Felix Salmon

The Shard as metaphor for London

Felix Salmon
Jun 26, 2012 19:16 UTC

Aditya Chakrabortty doesn’t like the Shard, the huge new skyscraper nearing completion next to London Bridge station, across the river from the City of London. It’s certainly a monument to the 0.01%: owned by the government of Qatar, and featuring Michelin-starred restaurants catering to guests at the five-star hotel; the hedge-fund managers who will rent out the office space; and of course the plutocrats in the 10 monster apartments (for sale at prices starting at $47 million or so).

Aditya’s not happy about this at all: the Shard, he says, “both encapsulates and extends the ways in which London is becoming more unequal and dangerously dependent on hot money”. The inequality point is inarguable, but it’s also inevitable, in any global financial center. And as for the dangerous dependence on hot money, that I’m less sure about.

Aditya cites “Who owns the City?“, a report from the University of Cambridge which shows that 52% of the City of London is now owned by foreigners, up from 10% in 1980. That’s a trend, not a hot-money capital flow: after all, the trend survived the financial crisis unscathed, even as property values plunged. He writes:

As the Cambridge team point out, the giddy combination of overseas cash and heavy borrowing leaves London in a very precarious position. Another credit crunch, or a meltdown elsewhere in the world, would now almost certainly have big knock-on effects in the capital.

I’ve read the Cambridge report, and I don’t really see them saying that at all. The closest they come is this:

For global financial office markets such as the City of London, functional specialisation not just in financial services but in internationally‐oriented financial services lock the fortunes of the occupier market to the state of the global capital markets; while growing international ownership and specialist global financial and real estate investment vehicles help to lock the investment and occupier markets together in a way that increases both upside and downside risk…

The locking together of occupier, investment, development and financing markets both within the City and across financial centres contributes to an inherent, systemic risk.

The point being made here, in less than crystal-clear language, is that the owners of the City are the same as the occupiers of the buildings in the City. Which means that if there’s a big bust in the world of international finance, the owners won’t just want to sell, they might well move out, as well — causing a double whammy to London office prices.*

But a reduction in London office prices is what Aditya wants! It would reduce inequality, and more generally it would provide a dividend of glossy and expensive real estate to a population which could never have afforded it on its own. That was Dan Gross’s point in Pop — while bubbles are bad for the people who invest in them, they’re generally good for the economy as a whole, which sees a lot of investment which would otherwise not have been made.

London’s a financial center, and like all other financial centers, it gets a lot of tax revenue from the financial industry. Come another credit crunch, that tax revenue will fall. But for the time being it makes sense to welcome the revenue, and the infrastructure improvements which international financiers are happy to pay top dollar for.

The fact is that new skyscrapers always cause an outbreak of nimbyish bellyaching. Here in New York, Christine Quinn, our probable next mayor, is refusing to come out and endorse a relatively modest addition to Chelsea Market, because although it makes sense from a city-wide perspective, the locals don’t like it. They never do.

But cities need density, and if they’re not going to degenerate into anachronism, they need big, expensive, modern skyscrapers. Especially if they aspire to being a financial center. Some of the criticisms of the Shard are just silly: the idea, for instance, that it somehow ruins the view of the Tower of London. What view of the Tower of London? You certainly couldn’t ever see it from London Bridge station, and in general the Tower is famous for being the least recognizable major landmark in London. I used to work as one of those tour guides on top of open-topped double-decker buses, for a summer, and I can assure you that long before the Shard was built, there was really nowhere you could get a good view of the Tower. Your best bet was to drive north across Tower Bridge, but even then the Tower itself just kind of shrinks into the riverbank, and a lot of tourists had no idea what they were meant to be looking at.

London is a city of large buildings on narrow streets (try finding the entrance to investment bank NM Rothschild one day), and the Shard is just the latest extension of that idea. I, for one, welcome it to the London skyline, even if I never set foot inside the place. It’s certainly a lot more interesting — and adds a lot more value to the city — than the bland mid-rise office buildings which Washington is doomed to, given its strict height zoning. Aditya’s right that the Shard hasn’t — yet — improved the lot of its immediate neighbors, but building nothing on that spot would hardly have been better for them.

