Felix Salmon

Eli Broad and the Gagosian consensus

Felix Salmon
Jul 13, 2012 00:58 UTC

I just arrived in LA, where the news that Leon Black was the buyer of The Scream is taking a decided back seat to the saga of MOCA. Just today, four life trustees of the Museum of Contemporary Art here wrote a letter to the LA Times distancing themselves from the direction it is taking, and another one — artist John Baldessari — resigned from the board entirely, becoming the fifth board member to do so since February.

The proximate cause of the latest storm was the firing of respected curator Paul Schimmel — and not even by MOCA’s new director Jeffrey Deitch, but rather by the man who brought Deitch in, Eli Broad. Broad tried to explain himself in an LA Times op-ed this week:

It became clear to the board that it needed a director who could create exhibitions that would dramatically increase attendance and membership and make MOCA a populist rather than an insular institution. After an extensive search and interviews with 10 candidates, the board wisely chose Jeffrey Deitch…

In today’s economic environment, museums must be fiscally prudent and creative in presenting cost-effective, visually stimulating exhibitions that attract a broad audience.

Broad was roundly criticized by, well, pretty much everybody in the art world, with the LAT’s Christopher Knight blithely asserting that “a great art museum whose board of trustees has a combined net worth far in excess of $21 billion shouldn’t have financial problems”, and that none of the moves made by Broad and Deitch were necessary.

But the fact is that MOCA has had enormous financial difficulties for many years, that Broad is pretty much the only individual willing to write it large checks, and that therefore he pretty much gets to call the shots. If populist is what he wants, populist is what he’s going to get. And so Schimmel is out, and MOCA’s next big exhibition is going to be a disco show curated by LCD Soundsystem’s James Murphy, following up on a James Dean show curated by film star James Franco. These things are fast, cheap, and popular — the exact opposite of Schimmel’s meticulously-constructed and art-historically incredibly important shows. You can’t throw a show of Robert Rauschenberg combines together in the space of a few months.

And so while Broad is willing to continue to subsidize expensive things that fit in with his vision, such as the main Grand Avenue building opposite the site of his own new museum, the rest of the museum’s program is becoming a parody of the LA mindset, where the only thing that matters is the box-office gross.

Is the saga of MOCA of purely parochial interest in LA, or is it indicative of broader trends? I hope it’s the former, but I fear it’s the latter. Broad is the prime exemplar of the way in which rich Gagosian clients have devastated the delicate ecology of the art world, especially in places like LA where its roots had little depth to begin with. The LA art world is fascinating and storied and important and wonderful in many ways — but for most of its history it was largely out of view as far as the city’s broader popular culture was concerned, the province of a small and dedicated group, rather than of high-profile celebrities and billionaires.

But now that contemporary art has become internationalized and homogenized, it has increasingly little time for geographical idiosyncrasies. Larry Gagosian is the Robert Parker of the art world, imposing his taste on institutions across the planet, via a group of nouveau-riche collectors who tend to buy whatever’s expensive.

Leon Black, it should be said, is not one of those collectors. He doesn’t buy trendy contemporary art: instead, he has amassed a formidable collection of indisputably world-class pieces, including some of the greatest drawings in the world. He owns Brancusi’s Bird in Space, for instance, which is the great and timeless precursor to the shiny rabbit that Eli Broad loves posing next to on the cover of his memoir. And as Kelly Crow noted in her scoop about Black buying The Scream, as a work on paper, it actually fits into Black’s collection very easily. Yes, it’s a trophy piece. But Black didn’t buy it just because it’s often found on the side of canvas tote bags.

Black operates at the very heights of the art world, sitting on the boards of both the Metropolitan Museum and MoMA. My guess is that The Scream will end up at the former, just because MoMA already has a surfeit of iconic 20th-Century works. But wherever it lands, it will enrich rather than change the nature of the museum: both institutions are so big as to dwarf any single donor or artwork.

Move down a notch or two, however, and when you get to the level of MOCA, or of most of the thousands of other modern art museums in the world, a small group of Gagosian-educated plutocrats can set the artistic agenda much more easily. Whether it’s Eli Broad at MOCA or Dakis Joannou at the New Museum, or even whether it’s the way in which big art fairs have become public spectacles in their own right, ratifying the expensive and ignoring any kind of curatorial context, a new popular consensus is taking hold. And consensus is always boring.


