Felix Salmon

The problem with Netflix

Felix Salmon
Apr 24, 2012 19:32 UTC

Nick Thompson today asks whether Netflix is doomed, and gives a fantastic potted history of how the company managed to pivot from being a wonderful DVD-by-mail company to being a clumsy digital-platform play.

While I agree with Nick’s conclusion, however, that Netflix is in a very tough spot, I disagree with the way he gets there:

It’s not easy for a startup to build massive warehouses and systems for mailing discs. It is easy, however, to get into the streaming business. Yesterday, for example, we learned of a startup called NimbleTV, which plans to let you watch all the channels you subscribe to through your cable provider on your phone or your tablet…

Netflix fears that just distributing digital content is a mug’s game. Anyone can move bits around, which means that the price for doing so will just keep dropping. So it’s trying to create its own original content. But, so far at least, it’s not very good at doing so. “Lilyhammer,” a mobster show that Netflix introduced in January, has gotten killed by reviewers; I gave up on the first episode after fifteen minutes of mediocre acting and clumsy dialogue. Early next year, Netflix will release a new season of “Arrested Development,” which will surely be better. But the company is in an odd spot, facing the same competition problem it avoided when it spun off Roku. If its shows are bad, it’s embarrassing. If they’re good, they could irritate partners. Netflix needs content from AMC, for example. But will those negotiations get harder once Netflix is creating its own shows to compete with “Breaking Bad” and “Mad Men”? …

It won’t be easy for Netflix to find a way to fend off its new competitors while keeping its old partners happy.

The way I see it, Thompson has this backwards. I think he’s dead wrong about the barriers to entry in the streaming business: they’re high, and if I were Netflix I really wouldn’t be worried about other streaming companies right now. As far as I can tell, Netflix is the only company in the world which is great at persuading millions of people to pay a regularly monthly fee for streaming content online. And while it might have competition on that front in the future, right now that’s the least of its worries.

Rather, Netflix’s problem is with what Thompson calls its “old partners”. There is a stream of money coming from Netflix’s subscribers, and Netflix is competing with its “partners” for that money. The studios have learned that Netflix will pay astonishing sums for streaming rights — orders of magnitude more than it ever paid for DVDs. And while Netflix used to be able to rent out a DVD hundreds of times after buying it once, under the streaming contracts it has to pay the studios every time a movie or TV show is streamed.

This is why I’m fundamentally pessimistic when it comes to Netflix’s prospects: any time that Netflix builds up a profit margin, the studios will simply raise their prices until that margin disappears. Netflix needs the studios more than the studios need Netflix: no one’s going to subscribe to Netflix for Lilyhammer and Arrested Development alone. And while HBO has managed to build up a good business by producing original content, Netflix really doesn’t want to be HBO, it wants to be much bigger than that. It wants to be a one-stop shop for video content, rather than a single channel among hundreds.

The problem is that if you’re a one-stop shop, then you have limited negotiating power to tell any given studio that you won’t pay their price. Netflix’s subscribers are, ultimately, paying for the content, not for the pipe. And so it stands to reason that Netflix’s revenue stream will go the people making the content rather than to Netflix itself.


I for one absolutely love Netflix streaming, it is the best thing since the ATM and microwave! I wonder what would be the outcome if Netflix was bought by a company with influence like a Wal-Mart? As Microsoft bought shares of Barnes and Noble Nook; the potential of those two together are endless. Netflix and Wal-Mart (once adversaries) would make a powerful entertainment team that would be able to make demands to studios and distribution companies rather than kneeling and surrendering to the entertainment masses.

Posted by Anthony52 | Report as abusive

Was Walmart’s ethics policy part of the problem?

Felix Salmon
Apr 24, 2012 14:36 UTC

Back in November 2006, Eduardo Castro-Wright, who was then the US president of Walmart, dispatched the company’s jet to pick up marketing head Julie Roehm in Chicago. She arrived late, in an ice storm, but made it in to the Walmart headquarters, where Castro-Wright started grilling her on the agency review process: how she had picked DraftFCB as the agency which would take over Walmart’s $1 billion-per-year account. Roehm had interviewed some 30 agencies before settling on Draft; the questions centered on whether she had allowed any of those agencies to pay for dinner while she was talking to them, and whether she had accepted a lift in the car of any of the agencies’ CEOs.

Four days later, Roehm was fired, for violations of Walmart’s extremely strict ethics policy. As Walmart expert Charles Fishman explains,

Wal-Mart had a kind of unbending almost obsessive adherence to even the trivialist elements of an ethical code. They’re a brutal competitor and everybody acknowledged that, but Wal-Mart was also the company that wouldn’t take a dinner from you, that wouldn’t let you provide a soda if you went to meet them to talk about business, where they wouldn’t join trade associations for many, many years because they didn’t want to pay dues and have a conflict of interest.