I suspect that over time, the Shard will attract more money and gentrification to London Bridge in general, which is great news if your worry, like Aditya’s, is the area’s “deprivation and unemployment”. Cities are living things, and the construction of the Shard is proof that London’s still very much alive. And that, as Woody Allen would say, is definitely better than the alternative.

*Update: Colin Lizieri of Cambridge University writes to add that he was making another point, too: that diversification into office space in different financial centers is not really diversification at all, since the owners and occupiers of all that property are increasingly the exact same businesses, or at least very highly correlated ones.


“… the author is actually a local too,…” (JustinC)

Umm … well … if you say so.

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How to make New York’s cyclists safer

Felix Salmon
Jun 26, 2012 13:29 UTC

It’s becoming something of a trend these days: good report, bad press release. The latest example comes from John Liu, the New York City comptroller, who is warning about New York’s bikeshare program. “LIU: BIKE SHARE PROGRAM PEDALS PAST SAFETY MEASURES” says the release (geddit?) — and certainly that’s the message received by the New York Times, which wrote up the news under the headline “Bike-Share Program May Mean More Accident Suits Against the City, Liu Warns”.

The report itself, by contrast, is much less alarmist, and mostly extremely sensible. Biking in New York is dangerous, for cyclists and pedestrians both, and it’s important to make it safer. Especially as thousands of new bikeshare riders are going to start wobbling their way around largely-unfamiliar streets. Here’s the scary chart:


The blue curve is the well-known safety-in-numbers effect: as biking becomes more popular, it also becomes safer. New York is an outlier here, and not in a good way.

Charles Komanoff has some on-point criticisms of Liu’s report, and if you read his report closely you’ll notice one big flaw in the chart. The x-axis shows bikers as a percentage of total commuters, while most bike trips in New York are not home-to-work commutes at all. If you included all New York cyclists, New York would have a higher ratio of cyclists, and fatalities per cyclist would go down. Put it this way: the chart is taking the total number of bike fatalities, and dividing it by the total number of bike commuters, rather than the total number of bicyclists as a whole. That results in low numbers for cities like Portland, where cyclists are much more likely to commute to work, and high numbers for cities like New York, where they’re much more likely to just be running errands, or shopping, or meeting friends.

That said, New York needs to become safer for cyclists and pedestrians both, and Liu has some very sensible proposals for helping it do that. The city should put a lot of effort into maintaing signage, bike lanes, and intersections, especially the most dangerous ones: the effect of that could be huge. It should expand the Safe Streets for Seniors program, which helps older New Yorkers navigate safely around vehicles of all types. It should educate bikers and drivers both on bike safety and the rules of the road; drivers in particular should look out to make sure they don’t cut in front of cyclists when making a turn, and also leave extra space when passing a cyclist just in case the biker has to swerve around a pothole.

The recommendations continue: kids should get taught bike safety at an early age. The “5 to ride” pledge should be promoted to all businesses with bike messengers or delivery people. There should be more police on bikes, and they should start handing out tickets to cyclists speeding through red lights or dangerously salmoning. On top of that, they should start ticketing cars and vans in bike lanes. And just generally be tougher on traffic. As the report says:

New York’s roads are an interactive, multi-modal system; increased enforcement from any surface modes will increase safety across all other modes. Through greater enforcement of speed limits and greater traffic signal compliance, the roads will be safer for all users.

Liu also wants to beef up New York’s overworked and largely ineffective Accident Investigation Squads; that’s a great idea. And he wants to collect lots of data on biking in New York and make it public. Which is a no-brainer.

Liu is also pushing to make helmets mandatory; I’m not such a fan of that idea. For one thing, I have yet to see any empirical data showing that mandatory helmets increase safety. And in general, insofar as a mandatory helmet law would reduce the number of cyclists, it would also reduce the safety-in-numbers effect. And as the chief fiscal officer of New York, he’s worried that increased biking might mean increased liability in terms of settlements paid out by New York City to injured cyclists. That worry seems small to me: as Komanoff says, the number of new cyclists will only increase the total by about 6%, and the $10 million of insurance that the bikeshare program has is much bigger than the $2 million to $3 million that New York has paid out annually in the past three years.