Only time will tell.
But it seems to me that a longer term strategy might be to conduct a museum in more fiscally prudent (business profitable) sense as to raise their endowment so that they have the ability to purchase a “formidable collection of indisputably world class pieces”…..

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Counterparties: America attempts to retire

Peter Rudegeair
Jul 12, 2012 21:49 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

Back in the spring of 2008, Roger Lowenstein came out with While America Aged, warning that the fragility of America’s pension plans “loom[s] as the next financial crisis”. Thanks to Lehman Brothers, his timing was a bit off. As Phillip Longman explains in a great piece in the Washington Monthly, now might be the time to start worrying:

According to a recent study by the Employee Benefits Research Institute, fully 44 percent of Baby Boomers and Gen-Xers lack the savings and pension coverage needed to meet basic retirement-age expenses, even assuming no future cuts in Social Security or Medicare, employer-provided benefits, or home prices. Most Americans approaching retirement age don’t have a 401(k) or other retirement account. Among the minority who do, the median balance in 2009 was just $69,127.

Among the litany of factors Longman cites that are coming to a head this decade: the “demographic deficit” that’s leaving the US with fewer working young people supporting more retired folks; the increase in household debt of all varieties over the last five decades; and the decline in median family net worth over the past 20 years.

There’s also the mostly undelivered promise of 401(k)s. As Jia Lynn Yang wrote recently, in 2009, 51% of Americans were “at risk” of not being able to maintain their current standard of living into retirement. That’s up from 31% in 1983. It’s looking more and more like Teresa Ghilarducci was right to argue: The 401(k) “is a failed experiment of how well individuals can save for their retirement”. Maybe it’s time to try her idea of “guaranteed retirement accounts“? – Peter Rudegeair

On to today’s links:

Congress wants another try at asking a banker tough questions, this time with Bob Diamond – Guardian

All 40 of JPMorgan’s in-house regulators were replaced last year with less experienced peers – DealBook

Romney said he left Bain Capital in 1999. Government documents said he stayed on for three more years – Boston Globe
Confidential documents support Romney’s version of events – Dan Primack

EU Mess
Spanish PM announces tax increases and budget cuts, and predicts zero economic growth amid protests – WSJ

One-stop shopping: Private equity pulls a Wal-Mart and dictates prices to suppliers – DealBook

Bold Rationality
Forcing young people to work for the government at minimum wage for 18 months may not be the best idea – Bloomberg View

Markets Have A Message
US Treasury sells 10-year debt at lowest yield ever – FT

The Fed
FOMC minutes: More stimulus or additional policy actions may be needed “if the economic recovery were to lose momentum” – The Fed
The US economy is “stuck in a new kind of normal, somewhere between crisis and prosperity” – NYT

Soviet Russia: bad at economic planning, good at economic infographics – Ripetungi

Weekly initial unemployment claims decline to 350,000 due to onetime factors – Calculated Risk

Pigs in Mud
Lawyers demand ex-Dewey lawyers give back pay or “face years of litigation” – WSJ

Must Watch
Joe Weisenthal interviews Paul Krugman and shows CNBC how it’s done – Business Insider (Part I, Part II, Part III)

Bad News
The connection between rising black unemployment and the shrinking public sector – Dave Weigel


The people who are accumulating unused profits don’t want to spend or invest those profits, they don’t want to pay taxes,and they don’t want the government to inject money into the economy to replace what the hoarders are taking out of circulation. So how do they expect the economy to grow?

I normally would have swung at the softball, but I’m traveling and don’t like writing long rants on a tablet, so I’ll leave it at that. For now.

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The sensible hunt for manufacturing jobs

Felix Salmon
Jul 12, 2012 16:29 UTC

Michael Kinsley tackles outsourcing today, complaining that Barack Obama is a protectionist who doesn’t understand its value, and that Mitt Romney is keener to pander to protectionists than he is to defend free-market principles. He writes:

Romney or Obama? “I don’t want the next generation of manufacturing jobs taking root in countries like China or Germany.” Early in the Republican primary campaign, China was the one subject Romney seemed genuinely agitated about. Imposing tariffs on Chinese goods was on the long list of things Romney said he was going to do on Day One of his presidency. Maybe he still is, but he doesn’t play it up the way he used to.

