. But that’s the power of theater: its conventions are designed to encourage us to suspend such disbelief. And so we walk away thinking that Mike Daisey is bold and wonderful, and really did ask that question of Foxconn workers under the glare of gun-toting Chinese guards. (We now know that no Foxconn guards are armed: that bit, too, was made up.) And we think that the Chinese workers are so beaten-down and resigned to their miserable fate that they never even stop to think about how things might be improved.

And this is why I believe the story of Shin In Geun, despite the fact that its format is inherently treacherous. Both Shin and Harden have every incentive to exaggerate and to make things seem worse than they are; what’s more, there’s absolutely no way of fact-checking the vast majority of what’s in the story. But what’s missing from their tale is the white man’s burden: the idea that a white American like Mike Daisey or Jason Russell (or Jeff Sachs, for that matter) is a selfless hero, doing good for the poor and exploited in other continents.

What Daisey should have done is what Dave Eggers did when he wrote What is the What: make no pretense that everything is true, and trust in the power of his storytelling to carry the audience along. Instead, he lied — both to This American Life and to his audience.

I am telling you that I do not speak Mandarin, I do not speak Cantonese, I have only a passing familiarity with Chinese culture and to call what I have a passing familiarity is an insult to Chinese culture—I don’t know fuck-all about Chinese culture.

But I do know that in my first two hours of my first day at that gate, I met workers who were fourteen years old,

I met workers who were thirteen years old,

I met workers who were twelve.

Do you really think Apple doesn’t know?

This had a lot of resonance for me, when I first heard it, not least because I understand statistics. In order to meet underage workers who are happy to talk about how old they are within two hours of turning up at a factory gate, there need to be a lot of those workers. Many more than the official numbers suggest. But in fact Daisey did not meet underage workers outside the factory gates. (He still claims that he did, but his translator, who’s a much more reliable source, says that he didn’t. And as Evan Osnos says, that whole episode defies credulity in the first place.)

Daisey’s m.o., it’s now clear, was to go to China, talk to some people, and then write a monologue in which he felt free to incorporate anything he’d read about the plight of workers anywhere in the country, presented as a direct piece of first-person reportage. And there’s a good reason why that’s an underhanded and unethical thing to do, which is that even if Apple did everything Daisey’s asking of them, he could still go to China and return with the exact same monologue. With hindsight, Apple was absolutely right not to engage with Daisey directly, because he created a game they could never win. The only winning move, for them, was not to play.

Jack Shafer, then, is right to come down hard on Daisey. He concludes with this, about fabulists generally:

I have my theory: 1) They lie because they don’t have the time or talent to tell the truth, 2) they lie because they think they can get away with it, and 3) they lie because they have no respect for the audience they claim to want to enlighten. That would be an ideal subject for a one-man theatrical performance.

The irony is that this subject has already been explored in a one-man theatrical performance — one by Mike Daisey, no less. Daisey, you won’t be surprised to hear, is gentler on James Frey and JT Leroy than Shafer is on Daisey, blaming in significant part “the demands of personal storytelling” for their sins.

In any case, it’s clear that theatrical events are bad places to look for unvarnished truth. And in the set of “theatrical events” I absolutely include things like TED talks. Many people have asked, of the hilarious TED 2012 autotune remix, whether it’s parody or not. The answer is that it’s not parody at all. Rather, it’s the work of someone who has been entranced by TED’s theater, and who hasn’t yet woken up to realize that statements like “we can change the world if we defy the impossible” are less stirring than they are just plain stupid.

Real life is messy. And as a general rule, the more theatrical the story you hear, and the more it divides the world into goodies vs baddies, the less reliable that story is going to be. I’ll be very interested to read Harden’s book about Shin In Geun, to see how the guards and teachers in the prison camp are portrayed — to see whether they’re monsters or whether they themselves are victims of the North Korean regime. As we know from Primo Levi, prison camps will twist and subvert the ethics of all concerned. And even in this excerpt we can see real moral problems: Shin himself behaves with astonishing heartlessness towards his own parents and brother.