Overall, however, I’d say that the report is a very positive thing. And in that it stands in contrast to the press release, which quotes John Pucher of Rutgers University as saying that he “would expect at least a doubling and possibly even a tripling in injuries and fatalities among cyclists and pedestrians during the first year of the Bike Share program in New York”. I’ll happily take that bet: it’s ridiculously alarmist, such a rise hasn’t happened in other cities with bikeshare programs, and no such projection is made in Liu’s report. Liu also wheeled out the media-relations guy from AAA New York, of all people, to say that the best way to prevent cyclists incurring serious injuries is to force those cyclists to wear helmets. That’s just depressing: one would hope that a car-drivers’ organization might at least pay lip service to safer driving, rather than putting the onus entirely on the bikers.

I’m very excited about New York’s bikeshare program, and look forward to using it regularly. I hope that the increase in the number of cyclists will help bring a bit more civility to New York’s biking community, especially in terms of stopping at lights and riding in the right direction. Meanwhile, my biggest fear is that we’ll see the opposite: a bunch of people who have no idea what they’re doing, riding on sidewalks, salmoning, and generally causing chaos. I don’t think that’s probable, but it’s possible, and I look forward to Citibike and NYC doing everything they can to prevent it from happening. As they do so, Liu’s report — if not his press release — is likely to be quite helpful.


the x axis – cyclist commuters as a percentage of all commuters – presumably includes train and subway riders, which form a much higher percentage of NY commuters than of any of the other listed cities. Isn’t the relevant figure cyclists to drivers?

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Is price stability immoral?

Felix Salmon
Jun 25, 2012 21:50 UTC

Steve Waldman is one of the most original thinkers on the internet, and I highly recommend you read his latest piece, “Stabilizing prices is immoral“. You might never think about central bankers quite the same way again, and indeed you could start thinking that they judge themselves according to how assiduously they service the interests of the rich and well-employed.

When central banks see consumer prices rising too fast, they raise interest rates to bring inflation back down under control. That’s a deliberate slowing of the economy as a whole, for the especial benefit of the kind of people who have a particular interest in low inflation. The beneficiaries, here, are lenders, and people who can’t assume that their salaries will rise with inflation. Meanwhile, debtors — and even the economy as a whole — would have been better off, at least in the short term, if the central bank hadn’t acted at all.

Now central banks act the other way, too: they cut interest rates when demand is too low. And when that happens, as Waldman says, the tables are turned:

Whether monetary or fiscal, an antideflationary response to a supply shock implies an increase in aggregate demand which helps keep marginal workers employed. Creditors and secure-but-stagnant job-holders lose out, as the increase in purchasing power they otherwise might have enjoyed via deflation is distributed to other parties.

So, what goes around comes around, right? Not so fast. I’m reminded of when I spent a lot of time looking into the equity premium — the excess return that investors get for holding stocks rather than bonds. Given that the equity premium exists, why doesn’t it get arbitraged away? A lot of the reason is that the premium has an annoying habit of turning up exactly when you don’t need it, and disappearing exactly when you do. Stocks do well when the economy is booming and lots of people have jobs and are getting raises. That’s when they don’t need to turn to their nest eggs. Conversely, in recessions, when people get laid off and need cash, stocks have a tendency to fall quite sharply, even as bonds do rather well.

As a result, there’s a good reason why investors like having bonds in their portfolio, even if they expect those bonds to underperform: there’s much more value to something which does well in bad times than there is to something which does well in good times.

And this is Waldman’s thesis about price stability: it helps out rich lenders in bad times, and helps out poor borrowers just when they don’t really need it.

Under a symmetric policy, creditors and the securely employed purchase their insurance against bad times by foregoing some benefit during good times. That’s still a fine deal. Their overall risk is reduced.