Meanwhile, if Romney is a free trader at heart, faking a bit of protectionism, Obama seems to be a protectionist at heart, faking a belief in free trade. That quote in the previous paragraph is from Obama, and shows a fundamental misunderstanding of how markets work. Trade is not a zero-sum game. There isn’t a certain number of manufacturing jobs that will either go to China or Germany, or come to us. We want China and Germany to have lots of manufacturing jobs. The more they have, the richer they are, the better off we will be as well. Beggar-thy-neighbor policies don’t work.

Kinsley is probably right on the politics, here, but he’s wrong on the economics. Here’s Obama’s quote, in context:

I was able to sign trade agreements with Korea and Colombia and Panama so our businesses can sell more goods to those markets. That’s why I’ve fought for investments in schools and community colleges, so that our workers remain the best you’ll find anywhere, and investments in our transportation and communication networks, so that your businesses have more opportunities to take root and grow.

I don’t want America to be a nation that’s primarily known for financial speculation and racking up debt buying stuff from other nations. I want us to be known for making and selling products all over the world stamped with three proud words: “Made in America.” And we can make that happen. (Applause.)

I don’t want the next generation of manufacturing jobs taking root in countries like China or Germany. I want them taking root in places like Michigan and Ohio and Virginia and North Carolina. And that’s a race that America can win.

This, it seems to me, is an entirely coherent economic policy if what you’re trying to do is maximize the number of good working-class jobs in America. There’s no doubt that US employment, as a whole, is on a long-term secular trend away from goods and towards services. And at the same time, the two countries with the world’s biggest trade surpluses — China and Germany — are precisely the two countries with the healthiest manufacturing industries. What’s more, neither of them is suffering a jobs crisis.

So the question arises: should the US continue to accept the Ricardian bargain whereby it concedes to China and Germany the comparative advantage in manufacturing, while keeping for itself the comparative advantage in borrowing-to-consume and constructing synthetic CDOs? The answer is no, and not only because there’s something hollow and dangerous about an economy which is too reliant on financial whiz-bangery. There’s something more important at stake here, and that’s employment.

US manufacturing in fact is extremely competitive on a global scale; the problem is that output has lagged productivity improvements, with the result that we’re making more stuff with ever fewer people.

There’s no particular reason why that should be the case: when manufacturers in China and Germany become more efficient, that’s their sign to employ more people, rather than fewer. As each employee becomes increasingly profitable, it makes perfect sense to keep on adding more employees. Or at least it does in some countries. In the US, by contrast, capital is cheap and plentiful, and there’s much more incentive here to replace people with capital goods wherever possible.

But at that point, why even invest the money in the manufacturing industry at all? Everything becomes a question of opportunity cost, and if you can get higher returns in say the financial sector, then the rational thing to do is to start an investment bank, make lots of money from your trading desk, and then take the proceeds and spend them on manufactured goods from China and Germany. That’s how markets work: goods and money become interchangeable, and if you have money then you don’t need to be able to actually make things any more. Money gives you all the competitive advantage you need.

Except, that’s a strategy which works until it doesn’t. I’m reminded of this bit from Kurt Eichenwald’s piece on Microsoft’s Steve Ballmer in the latest Vanity Fair:

The Microsoft CEO used to proclaim that it would not be first to be cool, but would be first to profit — in other words, i would be the first to make money by selling its own version of new technologies. But that depended on one fact: Microsoft could buy its way into the lead, because it always had so much more cash on hand than any of its competitors.

No more. The advantage that Ballmer relied on for so long is now nonexistent. Google has almost the same amount of cash on its books as Microsoft — $50 billion to Microsoft’s $58 billion. Apple, on the other hand, started the year with about $100 billion. Using superior financial muscle won’t work for Microsoft or Ballmer anymore.

A technology company’s ability to innovate is not a bad metaphor for an economy’s ability to manufacture things and employ people while doing so. If it’s lacking, then for a certain amount of time that hole can be patched with money. But not forever.

And so I think that Barack Obama’s push to bring manufacturing employment back to Michigan and Ohio and Virginia and North Carolina makes all the sense in the world. Trade is not a zero-sum game — Kinsley is right about that — but at the same time that’s no reason to feel sanguine when you see good working-class jobs get exported to countries where the idea of building a blue-collar career in the manufacturing sector is still a perfectly sensible and reasonable one. America does not have a jobs crisis among college graduates, even if the employment situation for recent graduates right now is grim. It does have a jobs crisis in areas where factories have closed and industrial skills are no longer valued.