One of the central problems with narrative nonfiction is that the best narratives aren’t messy and complicated, while nonfiction nearly always is. Daisey stepped way too far over the line when he started outright lying to his audience and to the producers of This American Life. But all of us in the narrative-nonfiction business (I’ve written such stuff myself) are faced at some point with a choice between telling the story and telling the whole truth, or the whole truth as best we understand it. Someone like Michael Lewis will concentrate with a laser focus on the story: what he writes is the truth, but it isn’t the whole truth. And when you have a storyteller like Mike Daisey who considers himself a monologist rather than a journalist, even outright lies can find their way in to the story very easily.

Ira Glass says that This American Life should have scrapped the idea of doing a Mike Daisey show the minute he told their fact-checkers that he had no way of contacting his translator. But maybe the mistake was made even earlier, when This American Life decided that a theatrical monologue could ever be held to standards of journalistic accuracy. This one certainly couldn’t, and in that I think it’s more the rule than the exception.


” I’m not one to claim that economic development necessarily causes democratic development, but they DO seem to be more than correlated.” (Walt French, last above)

Cool, Mr. French – you’ve found a fig leaf of allegedly ethical justification that gives us all the green light to pursue our personal financial self-interests without the need to even consider the consequences inflicted on others by the dragon our engagement feeds and nurtures. I’m sure we’re all ever so grateful.

If ever there is endowed a Nobel Prize for “Creative Contributions to the Art of Rationalization”, I’m nominating ….

Posted by MrRFox | Report as abusive

When Wall Street captures Washington

Felix Salmon
Mar 16, 2012 21:12 UTC

One of the themes running through Noam Scheiber’s new book is the idea that professional technocrats have a tendency to take at face value much of what they’re told by Wall Street. Bankers are very good at capturing/flattering mid-level political operatives, although admittedly they’re less good at it now than they were before the crisis.

And certainly there’s no shortage of bankers who have gone into government and have then proceeded to advance the interests of the financial-services industry: Bob Rubin is the prime example.

As for legislators, it’s probably no surprise that representatives from places like New York or Charlotte or Delaware will be very friendly when it comes to the financial-services industry. But more generally the industry rains all-but-indiscriminate funds on lawmakers on both sides of the aisle, with impressive results.

If Bill Clinton’s economic team set the parameters of what you might call Rubinite economic orthodoxy, then Obama’s team has more or less stayed within those parameters: the few exceptions, from the like of Christy Romer, have had almost no real impact. If you want more heterodox ideas, then you’d actually be better off looking at the Bush years: first the massive, fiscally-disastrous tax cuts, then the equally massive and fiscally-disastrous wars in Afghanistan and Iraq, and finally the highly-interventionist policies of Hank Paulson during the crisis.

It must be emphasized, of course, that Dodd-Frank — pretty much the first and last bill to pass Congress since 1980 which the financial-services industry didn’t love — had a lot of support from Democrats, and very little support from Republicans. And all you need to do is look at George Bush’s nominees to the SEC to see how much appetite the last Republican president had for regulation with teeth. Meanwhile, Mitt Romney is quite open about the fact that he thinks the financial-services industry is just great, and that he’ll do anything he can to help it out.

So if you’re in favor of increased regulation of financial-services companies, then you’ll support Obama over Romney. But this is a lesser-of-two-evils thing, as Scheiber’s book points out. And interestingly, the more experience that a policymaker has had in and around Wall Street, the tougher that policymaker is likely to be. When Larry Summers was Treasury secretary, for instance, he pushed through the Commodities Futures Modernization Act and was basically a hardline deregulator. After he’d spent some time earning lots of money from banks and hedge funds, however, and returned to the Obama administration, he had much less time for what they wanted to do.

The Obama-era Summers stands between tough-on-Wall-Street former bankers like Gary Gensler, at the CFTC, and much easier-on-Wall-Street lifelong technocrats like Peter Orszag, who of course wound up taking a highly lucrative job at Citigroup, and Tim Geithner. To be honest, it’s not a particularly broad spectrum. Wall Street has always been very good at getting what it wants from the government, no matter which party is in power. Scheiber thinks that there’s a chance that Obama will get tougher in his second term; I’ll believe it when I see it. Because in general, if the board of Goldman Sachs has essentially no control over how Goldman behaves, then the SEC and the Federal Reserve have even less.