But the opposite is true for debtors, taxpayers, and marginal workers. Just when these groups need a break, when the economy is bad due to an adverse supply shock, they are hit with additional costs in the name of price stability. Sure, when things are good all over, they get some frosting on their cake. Their highs are higher, but their lows are lower. Symmetrical price targeting turns debtors, taxpayers, and marginal workers into high-beta speculators on the state of the broad economy, while reducing the risk exposure of creditors and secure workers. It represents a vast subsidy, a transfer paid in risk-bearing, from debtors, taxpayers, and marginal workers to creditors and secure workers.

But, I’m not completely convinced. Adverse supply shocks notwithstanding, the general rule is that central banks cut rates in bad times, and raise rates in good times. When they cut rates, that’s bad for lenders and good for borrowers. When they raise rates, that’s good for lenders and bad for borrowers. So if you’re a rich lender, you’re unhappy in bad times and happy in good times. Far from insuring the rich against bad times, the central bank seems inclined to kick them when they’re down.

What’s more, over the long term, economies tend to do better if they grow steadily: volatile inflation does no one any favors, compared to the alternative.

Still, I like Waldman’s idea of a government savings account paying 0% real interest to anybody with less than $200,000 to invest. It should be easy to invest your savings so as to protect their purchasing power; in fact, it’s hard. Back in 2010, I asked the world to invent a Gross World Product swap: basically, big multinational corporations could fund themselves at the rate of growth of the world as a whole, while risk-averse investors could buy a proxy which would very closely track global purchasing power. That hasn’t happened yet. So for the time being, a simple index-linked savings vehicle would be a great start. And, as Waldman says, it would be easy insurance against exactly the kind of supply shocks that Waldman is worried about.


If former New York Fed Chairman and Goldman Sach’s alumni Stephen Friedman knew about secret loans to Goldman in 2008 and 2009, how did he not buy GS with unknown information?

http://hartzman.blogspot.com/2012/06/if- former-new-york-fed-chairman-and.html

FINRA, SEC, DOL, CFPB, FTC, FRB, and PCAOB Wells Fargo Whistleblower Filing

http://hartzman.blogspot.com/2012/06/fin ra-sec-dol-cfpb-ftc-frb-and-pcaob.html

Did Warren Buffet know about Bank of America’s Secret Liquidity Lifelines when Berkshire Hathaway Invested $5 Billion in BAC?

http://hartzman.blogspot.com/2012/06/did -warren-buffet-know-about-bank-of.html

Updated with some Warren Buffett and Goldman Sachs: “The Fed’s Secret Liquidity Lifelines”: Wachovia Corporation and Wells Fargo & Company

http://hartzman.blogspot.com/2012/06/fed s-secret-liquidity-lifelines.html

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Counterparties: Central banks warn about central banks

Jun 25, 2012 21:15 UTC

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The BIS annual report is out, and you probably won’t read a more depressing economic brief this year. The gruesome details: Global economic growth in advanced economies was halved last year, to 1.6%, amidst an “abysmal fiscal outlook”; we have “a global banking system that is still dependent on economic support”; bank credit spreads are back at levels seen during the height of the crisis; and advanced economies would need 20 consecutive years of surpluses of more than 2% of GDP just to get to precrisis debt-to-GDP levels.

But the world’s central banks are also warning us about themselves. The consequences of endless low rates, the BIS writes, include reduced incentives for indebted nations to cut back and “the wasteful support of effectively insolvent borrowers and banks.” Explaining why world central bank holdings have doubled in the last decade, the BIS does not mince words about who’s to blame:

The extraordinary persistence of loose monetary policy is largely the result of insufficient action by governments in addressing structural problems. Simply put: central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed.

You wouldn’t be wrong to think that sounds a lot like Bernanke’s polite nudging of Congress over the last few years. To Matt Yglesias, the BIS report sounds like a series of excuses. Izabella Kaminska wonders if the world’s central banks have gone all Sartre. Scott Sumner, adding to the philosophical confusion, notes that some economists can’t even agree if the Fed’s post-crisis policies have actually increased the money supply or decreased it. Dismal science, indeed. – Ryan McCarthy

And on to today’s links:

The world’s billionaires in one chart – WashPo

Ex-regulator, on the billion-dollar MF Global loophole: “It’s what the industry wanted” – NYT
Your pension fund, now even more underfunded – NYT
The CFTC would prefer to regulate in private – NYT