If you run a company, one of your jobs is to ensure that your company’s money isn’t wasted. And similarly, if you run an economy, one of your jobs is to ensure that your country’s labor force isn’t wasted. There are far too many Americans, right now, who could be working and aren’t. That’s downright inefficient. Their skills are well suited to the manufacturing industry. And so, if new manufacturing jobs are to be created, somewhere in the world, it makes a huge amount of sense that they be created in places like Michigan and Ohio and Virginia and North Carolina: that’s where the low-hanging fruit lies, in terms of hard-working employees with enormous potential productivity gains.

Kinsley’s right that we want China and Germany to have manufacturing jobs. But here’s the thing: China and Germany have manufacturing jobs. New manufacturing jobs, at least in the short term, should move where there’s both a shortage of such things right now, and a large potential labor force willing to get to get to work tomorrow. Certainly it’s the job of the president to encourage precisely that. And if he succeeds, he will have built a powerful economic engine in a part of America which is not doing well at the moment.

Note that Obama talked about bringing those jobs to America not in any protectionist context, but rather in the context of a series of free trade agreements which, at the margin, make outsourcing easier rather than harder. His goal is not to steal jobs from elsewhere, but rather to make America a place where the infrastructure and workers are so attractive that companies around the world decide to source their manufacturing here. No one cares, any more, about the nationality of the employers in these states: a job is a job, whether your employer is American or Brazilian or Swedish.

The computer I’m writing this on was made by an American company in China, but there’s no particular reason why other items in my household shouldn’t be made by a Chinese company in America. If the US can create the conditions for that to happen — if Chinese companies voluntarily move some of their manufacturing here because that’s how effective the US manufacturing sector has become — then everybody wins. That’s what Obama wants. And wanting that requires no misunderstanding whatsoever of how markets work.


“It hasn’t done this because keeping banks well capitalized is a higher priority for them than downstream, secondary effects like facilitating bank lending.”

A few years ago, I might have agreed. Now? The banks’ balance sheets are healthy enough that getting the economy going again is a greater priority.

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Counterparties: Another day, another city

Ben Walsh
Jul 11, 2012 22:15 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

This is no Meredith Whitney-sized apocalypse, but it’s worth noting that San Bernardino is the third California city in two weeks to seek bankruptcy.

The San Bernardino City Council made the decision after a report by staff said it would run a deficit of $45 million in its current fiscal year and that further cuts were not possible: “The city has declared numerous fiscal emergencies based on fiscal circumstances and has negotiated and imposed concessions of $10 million per year”.

In the short term, this means San Bernardino will stop making payments on debt and attempt to find some sort of fiscal path forward. As Matthew DeBord notes, San Bernardino could come “out of bankruptcy with its debt reorganized and with a better chance to have a balanced budget and a reserve fund in the future”. However, debt payments are a small portion of the city’s deficit, so even under that rosy scenario, the city faces tough choices elsewhere. (The city is also contending with allegations of more than a decade of misreported city fund balances).

Twenty percent of the city’s workers have already been laid off, and many have taken pay cuts, DeBord reports. A recent auditor’s report noted that 31% of the city’s revenue comes from property taxes, and recovery to pre-housing-bubble levels seems unlikely. There’s also the issue of how to right-size spending on vital services like police and fire. Fellow bankruptcy-seeker Stockton, MuniLand’s Cate Long notes, ”[admitted] that the city has had little-to-no success in getting the pay of its public safety workers under control” and sought bankruptcy, in part, to renegotiate union contracts. The picture is brighter for San Bernardino, which spends only 42% of city funds on public safety, compared with Stockton’s 76%.

Although San Bernardino’s looming bankruptcy is having “basically having zero impact” on the bond market, there’s a bigger issue here. State and local government spending is in long-term decline: Two prominent forecasters expect it to fall to 10% of GDP by 2020 from 11.9% last year. Meredith Whitney may have been wrong about mass muni defaults, but we’re still seeing cities coming within just a few thousand dollars of insolvency. – Ben Walsh

On to today’s links:

Income distributions for Major League Baseball and the US as a whole are surprisingly similar – BMO
Muni bonds’ tax-free status limits their appeal to investors – Josh Barro

Inefficient Markets
More than 80% of the US equity premium is gained in the 24 hours before Fed announcements – Liberty Street Economics