We now know, of course, that Castro-Wright was the man at the very center of the Walmex corruption scandal. Which raises the obvious question: did the corruption at Walmex appear despite Walmart’s ultra-strict ethics code? Or did it, paradoxically, appear because the code was so strict?

The point here is that Walmart left, essentially, nothing to its employees’ discretion. It didn’t trust them to do the right thing: it codified everything in a set of rules, and then told them to follow those rules. And you can see how that might have resulted in a kind of Calvinist scale-blindness, where accepting a soda when going to meet a vendor is exactly as bad as greasing Mexican wheels to the tune of 24 million dollars.

On top of that, the most senior executives at Walmart had a lot of discretion when it came to enforcing the rules. For someone like Roehm, who never fit in to the corporate culture, it was easy to find an infraction and fire her. On the other hand, when it came to allegations touching on Castro-Wright himself, it was similarly easy to hand the investigation off to one of his loyal subordinates, who did what he was expected to do and buried it.

Accepting a soda from a vendor, of course, is not illegal; engaging in sham investigations, on the other hand, is. Or can be, at any rate. At a grown-up organization, the Mexican allegations would have been a much darker shade of grey than anything that Roehm is alleged to have done, and would therefore have been taken much more seriously. But executives at Walmart, used to seeing the world in black and white, were unable to distinguish between the merely unethical and the downright illegal. As a result, there could be criminal charges for Walmart executives. Call it the ultimate unintended consequence of a strict ethics policy.

Update: EJ Fagan has a very smart take on all this.

There’s a difference between having a soda bought for you and buying someone a soda. Internally, maybe Wal-Mart did not want its employees to make economically inefficient decisions based on who bestowed upon them the most favor, just like people in Mexico don’t want their government making decisions they wouldn’t otherwise make if an agent from a giant multinationals didn’t transfer six figures to their offshore bank account. Their ethics policy may be designed to support what’s good for Wal-Mart, not necessarily to follow any sort of legal or moral code. We shouldn’t expect anything else from a profit-seeking corporation in a competitive marketplace.


The case of Walmart making facalitaing payments is extreemly similar to BofA and most other publicly traded banks bending and breaking forclosure rules.

The business case is simple… Walmart will not be, can not be, and should not be fined enough to make the net present value of breaking the law negitive. If the back of the envelope estimates are anywhere near accurate 20% of the value of the company is the mexican business. If they got an unfair jump start on half of that business than their crime is worth a clean 20 billion.

They will never be fined that much… probably not even one hundreth of that amount… and so the ethics are pretty small potatoes…

…there is no inured party that I can find anyway… customers save money, the employees actually make a market wage in mexico, the mexican goverments actually collect taxes since Walmart actually reports unlike many small mexican businesses, and best of all Walmart reinvests every dime of mexican profit in mexico because they don’t want to pay US income tax on repatrating the profits they make down there.

If I’m a Walmart share holder I’m glad they did what they did… it’s not like they killed someone here which a bunch of companies have.

Posted by y2kurtus | Report as abusive

Could the NYT make money from its scoops?

Felix Salmon
Apr 24, 2012 04:14 UTC

Perhaps the most surprising thing about the NYT’s Walmart exposé this weekend is that it was such a surprise to the market. Note this, for instance:

In December, after learning of The Times’s reporting in Mexico, Wal-Mart informed the Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act, a federal law that makes it a crime for American corporations and their subsidiaries to bribe foreign officials. Wal-Mart said the company had learned of possible problems with how it obtained permits, but stressed that the issues were limited to “discrete” cases.

“We do not believe that these matters will have a material adverse effect on our business,” the company said in a filing with the Securities and Exchange Commission.

The filing in question was Walmart’s quarterly report, which was filed with the SEC on December 8. These things take a significant amount of time to put together; it’s reasonable to assume that Walmart has known about this NYT investigation, then, for a full five months at this point. And while the story carries the sole byline of David Barstow, it was reported with the help of James McKinley in Mexico City, as well as the fabulously-named Alejandra Xanic von Bertrab. The newspaper was surely extremely assiduous in its reporting and fact-checking; I’m sure that there was an extremely large number of sources who had some inkling of what was being reported.

And yet the market was taken by surprise, with $12 billion of market capitalization evaporating from Walmart and Walmex in one day.