John Thain, Wall Street’s “Father of the Year,” and other silly banker awards – Bloomberg

New Normal
Old vs young: America’s raging economic resource battle – NYT
Prison REITs – Barron’s
September is the cruelest month (for financial crises) – Greg Ip

EU Mess
George Soros calmly suggests the EU has only three days to form a fiscal union – Bloomberg
The growing difference between what Angela Merkel says and what she does – David McWilliams
Real political union is fiscal union, and that means transferring wealth – Fistful of Euros
Schaeuble: “Excuse me, but the desire for improvement is a basic condition of human existence” – Der Spiegel
And now Cyprus has requested a bailout –Bloomberg

Welcome To Adulthood
Only 55% of new law school grads land a job within nine months – WSJ

The market would like more high-yield bonds, if you’ve got any – Sober Look

Baltimore may sell advertising on its fire trucks. Syracuse may sell ads on its helicopters – NYT

Scalia dissents: “Interior decorating is a rock hard science compared to psychology practiced by amateurs” – New Yorker

Baby Steps
Morgan Stanley advisers will soon send tweets from a library of pre-written messages no one wants to read – NYT

Follow Counterparties on Twitter, Tumblr and like us on Facebook. And, of course, there are many more links at Counterparties.


Re: Old versus Young, Leonhardt paints with a very broad brush that I’m not sure is correct even in the aggregate. Without references, I don’t think it’s safe to say that the old are trending conservative and the young liberal (at least socially), and so on.

The debate on where society’s resources should go is one we should be having, however. Should the old command resources based on their lifetime contributions to society, or the young as an investment in the future? Especially within the context of increasing lifespan and a changing support culture. I don’t know, though it’s unfortunate that Leonhardt believes he does. Oh, to be young and so certain about Big Questions, what a dangerous thing.

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Subordination in Spain causes very little pain

Felix Salmon
Jun 25, 2012 16:20 UTC

Sony Kapoor has a very good post on the Spanish bank bailout today, explaining that when Spanish credit spreads rose in the wake of the bailout, that had nothing to do with the fact that bailout funds were senior to privately-held bonds, and everything to do with enforced austerity.

The clever thing about Kapoor’s post is that he explains this empirically, through simple force of arithmetic. Basically, channelling new money to a liquidity-constrained debtor is always good for existing creditors, even if the new money is senior. That’s obviously the case if the new money prevents insolvency, but it’s also the case if it doesn’t:

Imagine a country has an NPV of expected future primary surpluses equal to x euros, which defines its sustainable debt carrying capacity and that its debt stock is y euros; we don’t need to say whether x is bigger than y or not. Now on a date say the 1st of Jan 2013, it gets a public bailout equal to z euros. Its debt repayment capacity is x+z euros as it now has the equivalent of z euros in a bank and its total debt is now y+z euros. If y>x then y+z>x+z and nothing changes. Assume x = 0.8 y, then bondholders would face a 20% haircut, whether before or immediately after the public injection of z euros.

Now imagine that the z euros bailout is at a concessional rate of interest. Then it will improve the sustainability of debt, all else remaining the same and increase the potential pay out to private bondholders. Equivalently, if the country invests the z euros it obtains in NPV positive projects, the sustainability of its debt improves, making the outcomes for private bondholders more positive.

So why are Spanish bond yields now so much higher than they were before the bank bailout? Isn’t the bailout a good thing? Not necessarily:

There is one exception to this rule, which is when the conditionality accompanying a public bailout is so flawed that it makes the recipient country adopt policies that actually hurt growth prospects and reduce its debt carrying capacity thus increasing the likelihood of insolvency and the size of private sector losses. This is a big and legitimate fear given the current excessive focus on austerity in the Eurozone and may play some part in the panic around Spain.

The logic here is scary, but also entirely coherent: the more bailout funds a country gets, the more it ends up being forced into austerity programs which will ultimately do more harm than good.

On the other hand, there’s hope here, too. If Mediterranean Europe eventually manages to tear Germany away from its unhealthy austerity addiction, then all this extra liquidity in the Eurozone could trigger a significant tightening in sovereign yields. Even if it’s subordinating those bonds at the same time.