As the weather has twisters , we have entered into the financial twister that is the greatest depression in history , the rate of devaluation is so great that the markets are confusing it with capitalization.

Posted by Mr.Sakli | Report as abusive

Chart of the day: Growth and debt

Felix Salmon
Mar 16, 2012 17:54 UTC

Greg Ip has a fantastic blog post on the subject of America’s GDP growth and the potential thereof. He’s talking about this chart:


The blue line, here, is actual US GDP. The green line is what’s known as “Potential Gross Domestic Product” — the amount of output that the Congressional Budget Office reckons that the US could produce, if it were running at full capacity. (Don’t be confused by the weird formula: potential GDP is released in real 2005 dollars, so I’ve multiplied that data series by the GDP deflator to convert it to nominal dollars. You’ll see why in a minute.)

The main worry in this chart, of course, is the fact that the blue line — actual GDP — is so far below the green line, which is where by rights we should be. Up until the Great Recession, the two series tracked each other very closely. Now, however, they diverge by some $890 billion. That’s $7,800 per household, per year.

Greg’s point is that the green line might well overstated: that the economy can’t in fact grow, sustainably, at the kind of pace that the CBO is assuming it can. As he puts it: “both the level and growth rate of American potential output is much lower than we think”.

I think this theory is entirely plausible. And to demonstrate why, I’m going to take the exact same graph above, but add one more data series to it — this time the amount of credit outstanding in America.


There’s a whole narrative in this chart. From 1970 through the beginning of the crisis in 2008, GDP grew at a pretty steady pace. But the amount of debt required to generate that output just got bigger and bigger — the rate of growth of the credit market was much faster than the rate of growth of GDP. In 1970, GDP was $1 trillion while the credit market was $1.6 trillion: a ratio of 1.6 to 1. By 2000, when GDP reached $10 trillion, the credit market had grown to $28.1 trillion: a ratio of 2.8 to 1. And by mid-2008, when GDP was $14.4 trillion, the credit market was $53.6 trillion. That’s a ratio of 3.7 to 1.

In other words, in order to keep up a steady rate of GDP growth, we had to saddle ourselves with ever more cheap and dangerous debt.

Then, suddenly, the growth of the credit markets screeched to a halt, and we had a major recession. And since then, the size of the credit market has been roughly flat.

It makes sense that if we needed ever-increasing amounts of debt to keep up that long-term GDP growth rate, then when the growth of the debt market stops, our potential growth rate might fall significantly.

I’m glad that we’ve finally put an end to the credit bubble, which had to burst at some point. But it’s naive to think that we can do so without any adverse effects on broad economic activity. So we might indeed have to resign ourselves to lower potential growth going fowards. If only because we’re taking ourselves off the artificial stimulant of ever-accelerating credit.


Your basic intuition is betraying your reasoning. The point you are making in this post is profoundly wrong for two main reasons. And I have seen recently such kind of argument so many times, that I am becoming paranoid about it. So here is my contribution.
Firstly, as one of the earlier comments highlight it is not clear that a reduction in the pace of debt will lead to a lower capital stock, lower productivity, to lower technological knowledge, or to a lower labour supply. What is the connection between the two sides of your reasoning: debt and potential output? I don’t see any: prices, wages, interest rates may change, but those REAL factors remain the same. I suspect that your problem is related to the second point I am going to highlight next.
You may be confusing the impact of debt with the impact of some other aggregate. The central bank and the banking sector can create money out of the blue. But no one can create debt out of the blue.
For the sake of simplicity, imagine a closed economy (the argument is easy to develop this way).There is a certain level of savings which end up having a certain monetary value. If the level of savings increase (and Price level constant), the monetary value of savings goes up as well. The point is that the level of savings may remain constant, but (apparently) de amount of debt may go up. Why “apparently”? Because in this economy (a closed economy), the level of all debt (negative savings), has to be TOTALLY EQUAL to all loans (positive savings).
So for this economy as a whole, it is as if net liabilities (debt) are zero. In the end, the LEVEL of debt is irrelevant, but not the way debt is USED for. So, if I borrow money and just throw it down the tube, I will not be able to pay it back. But this is another problem which has nothing to do with the level of debt itself, but rather with the efficiency of allocating those loans to specific aims.
So unless, we have someone coming from Mars or any other planet, borrow and disappear, or we have a large proportion of debt badly used (which I am not ruling out, for obvious known reasons), we do not have (as a matter of fact) any problem with the fact that the LEVEL of debt may grow faster than GDP. It is one major mark of the very history of modern capitalism. There is plenty of evidence showing that financial intermediation has grown faster than GDP. And in the world of economic theory there are already convincing arguments showing that if the costs of intermediation go down for a while, yes, we should expect intermediation to grow faster than GDP. There is an interesting recent paper by Edward Prescott and associates on this issue.
Do we remember what happened in the 1990′s with a similar story about the “Paper Tigers”? A huge amount of people were sentencing them to oblivion. It was a fashion that proved wrong.