Which raises the obvious question: shouldn’t the NYT, which can always use a bit of extra revenue, take advantage of the fact that its stories can move markets so much? Not directly: I’m not suggesting that the New York Times Company should start buying out-of-the-money put options on Mexican corporates in advance of its own stories. But how much would hedge funds pay to be able to see the NYT’s big investigative stories during the trading day prior to the appearance of the story? It’s entirely normal, and perfectly ethical, for news organizations, including Reuters, to give faster access to the best-paying customers.

What’s more, good journalism is increasingly being done by people who unabashedly have skin in the game. The Muddy Waters report on Sino Forest, for instance, was explicitly written by someone with a big short position in the company. And today Anonymous Analytics, a forensic-accountancy spin-off of the hacker group, has released a detailed report on Huabao International which is similarly likely to cause a substantial fall in its share price. They write:

Anonymous Analytics holds no direct or indirect interest or position in any of the securities profiled in this report. However, you should assume that certain contributors to this report, as well as their members, partners, affiliates, colleagues, employees, consultants, muppets clients and investors, as well as our clients have a short position in the stock of Huabao International Holdings Limited (HK: 336, “Huabao” or the “Company”) and/or options of the stock, and therefore stand to gain substantially in the event that the price of the stock declines.

It’s a good report, well worth a read for connoisseurs of short-seller research. My favorite bit is where they flew to Botswana to try to find out what on earth the Huabao operation there was up to, tracking down the plant despite the fact that the company had photoshopped its photograph to make it impossible to work out where it was. This is a kind of long-form journalism, and it can be extremely remunerative. If the NYT is working on similar stories, why not take advantage of that fact and allow other people to make money off what you’re doing anyway?

The reporters and even the editors on any given story need never have any connection with any hedge fund or corporate client. All that’s needed is that when a big story is entering the final stages of layout and fact-checking, a version is sent under strict embargo to a client or clients who have paid for that access. They can then act on the story in the markets.

The main potential problem I see here is that if such an arrangement were in place, corporate whistleblowers might be risking prosecution as insider traders. But I’m sure the lawyers could work that one out. The church-lady types would I’m sure faint with horror. But if hedge funds are willing to pay the NYT large sums of money to be able to get a glimpse of stories before they’re made fully public, what fiduciary could simply turn such hedge funds away?


I love the way you initiate the discussion. I live in Mexico and from many sources I have heard many corruption acts from Walmart and other companies such as America Movil. Having or not the information beforehand wouldn’t change their ethics…

Posted by partner.analyst | Report as abusive

Walmexgate’s fallout

Ben Walsh
Apr 23, 2012 22:34 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

In the first day of trading since the New York Times published David Barstow’s devastating investigation into systematic corruption at Wal-Mart in Mexico, Wal-Mart de Mexico fell 12.5% and Wal-Mart dropped 4.7%. In total, approximately $12 billion in market cap was lost.

Wal-Mart’s own response seems to do little to mitigate the damage.

Felix raises the possibility of an investigation by Mexican authorities into WalMex’s banking business. The WSJ’s Vipal Monga writes that the cost of the internal investigation alone could weigh on the company, pointing to the $93.3 million Avon spent last year investigating FCPA violations:

If Avon is any guide, Wal-Mart’s internal investigation into allegations of a massive bribery scheme in Mexico could end up costing the company a significant amount of money.

Business Insider’s Eric Platt breaks down the fines Wal-Mart could face:

Over the period the Times investigates, Walmart opened a net 239 new locations in Mexico. If each of those locations should have not opened as quickly, then multiplying each new location by that average store revenue rate means Walmart generated an extra $6.558 billion over the 2002-05 period…

But under the Alternative Fines Act, a fine under the FCPA can be twice as large as the benefit seen to the guilty party. If doubled, Walmart could be on the line for $13.1 billion, a hit to EPS of $2.24.

Beyond civil penalties, Roland Jones at MSNBC has the following eye-popping quotes:

“We could easily see criminal prosecutions,” said Jacob Frenkel, a former official of the Securities and Exchange Commission.

“The fact that it’s a U.S. company working through a Mexican subsidiary does not give the U.S. company protection,” Frenkel told CNBC, adding that anyone who is found to have their fingerprints on the alleged wrongdoings “has potential liability, civilly and criminally.”

A 2009 interview with the New York Times is coming back to haunt Eduardo Castro-Wright, the Wal-Mart executive who is said to have personally authorized bribes. He told the paper that “there’s no leader who can be called one if they don’t have personal integrity” and that “cultural differences,  which are so often touted as the rationale for making decisions in business, are grossly overrated, and that human behavior really doesn’t have a language. It’s pretty much the same everywhere.”

US Representatives Elijah Cummings and Henry Waxman have also sent a letter to Wal-Mart CEO Mike Duke requesting a meeting as they begin an investigation of their own. Whether Duke still has his job when they do meet remains to be seen. - Ben Walsh

On to today’s links.