Great post…

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Why checks won’t be abolished

Felix Salmon
Jun 25, 2012 04:46 UTC

In the latest issue of the Atlantic, I have a short piece under the headline “The End of the Checkbook” — something which can’t come quickly enough, at least for me. The video above is a bit of fun, and the result could be easily tweaked just by changing the distance I walked to the ATM, but the fact is that even supposedly easy things, like depositing a check by taking a photo of it, are in reality quite hard and full of frustrations.

The time in the video is absolutely the minimum amount of time needed: it was done over a very fast wifi connection, in a well-lighted room, with all the necessaries, including a pen and my ATM card, to hand. A few days later I tried to deposit a couple of checks when I was at home, and the process took me a good ten minutes, partly because it was nighttime and therefore shadows kept on falling over the checks when I tried to photograph them. “Can’t read check. Please retake photo.”

I never write checks, but I still receive them with some regularity, nearly always in the mail. When the check is for a lot of money, I’m always a little bit astonished that people are still entrusting such large sums to the US Postal Service. And it’s not just the post office which can lose checks, either. I don’t open every single piece of mail I receive, and sometimes a letter which looks like junk turns out to have a check in it. Other times, a check is attached to the bottom of some long letter, after a perforation, and it doesn’t always look like a check at first glance. And then, once you receive the check, you have to remember to deposit it, rather than having it slowly drown in a to-do pile of paper somewhere.

All in all, I’m quite sure that over the 15 years I’ve been in the States, I’ve somehow failed to deposit at least a few checks along the way, and that most of the time it’s been entirely my own fault. It’s an incredibly anachronistic system, though, and I don’t really see why there’s such an onus on me to open my mail and recognize the check and successfully deposit the check. All of those things are easy enough that we get them right 99% of the time, but even at 99% accuracy we’re still talking about 3% of checks going undeposited. And no one would dream, today, of regularly using a payments system with a 3% failure rate.

But this is a collective action problem: it can’t be solved by any single bank, and the solution really needs to be imposed by an activist Federal Reserve. Which, sadly, has a laissez-faire attitude towards payments systems, and generally thinks it shouldn’t get involved. As a result, Americans are going to be living in a second-best world of physical checks for decades to come. We deserve better, and we’re not going to get it.


Janet-1 -> If I have workmen in either I get cash out on my way home from work or I do an electronic payment. The cleaner I use gave me account details when I first started using them and I just transfer the money in each fortnight.

They generally get the money instantaneously so it is easy for them to check; I’ve been phoned by my brother who was in a garage with no money asking for me to transfer him cash. He has then walked in to the store and paid by debit card as it has already been received.

KenG_CA -> I live in the UK

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Counterparties: SCOTUS’s massive healthcare decision

Ben Walsh
Jun 22, 2012 21:23 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

The Supreme Court is holding off issuing a ruling on the constitutionality of Obamacare until next week.

The are four basic scenarios of what the Court can do and the decision has massive economic implications. The industry accounts for some 18% of US GDP; billions of dollars in federal spending and the future of hundreds of community healthcare centers are in play.

Only the justices and their staff of clerks know with any certainty where this is headed (sorry, Jeff Toobin). No matter how obsessively you check SCOTUSblog – your single best resource for all things Supreme – you won’t hear anything early. Unlike the rest of the branches of government, the Supreme Court is a leak-free machine. Until the official word comes, comfort yourself with the Vegas odds and courthouse gossip.

The decision likely hinges on Justice Kennedy: Dahlia Lithwick calls him “the original independent swing-state voter”. Or it could just as easily hinge on what the justices think of the mandated eating of broccoli, a vegetable Americans actually do like, it turns out.

And if you need to be hit over the head with the human importance of this issue, the NYT’s Annie Lowrey looks at an Oregon program that found providing health insurance to adults in poverty made them “healthier, happier and more financially stable”.

To help lead you through the twists and turns of the healthcare decision, we’ve compiled a Twitter list of the best people to follow. A huge thanks to Erin Geiger Smith and the Reuters Legal team for helping with this.