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What would happen to investment banks in a crisis?

Felix Salmon
Mar 16, 2012 15:43 UTC

Sheila Bair has put her finger on the fundamental weakness of this week’s stress tests with a single statement:

“No distribution should have been approved that would bring the leverage ratio below 4 percent,” Bair, the former chairman of the Federal Deposit Insurance Corp., said yesterday in an interview. “With leverage of 25-to-1, during a crisis, these banks would likely suffer a run.”

Essentially, the stress tests model what might happen to bank balance sheets in the event of a major crisis — one which includes a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices. The Fed wanted to make sure that all big banks would still have a capital base of at least 5% of their assets in that scenario, which is why it barred Citigroup from returning capital to shareholders. Citi comes out at 5.9% “assuming no capital actions after Q1 2012″, but that number drops to 4.9% “with all proposed capital actions through Q4 2013″.

But capital levels are only half of the equation; the other half is leverage. And look at the Tier 1 leverage ratio for the different banks under the stressed scenario, on page 27 of the PDF. Citigroup plunges from 7.0% now to just 2.9% after the stress, while Bank of America is much more robust, dropping from 7.1% to 5.3%. And here’s the scary thing: of all the big banks, it’s the ones with investment banking arms which fare the worst. There are 19 different banks listed; seven of them end up with a leverage ratio under 5% in a stressed scenario. Citi’s one; the others include Goldman Sachs (4.5%), Morgan Stanley (4.5%) and JP Morgan Chase (4.0%), its “fortress balance sheet” notwithstanding.

Now, picture yourself in the kind of crisis where stocks are down 50% and unemployment is up to 13%. And imagine that you discover that the counterparty you use for all your financial transactions is levered 25-to-1. You will change your counterparty. That’s known as a run on the bank, and it’s fatal.

In other words, banks don’t need to just survive the stress test; they need to be able to keep their customers in a stressed situation as well. If a bank comes near to insolvency, it will go bust, as its customers rush for the exits.

As Bair says, bank counterparties don’t look at sophisticated risk-based metrics in a crisis: they look at headline numbers like the leverage ratio.

“This underscores another weakness of the tests: They didn’t really stress liquidity,” said Bair, now a senior adviser at Pew Charitable Trusts, a Washington-based nonprofit. “The investment banks are particularly vulnerable to liquidity failures because they don’t have a large, core deposit base.”

Investment-bank counterparties can flee in a matter of hours; old-fashioned deposit runs tend to take a lot longer. Which means that investment banks should be held to a higher standard than commercial banks when it comes to the stress tests. Instead, they just need to show a liquidity ratio of more than 3%. That number’s too low.


MrRFox, yeap because Northern Rock had done a great job for the UK.

Posted by Danny_Black | Report as abusive

Why banks will continue to rip off clients

Felix Salmon
Mar 16, 2012 14:23 UTC

Frank Partnoy makes a great point: the word “client” has been over-used by investment banks so much that by this point it “has become Orwellian doublespeak”. But the problem is much deeper than one of semantics. When all counterparties are considered clients, then that creates a corporate culture where all clients are considered little more than counterparties. And that, in turn, can be evil and poisonous.