Nestle to pay $11.9 billion for Pfizer’s infant nutrition business – Dealbook

EU Mess
Spain’s economy shrinks 0.4% in the first quarter of the year – WSJ
Greek austerity has cut the country’s budget deficit, but fiscal progress cannot erase deep unrest – Reuters
Emerging economies can save the Euro, but developed countries don’t want to disrupt the status quo – Bloomberg Ticker
ECB pushes back on Geithner and IMF requests for action - Bloomberg
Hollande and Sarkozy move to runoff in French election after strong performance from far right - NYT

Mas Kapital
After criticism from government, Chinese banks may find raising capital difficult – NYT

Health care
Ronald Dworkin: the real argument why the mandate is constitutional – NYRB

Enough with the “Steve Jobs wouldn’t have done this” nonsense from pundits – Forbes

Big Numbers
Derivatives exposure by bank visualized with skyscraping stacks of $100 bills – Demoncracy

Billionaire Whimsy
Estimating the value of the gold in Scrooge McDuck’s vault – The Billfold

Too many bankers, not enough deals: cost-cutting focus shifts to M&A and financing – WSJ

Tyler Cowen explains why Japanese investors keep buying their own country’s debt - Marginal Revolution

Argentina vs Elliott: It’s not about pari passu any more

Felix Salmon
Apr 23, 2012 22:32 UTC

Earlier this month I wrote about Argentina, Elliott, and the pari passu war — the legal fight between New York hedge funds and the country of Argentina over bonds which Argentina defaulted on almost a decade ago.

The latest development in the case is that Elliott has now filed its own 89-page brief. There’s some smart legal argument in there, as you’d expect from Ted Olson. (Elliott has never been a company to scrimp on legal fees.) But the most surprising bit, at least to me, is that Elliott is quite explicitly distancing itself from its own pari passu argument.

Elliott more or less invented the pari passu argument, in 2000, when it was fighting a similar case against Peru. But this time around, Elliott’s slicing up the pari passu clause very thinly, and discarding the pari passu bit of it entirely.

Here’s the clause that Argentina agreed to when it issued its original debt:

The Securities will constitute… direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness.

And here’s Elliott, parsing it:

That pari passu clause is not at issue here… The relevant clause is the second sentence, in which Argentina promises that it will ““rank”” ““payment obligations”” under the FAA Bonds ““at least equally”” with obligations under its other ““unsubordinated External Indebtedness.”” To distinguish this undertaking from the irrelevant pari passu clause in the previous sentence, Appellees refer to it as the ““Equal Treatment Provision.””

It’s really hard to see how the pari passu clause could be irrelevant in this case while it was relevant in the Peru case, but I’m sure the Second Circuit doesn’t care about that. The important thing, here, is whether, pared down to a single sentence, what Elliott is now calling the Equal Treatment Provision can support a far-reaching court order which doesn’t just encompass Argentina, but also binds the trustees acting on behalf of the holders of Argentina’s new bonds.

After all, the important question in this case is whether the Southern District judge, Thomas Griesa, can slap an injunction on innocent bondholders of Argentina, many of whom took a 70% haircut on their original debt, just to satisfy the debts of creditors who took no haircut at all. That’s a very drastic remedy, and Olson really needs his 89 pages to try to persuade the Second Circuit that such a remedy is somewhere to be found in that one slender sentence.

That said, Elliott has the wind behind it in this case, for two reasons. First is the fact that Griesa is Griesa — a genuinely venerable judge and one whom the Second Circuit will have no particular appetite to overturn. As Elliott puts it,

It is difficult to conceive of any case in which deference to the discretion of the district court is more appropriate than it is here. The same district judge, with nearly three decades of experience on the federal bench, presided over dozens of similar lawsuits against Argentina for more than one of those decades. He has in-depth familiarity with the parties, counsel, and facts, and he has borne witness to virtually every development in the evolving disputes arising from Argentina’’s 2001 default. He has extensively examined the arguments and written more than 100 opinions and orders, many of which favored Argentina.

It’s true that Griesa has owned this case from day one, and that it’s going to be almost impossible for anybody on the Second Circuit to challenge the depth of his Argentine knowledge. On the other hand, Griesa’s orders (here here here) are slim: for all that he took his time delivering them, most of the legal reasoning is left implicit. The Second Circuit really has no choice but to work out its own opinion from first principles.