So have as relaxing a weekend as is possible when a decision affecting how we spend $2.5 trillion a year awaits your return. – Ben Walsh

On to today’s links:

Long Reads
How companies inject trillions of gallons of toxic liquid deep into the earth – ProPublica
Taibbi: How banks “systematically” stole from America by rigging muni bids – Rolling Stone

EU Mess
Monti: We have a week to save the EU and prevent “progressively greater speculative attacks on individual countries” – Guardian
“Like asking your children to grade their own homework”: Euro banks may be artificially inflating their health – WSJ
Krugman: When it comes to economic inequalities, the euro zone is no worse than the US – NYT

Shovel Readyish
Brazil’s massive, “pharaonic” stimulus program is now being compared to China’s – NYT

Investors respond to Moody’s bank downgrades with emphatic “meh” – Bloomberg
Moody’s slightly reduces its overrating of banks – Dealbreaker
Moody’s ratifies interbank mistrust – Felix

Investing is more win-lose than win-win – Howard Marks

New Normal
Corporate profits hit an all-time high; wages just hit an all-time low – Business Insider
Nevada has had the highest employment in the nation for the last 27 months – WSJ
Superheroes aren’t immune to recessions – Imgur

Gawker’s amazing shredding of the NYT‘s Brant brothers profile – Gawker

Data Points
An interactive guide to rich folks’ private islands – Datablog

Economist Anna Schwartz dead at 96 – NYT



My guess is they will declare the requirement to buy unconstitutional but the penalty/tax constitutional. It’s a nearly perfect way for them to get their say while not really changing anything, something lawyers love. There is a vague logic to it; government can’t compel but can motivate, and the government has nearly unlimited power to tax enshrined in the constitution and decisions to date. Yet they can say this preserves liberty, it is just that liberty isn’t free. All moot in the end but a clever way with words.

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Financial fiction

Felix Salmon
Jun 22, 2012 20:35 UTC

Near the beginning of Capital, the new novel from John Lanchester, we’re introduced to banker Roger Yount, and are treated to a wonderful three-page riff on the million-pound bonus he’s desperate to receive:

He wanted a million pounds because he had never earned it before and he felt it was his due and it was a proof of his masculine worth. But he also wanted it because he needed the money. The figure of £1,000,000 had started as a vague, semi-comic aspiration and had become an actual necessity.

Yount’s voice, as channeled by Lanchester, is one of the joys of this book: “Any flights would be taken business class, since Roger thought that the whole point of having money, if it had to be summed up in a single point, which it couldn’t, but if you had to, the whole point of having a bit of money was not to have to fly scum class”.

Lanchester is a real expert on banking and the global financial crisis: his book I.O.U. is a great one-stop guide to what went wrong. And having written that book, he had no need to try to explain the crisis all over again here. Instead, he has rolled out a much broader, novelistic canvas, stretching across creeds and classes and countries, which is a true pleasure to read, and which does an amazing job of evoking and showing what London has become. Anybody who loves London, or hates it, will love this book, and will find just as much detail in the descriptions of football agents and corner shops as there is on the trading floor.

Lanchester’s not the only Wall Street expert to have written a novel: The FT’s John Gapper has come out with one too. Called A Fatal Debt, and coming out on Tuesday, it’s a rollicking beach read, and loads of fun for anybody who prefers their bankers on the dead side. Gapper’s a friend, so I can’t claim to be objective here, but I devoured this one in no time. Lanchester’s book is long and complex and something to savor; Gapper’s is punchy and plot-driven and a guiltless pleasure.

Gapper’s book is set mostly in New York, and the Hamptons; I’m sure it’s going to be read around these parts a great deal over the next couple of months. It’s the perfect form of escapism for anybody with a summer place on the South Fork, especially if they have anything to do with finance. Which most of them do.

The financial thriller is becoming something of a genre these days: I also enjoyed The Fear Index, by Robert Harris, and Dead Bankers, by Philip Delves Broughton. It turns out that people who understand money also seem to be quite good at cunning and plot twists, a bit like mathematicians tend to be good musicians. And for those of us who read thousands of words of dry financial nonfiction every day, the opportunity to kick back with a book designed to be enjoyed, rather than something more didactic, is something to be savored and treasured. Now that we’re officially in summer, you can make some space for fiction. And you could do a lot worse than picking up any of these books.