Partnoy says that “the firm’s salespeople know who is a client and who is a mere a counterparty”, and to a certain degree he’s right. A sovereign wealth fund dealing with the equity derivatives desk is a counterparty; a private individual whose money is being managed by Goldman Sachs Asset Management is a genuine client. If you’re paying Goldman fees, you’re quite unlikely to be called a “muppet”, and no one in the firm is going to try to “rip your eyes out”.

But that doesn’t mean that Goldman will always be acting in your own best interest, rather than its own. Stockbrokers, famously, receive substantial fees from their clients, but don’t have a legal fiduciary duty to those clients, and do have a demonstrated tendency to steer their clients into the investments which end up paying them the highest commissions.

And even companies paying for M&A advice are sometimes victims of Goldman’s conflicts.

In other words, no one can complacently assume that they’re a favored client of Goldman Sachs and that therefore Goldman will be ripping off others on their behalf, rather than ripping off its own client. Not even people writing large checks to Goldman every quarter.

I’ve been talking to bankers in the days since Greg Smith’s op-ed came out, and there’s a pretty much unanimous feeling that bankers’ loyalty to clients, at least at Goldman and other big investment banks, has been declining across all aspects of the business, for many years.

Greg Smith was in equity derivatives — an area where it’s incredibly easy for salespeople to hide fees if they’re inclined to do so. In fact, it’s so much easier for a bank to build its fee into the pricing of complex bespoke products than it is to charge that fee directly, all banks do exactly that. It’s like buying “commission-free” currency when you go on holiday: you know full well that the bureau de change is still making money; it’s just making that money by giving you a bad price for your dollars, rather than by charging you a high commission.

But in a business devoted to making ever-increasing sums of money, it’s very easy for those hidden fees to get bigger and bigger over time. I talked to one former equity derivatives executive a couple of days ago, who said with surprising vehemence that in his day, the big clients were God: you built in fees, yes, but you never ripped them off or tried to steer them into something which was not in their best interest. Now of course what he was saying was self-serving, but I think it had an element of truth to it, too.

There’s been a lot of talk in the past couple of days about how Smith was not much of a star at Goldman: he was the sole person trading US equity derivatives in London, which is always going to be a marginal job at best, and he hadn’t risen very far up the greasy pole given how long he worked at the firm. Certainly it’s a bit of a stretch to call him an “executive” at Goldman, as that term is generally understood: he didn’t even have any employees. But at the same time, his relatively lowly position in the company is entirely consistent with a tale of a smart but ethical professional who didn’t make as much money for the firm as his peers did, just because he didn’t rip off his clients to the degree that they did.

All of which is to say that it’s worth taking Floyd Norris’s concerns seriously about the latest spate of deregulation in the securities markets. I think that there’s a lot to like in the JOBS act, especially the idea that we should stop forcing companies to go public just because they have 500 shareholders, including employees. Companies should be encouraged to give out equity to their employees, without worrying that if they do so, they’re on some kind of IPO train which can’t be derailed.

At the same time, however, there’s a lot of deregulation in the JOBS act which seems aimed primarily at giving banks a greater opportunity to make money, largely at the expense of investors in the primary markets. Mary Schapiro has some strong and important points: the primary markets are rife with information asymmetries, and someone needs to protect the interests of investors, rather than allowing banks to rip them off with legislated impunity.

All big banks are public companies. Public companies are always under a lot of pressure, from their own shareholders, to grow. But as a country, we have a public interest in seeing those banks shrink. The tension is clear. And if regulators try to get banks to shrink, the banks in turn are going to make even greater efforts to extract the highest profits possible from the businesses they retain. Which is another way of saying that they’re going to rip off their clients even more. So let’s be assiduous when it comes to regulation, because neither banks nor their boards are going to lift a finger to protect client interests. Not when they’re trying to maintain and maximize their own profitability.



Posted by Very_baaaad_boy | Report as abusive