More interestingly, Elliott’s brief comes just as an international legal nightmare surrounding the nationalization of Argentine oil company YPF is about to begin. Argentina’s decision to nationalize YPF was bad enough on its own, but from a timing perspective you can be sure there were quite a few facepalms at the Cleary Gottlieb offices. The Second Circuit sees its main job as upholding New York’s status as a protector of contractual rights, and Argentina is trampling all over those rights in as public a way as it possibly can. That’s going to make a decision in favor of Argentina that much more difficult for the appeals court.

So the final decision really could go either way. I’ve got a $5 bet with Reynolds Holding on this: I’m taking Argentina, he’s taking Elliott. He’s much more of a lawyer than I am, of course. But I have politics on my side — the United States is arguing siding with Argentina. Which has got to count for something.


$5–Ah, the courage of your convictions. Come on, guys!

Posted by hedgeygrl | Report as abusive

Let’s not worry about fake online drugs

Felix Salmon
Apr 23, 2012 14:09 UTC

Roger Bate has a curious op-ed in the NYT today. He’s the lead author on a study which bought 370 drug samples from 41 online pharmacies around the world, and then tested their authenticity. The results? With the exception of Viagra bought from non-verified websites, every single drug was 100% authentic. But you’d never guess that from his op-ed:

In 2007-8, when counterfeit versions of heparin, a blood-thinning drug, were shipped from China to the United States market, 149 people died. In the last few months, bogus versions of the cancer drug Avastin, apparently shipped from the Middle East, have surfaced in clinics in California, Illinois and Texas. Thankfully, so far as we know, they haven’t killed anyone, but more and more cases of dangerous fake drugs are being reported by the Food and Drug Administration. Numerous incidents surely go unreported, the evidence swallowed, the deaths incorrectly attributed to natural causes.

Fighting the fake drug menace is like playing whack-a-mole. It is technically illegal for individuals to order drugs online from other countries. And yet no sooner does the F.D.A. shut down one dubious online pharmacy than another pops up. According to the National Association of Boards of Pharmacy, only 3 percent of the 9,600 online pharmacies it has reviewed complied with industry standards. Many were based overseas, so their sales to Americans were illegal; others did not require doctors’ prescriptions. And some were very likely peddling dangerous counterfeit drugs.

This is all highly alarming — but also highly misleading. The “more and more cases” of fake drugs being found by the FDA? The FDA’s counterfeit medicine page lists exactly six cases in the past 24 months, of which just two — Tamflu in June 2010, and Vicodin ES in March 2012 — were linked to online pharmacies. The bogus Avastin, by contrast, was being distributed through legitimate channels by two distributors: Quality Specialty Products (QSP), a/k/a Montana Health Care Solutions, and Volunteer Distribution in Gainesboro, Tennessee. It had nothing to do with online pharmacies at all.

Realistically, the US simply doesn’t have a “fake drug menace”. Yes, fake drugs exist, and they’re not all that hard to find if you’re based in, say, Ethiopia. An earlier study by Roger Bate found that 7 of 36 drugs bought by secret shoppers in Ethiopia failed a stringent authenticity test. (On the other hand, 100% of the drugs bought in Turkey were legitimate, and Brazil, Russia, and China all performed very well in the test.)

What’s more, even if the US did have a fake drug menace, which it doesn’t, the menace would not be coming from internet pharmacies. As Bate himself has found, internet pharmacies sell authentic drugs at low prices; the only exception to this rule is unlicensed sites hawking Viagra.

But Bate doesn’t seem to believe the evidence of his own eyes. Instead, he relies on urban myths: his July 2011 paper, for instance, said in its second sentence that “according to the World Health Organization, substandard and counterfeit drugs have been found in both developed and developing countries, accounting for more than 10% of the global medicines market and over US$32 billion in annual earnings.” This is a classic bogus counterfeiting statistic: if you go to the WHO page he links to, the WHO in fact makes no such assertion at all. Instead, it attributes the factoid to the FDA, with no footnote.

I’ve been trying to track down these statistics to their source for years, and I’ve never yet found one with a solid empirical grounding. Certainly Bate’s own studies would seem to disprove this assertion, but that doesn’t stop him, in his op-ed, talking authoritatively about “criminal networks” which “launder billions in profit”. As far as I can tell, no such network has ever been identified, and while there might be billions of dollars of profit in illegal drugs, that money is much more likely to come from marijuana and cocaine than it is from fake pharmaceuticals.

And in any case, concentrating on fake drugs is itself dangerous, because it diverts resources from the real problems with US drugs — legitimate drugs where there has been either a flaw in the manufacturing process or which have degraded because they’ve been stored badly or for too much time. Fake drugs are dangerous; real drugs can actually be more dangerous, just because people aren’t nearly as worried about them.