“… and loads of fun for anybody who prefers their bankers on the dead side.”


“And for those of us who read thousands of words of dry financial nonfiction every day, the opportunity to kick back with a book designed to be enjoyed, rather than something more didactic, is something to be savored and treasured.”

Are each of your days like 40 hours long?

Let me add an old favorite – “Someone Else’s Money”, by Michael M. Thomas. Dated, but it’s in paperback and it’s got it all.

Posted by MrRFox | Report as abusive

Why are US stock pricing conventions so sticky?

Felix Salmon
Jun 22, 2012 18:32 UTC

Last week I explained why Wall Street prefers lower-priced stocks: they mean that bid-offer spreads are wider, in percentage terms, and when that happens, brokers make more money.

So it comes as little surprise to see that Wall Street is now agitating for some stocks to trade in increments of 5 cents or 10 cents, rather than the current 1 cent:

Brokerage firms often can’t afford to spend money developing reports on thinly traded companies because firms are less likely to make back that money through commissions linked to trades in such securities, said Healy. With less research available on small-cap companies, mutual funds and other institutions may not be inclined to invest in such stocks, he said.

Of course, there were lots of silly reasons put forward too: one executive even said that he was pushing the change for investors‘ sake, on the grounds that they “like round numbers”. But the real reason is the obvious one: the higher the bid-offer spread, the more money brokerages make. I, like Alex Tabarrok, am naturally suspicious when industry insiders say that higher tick sizes are in the public interest.

But there’s something else going on here, surrounding the semiotics of nominal share prices. The fact is that it’s pretty easy to choose a wide or a narrow bid-offer spread without changing tick sizes at all: if you want a wide spread have a low nominal share price, and if you want a narrow spread, have a high nominal share price. Anything over $50 or so will give you the narrowest possible spread, since bid-offer spreads almost never go lower than 2bp. On the other hand, if you want a spread of 30bp to allow Wall Street to make a killing, then just do a big share split which results in a share price of $3 or so.

Why don’t companies do this? Because nominal share prices matter, at least to retail investors. After I wrote my last post, a Wall Street veteran emailed me:

Trust me on this: Individual investors HATE HATE high-priced stocks. I know the logic makes no sense but you simply cannot sell a $70 stock to an individual unless it’s a very well-known blue chip. They hate it.

You would be surprised to hear how many people say that they’re looking for something “in the $23 range.”

This is weird, and irrational, but true. What’s more, individual investors are highly suspicious of very low-priced stocks, too. If Apple suddenly announced a 150-for-1 stock split, so that its shares started trading at $3.86 apiece, that would be bearish for the stock, the conventional wisdom that investors like stock splits notwithstanding. A company whose shares trade below $4 just feels as though it’s small, or struggling: certainly not a world-beating behemoth. (Incidentally, if Apple did do that 150-for-1 stock split, it would have 140 billion shares outstanding, and would trade on average 3.1 billion shares per day.)

The subtext of nominal share prices, beyond the obvious realm of penny stocks, is something I’ve never been good at understanding; if you know any good guides to it, I’d love it if you could point me in their direction. And even penny stocks don’t make a lot of sense to me: if you don’t want the stigma of being a penny stock, why don’t you just do a reverse stock split?

In any case, for reasons I don’t pretend to understand, it’s obviously a lot easier to try to change tick sizes than it is to change nominal pricing conventions. Some things are incredibly sticky, even if they don’t make any sense. I guess they’re a bit like that weird American love of pounds and miles and gallons.


In addition to mutant_dog’s reasons (odd lots, possibility of doubling), I wonder if some is that individual investors often have a fixed amount to invest at a given time, and want to minimize left-over funds. E.g. I often have $2K to invest. At $575/share, there’s $275 “left over,” versus only $22 at $23/share.

That’s a particular heuristic I’m very guilty of — so, I end up just buying index mutual funds where I can have fractional shares.

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