Still, Bate does at least appreciate that if you’re buying drugs from a licensed online pharmacy, those drugs are going to be authentic. As such, he says, that behavior should not be criminal. But he’s still a very long way from the logical conclusion, which is that there should be a free market in authentic drugs:

Buying drugs online from overseas isn’t for everyone. It should remain a limited option for desperate cash buyers — sick people with limited resources and insurance coverage — not a way for well-insured patients to reduce their co-pay. American health insurance companies should not be required to reimburse consumers for these drugs, because that would effectively import foreign governments’ price controls into the United States and undermine American companies’ research and development budgets.

This really doesn’t make sense. If authentic drugs are perfectly good for “desperate cash buyers”, why can’t they be used by the rest of us with health-insurance plans? There’s no reason why I would want to reduce my co-pay when buying drugs online; I’m perfectly happy to make exactly the same co-payment when buying at a Canadian online pharmacy as I would when buying at the drugstore down the street. But my insurer would save money, and maybe, ultimately, that would reduce the total cost of healthcare and health insurance in this country.

Yes, if the cost of healthcare and health insurance comes down, that might mean — that should mean — lower profits for Big Pharma. But would lower profits mean lower R&D budgets? And would lower R&D budgets mean fewer great new drugs coming to market? No one knows; all we know for sure is that Big Pharma’s R&D expenditure is enormous, and is increasingly bad at creating great new drugs. In general, if you want to look for billions in profits, you should be looking to the big pharmaceutical companies, not mythical organized-crime syndicates. And it’s definitely worth asking why and whether we have a societal interest in protecting those profits instead of opening up the market in US pharmaceuticals to a modicum of competition.

What we’re faced with here is a tradeoff. On the one hand, there are clear financial benefits to letting Americans and American insurers buy their authentic drugs wherever those drugs are cheapest. On the other hand, there are extremely vague worries that were that to happen, some hypothetical new future drug might fail to make its way to market. Given the massive economic and fiscal costs of healthcare price inflation, it’s surely a no-brainer to go for the option which unambiguously saves money. Especially since, as Bate himself has demonstrated, the drug-safety risks of going down that road are essentially nonexistent.


“No one knows; all we know for sure is that Big Pharma’s R&D expenditure is enormous, and is increasingly bad at creating great new drugs.”

It is enormous taken on its own, but it’s less than half the amount Big Pharma spends on administration and marketing. And Pharma really has no desire to create new drugs, just endlessly refining what we already have, hence the amount spent on marketing. Plenty more information here.

http://mdcarroll.com/2009/10/25/explaini ng-research-drug-company-expenditures-pa rt-1/ and http://www.rxgs.com

Posted by Frank99 | Report as abusive

What does the Walmex corruption scandal mean for Banco Walmart?

Felix Salmon
Apr 21, 2012 19:33 UTC

David Barstow’s explosive 7,600-word investigation of corruption at Wal-Mart is required reading this weekend. I’m not going to attempt to summarize the whole thing, but basically Eduardo Castro-Wright, currently Wal-Mart’s vice-chairman, oversaw a culture of bribery when he was CEO of Walmex. And when a key player in that bribery scheme blew the whistle, Walmart in Bentonville buried the investigation, and didn’t report anything to the authorities in either Mexico or the US.

All of this looks like a slam-dunk case under Foreign Corrupt Practices Act, and I’m quite sure that multiple extremely senior heads are going to roll in the wake of this NYT exposé. As always in such cases, the crime was bad; the cover-up was worse.

One name, however, is conspicuous by its absence in Barstow’s report: Banco Wal-Mart, the huge bank which is a wholly-owned subsidiary of Walmex. It’s a serious player in the Mexican banking industry — it opened its millionth account over a year ago — and thanks to a quirk of international banking-regulation protocols, it lacks a lot of the regulation that its competitors have.

Banks like Banco Wal-Mart which are subsidiaries of foreign corporations are meant to be regulated by the bank regulators in the parent’s country. But because regulators in the US have consistently refused to allow Wal-Mart to become a bank here, bank regulators in the US don’t regulate Wal-Mart at all — let alone its Mexican subsidiary. (There is a Wal-Mart-branded prepaid debit card, but that’s run by Green Dot, not Wal-Mart.)

Barstow’s report shows that corruption is marbled throughout Walmart’s international operations, not only in Mexico but also in Asia, where reports of bribery were coming in to Bentonville HQ at the rate of five per month just from Asia alone. There’s nothing in the NYT which suggests that Banco Wal-mart was doing anything suspect at all — but at the same time, all parts of Castro-Wright’s empire should be under suspicion now, given the kind of illegal activity which peaked under his leadership. And Banco Wal-mart was one of the jewels in Castro-Wright’s crown.

All US corporations are held to high standards under the FCPA, but banks are even more important, given the way in which they’re regularly used by criminals for money laundering. After reading the NYT this weekend, I have no faith at all that Wal-mart has done an effective job of ensuring that Banco Walmart is corruption-free. And given its regulatory status, I also have no faith at all that if there were corruption at the bank, its regulators would have found it.

If I were the Mexican banking authorities, then, I’d start asking some very pointed questions indeed in the wake of this news — and I might even start thinking about revoking Banco Walmart’s license entirely. Certainly there’s no indication at all that Wal-Mart cares about stamping out corruption in Mexico — quite the opposite. And if a foreign-owned bank is operating in your country, you want to be sure that its parent is particularly assiduous in such matters.

I’ve historically supported the idea that Wal-mart should get a banking license: I think, in principle, that such a bank would provide healthy competition for existing banks, and that it would help to reduce the rolls of the unbanked. But in the wake of this news, the chances of Wal-Mart getting such a license are surely more remote than ever. And the Mexican authorities must be wondering whether US banking regulators didn’t have the right idea after all.


What do you mean by “it lacks a lot of the regulation that its competitors have”??? It is regulated by the Mexican authorities as a “Insitucion de Banca Multiple” (see http://www.cnbv.gob.mx/Paginas/PES.aspx) just like HSBC, Santander, American Express and all its competitors.

If you meant by US regulatiors, that would probably not apply to other non-American banks in Mexico either (HSBC, BBVA, Scotiabank, RBS, et al.)

Posted by DanielDF | Report as abusive

Counterparties: Catch and release, board of directors edition

Ben Walsh
Apr 20, 2012 22:07 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

In 1996, Richard Parsons joined the board of directors of Citicorp. Two years later, in 1998, Citicorp’s board approved its merger with Travelers – a merger that was illegal at the time, since it violated the Glass-Steagall Act. But no matter, in 1999, the Glass-Steagall Act was repealed, allowing the creation of Citigroup to go through unimpeded. There was no indication at the time that Parsons objected at all to the way that the law was changed to allow the creation of a financial services behemoth.

Parsons remained on the Citigroup board until three days ago, when he stepped down as chairman. And now he is publicly casting doubt on the wisdom of repealing Glass-Steagall:

“To some extent what we saw in the 2007, 2008 crash was the result of the throwing off of Glass-Steagall,” Parsons, 64, said during a question-and-answer session. “Have we gotten our arms around it yet? I don’t think so because the financial-services sector moves so fast.”

Parsons’s role as a passive director – even as his institution oversaw the evaporation of hundreds of billions of dollar in value during the financial crisis – is hardly unique: Citi is far from the only financial firm with a captured board and weak oversight. Earlier this week the re-election of Goldman Sachs Director James Johnson was opposed by Ruane, Cunniff & Goldfarb, the managers of the Sequoia Fund.

Parsons’s 2012 pay of $75,000 in cash and $150,000 in stock isn’t close to Johnson’s outrageous $523,000. Still, it’s hard not to wonder how much earlier Parsons might have come to his regulatory epiphany had Citi paid him $50,000 to $80,000 a year or had he not already been wealthy on arrival, as Felix suggested:

If board members get rich, it should be from the appreciation of the shares they buy, rather than from money they’re paid to turn up to board meetings. Management has a strong incentive to put already very rich people on its board: they’re inured to large sums of money, and are therefore much less likely to blink at compensation packages which can reach well into the eight-figure range. So let’s hire directors for whom an extra $50,000 will actually make a noticeable difference to their annual income.

As galling as Parsons’s about-face is, it’s weirdly heartening to know that even after almost two decades of being captured, once released, Parsons changed his tune. Maybe, if we change directors’ incentives, they might start speaking their mind when doing so can make a difference. – Ben Walsh

On to today’s links.

Sometimes, when “all the facts are in,” it’s worse: the UC-Davis pepper-spray report – Brad Hicks

The fuzzy math behind claims of bailout profits – Bloomberg

Old Men and the Sea
Steve Jobs’s unfinished custom yacht – PSFK

The decline of cross-border banking – The Economist
Despite a strong quarter, potential Moody’s downgrade hangs over Morgan Stanley – DealBook

Federal Reserve gives banks two years to comply with the Volcker Rule – WSJ

Fourth Goldman insider under investigation in Gupta case – WSJ

As debt falls, data shows the American consumer may be ramping up spending – NYT

Nine banks investigated for overdraft fees by CFPB – Bloomberg

Adding Value
A good central banker could be worth $1 trillion a year to the U.S. – The Atlantic

“Revenue neutral” tax reform: an illusion political candidates have no incentive to dispel – Project Syndicate

Spending by Any Other Name
People like tax cuts and charity, but we should abolish the charitable tax deduction – Economonitor

Crime and Punishment
Price of stolen taco 100.33 times greater than non-stolen taco – ESPN

Utah passes bill to allow gold and silver to be used as currency – CivSource

EU Mess
Italian museum burns art in protest against budget cuts – BBC


Danny_Black, the losses at Frannie were socialized (once the shareholders were wiped out). I understand why it needed to be done, of course, but that doesn’t change the facts.

Admittedly they aren’t really banks.

Posted by TFF | Report as abusive

How Pete Peterson is driving the fiscal consensus

Felix Salmon
Apr 20, 2012 17:57 UTC

Trudy Lieberman has a good post at CJR on the “surprisingly broad consensus” around the need to reduce the fiscal deficit in general, and to take aim at Social Security in particular. “Social Security,” she writes, “is the one issue on which the electorate is not divided” — but that hasn’t stopped a bipartisan group of Washington grandees from preaching doom whenever it is brought up.

More generally, the idea of “fiscal responsibility” seems to have become as American as motherhood and apple pie — both parties preach it, and say the other guys are the profligate ones. The group of people saying “hey, we print our own money, interest rates are at zero, inflation is not an issue, the corporate sector isn’t borrowing, there are a thousand more important things to worry about right now, why on earth is everybody worried about the deficit all of a sudden” is in a decided minority.

The obsession about fiscal prudence is a new phenomenon, and can be dated, pretty much, to 2008, when Blackstone went public and Pete Peterson took his billion dollars in proceeds and decided to use it to found the Peter G Peterson Foundation. Wherever fiscal prudence is preached, Peterson’s money can nearly always be found.

On May 15, for instance, the PGPF is hosting the third annual Fiscal Summit, featuring fawning softball questions for Bill Clinton, John Boehner, Tim Geithner, Paul Ryan, Alan Simpson, and others. I myself was asked to moderate a discussion in New York a couple of weeks earlier, launching “A Curriculum for Teaching about the Federal Budget, National Debt, and Budget Deficit” called Understanding Fiscal Responsibility. Peterson’s going to be there, and the likes of Peter Orszag and Kirsten Gillibrand have been invited.

I’m decidedly dubious about the wisdom of teaching sovereign fiscal responsibility to high schoolers. For one thing, it’s inevitable that many teachers will resort to the personal-finance metaphor, and thereby teach something which is downright wrong. And if you look at the way these curricula are constructed, there’s an incredibly strong bias in favor of spending cuts and against tax hikes.

Take, for instance, the National Budget Simulation, a key part of many fiscal-responsibility lesson plans. Here’s how it works:

The new President of the United States has been elected on the promise of fiscal responsibility. He has promised the voters he will not raise taxes, and he will not reduce Social Security or Medicare…

Suddenly, the United States is subject to military attack — a turn of events not anticipated in the current budget. At the same time, a lingering recession reduces the government’s tax revenues and forces the government to increase its spending on unemployment benefits, welfare, housing assistance, food stamps, and other need-based programs. Because of the increased spending and reduced revenues, the nation falls into a projected deficit…

The President is committed to keeping his campaign promises, in order to maintain support for his reelection. He must protect the programs he promised to protect, and he cannot raise taxes, so he must cut spending on other programs… The President turns to you, his trusted economic advisor, for help.

One of the most annoying parts of the fiscal debate, at least for me, is the way in which it has become synonymous with spending cuts rather than tax hikes. Say “fiscal balance” and people start thinking in terms of means-testing Social Security, rather than, say, implementing a carbon tax or a financial-transactions tax. And so we get the likes of Paul Ryan being taken very seriously — Mitt Romney is positively gushing about him, these days — even as the idea of paying for expenditures by raising taxes becomes increasingly un-American.

Reasonable people can differ on the question of how important it is to balance the budget, but I think it’s fair to say that there are lot of screamingly important issues, from endemic long-term unemployment to global nuclear proliferation, which aren’t getting a fraction of the attention that fiscal policy is getting. Which only goes to show, I think, just how powerful Pete Peterson’s targeted millions can be.


“Bottom line: we had a working tax system before George W. Bush took power. Go back to that, and then we can talk reform.”

I’m fine with that bottom line… Unfortunately neither candidate for President supports anything like that, nor does anybody in Congress. They’ve already messed up the tax code royally, and are working feverishly to mess it up even worse for next year.

At what point does a rollback no longer suffice? At what point is a complete overhaul preferable?

Posted by TFF | Report as abusive