Tax Arcana
In 2009, Americans paid the lowest federal tax rates in 30 years – WaPo

JPMorgan may claw back millions in pay from execs over the London trading scandal – WSJ

EU Mess
Under bailout terms, Spain may cede bank control, while investors face haircuts – WSJ

Take Your Time
Regulators have met just 37% of Dodd-Frank’s rule-making deadlines – Politico

Apropos of Nothing
The value of the general manager: Why corporations need more Michael Scotts – HBR Blog
Blame horses for pants – Alexis Madrigal

Appropriately Surly
Krugman: “I just did Squawk Box … it was one zombie idea after another” – NYT

MF Doom
US Bank is being drawn into the PFG investigation – WSJ


@Ben – no problem on the link, I didn’t assume it was intentional.

I agree with your point that just taking people who are already 40 or 50 year old specialists and then promoting them to be general managers of a business unit doesn’t really solve the problem – it just pushes the same problem down to business units instead of the whole company. I think the more interesting idea is encouraging people to spend time in different functional areas. At a minimum, there are ways to make sure that finance and operations people actually talk to sales people (or, even better, a customer) on occasion, which should benefit how a company functions as well as developing additional skills. Like everything, there’s the need to guard against going too far the other way, with too many people in long meetings that don’t have a point.

Unfortunately, some of this mindset has fallen by the wayside because it was easier to implement when the expectation was that people would stay with 1 company for an entire career.

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Why the eminent-domain plan doesn’t hurt second liens

Felix Salmon
Jul 11, 2012 16:31 UTC

Brad Miller, arguably the most sophisticated and well-informed member of the House when it comes to housing finance issues, has an op-ed in American Banker today about the eminent-domain plan being mooted in San Bernadino (which just voted to file for bankruptcy, by the way). Miller’s excited about the plan, because he thinks that it will force banks to take losses on all-but-worthless second liens. But, sadly, he’s wrong about that.

Miller actually makes two mistakes in his piece. The first comes when he explains how the price of the mortgages would be determined:

Deciding a fair price would not be hard. There are frequent auctions of mortgages with a sufficient number of informed, sophisticated buyers. The auctions are an almost perfect pricing mechanism. There would be comparable sales to determine almost any mortgage’s fair market value.

Miller’s right that mortgages do get auctioned relatively frequently, if not frequently enough that the market can even be considered highly liquid, let alone “an almost perfect pricing mechanism”. But here’s the thing: the private-label mortgages which tend to get sold off are precisely the mortgages that Mortgage Resolution Partners does not want to buy — the ones in default. Banks which own performing mortgages have almost no incentive to ever auction them off. And MRP has said that performing mortgages are the only mortgages it’s interested in.

What’s more, when performing underwater mortgages are traded, they’re often sold above par, since the homeowner is locked in to higher-than-prevailing mortgage rates. MRP, by contrast, is determined that it will only buy mortgages well below par: indeed, they’re saying that they’ll demand a discount not only to the face value of the mortgage, but even to the market value of the property. As a result, deciding a fair price might well be completely impossible: the owners of the mortgage would value it as a performing loan at a high rate of interest, while MRP would essentially ignore the fact that it’s performing, and value it on the basis that it cannot be worth more than the value of the collateral.

A free market copes quite easily with huge valuation discrepancies like that: there’s simply no trade, and the owner of the mortgage holds onto it, while companies like MRP find themselves unable to offer a price at which anybody is willing to sell. That’s why MRP’s whole idea is contingent on doing an end-run around the free market, and forcing the owners of the mortgage to sell. The point here is that if there really was a low market-determined fair price for the mortgages, then MRP wouldn’t need eminent domain at all: it could simply buy up those mortgages on the free market, directly from banks. Maybe, eventually, once it ran out of free-market mortgages to buy, MRP could try to use the eminent-domain method to buy mortgages from CDOs and MBSs. But at that point they’d have real-world market-based proof of how much such mortgages were worth.

MRP isn’t going down that road, however, because it knows that no one will voluntarily sell them mortgages at the kind of discounts it’s looking for. Which is prima facie evidence that the amount it’s willing to pay is not a fair price after all.

Miller then moves on to the thorny issue of second liens. While first liens are often owned by special-purpose investment vehicles, second liens are generally owned by banks. Miller writes:

So the real losers from the program would be the biggest banks, the holders of second liens, not investors in first mortgages. And even for the biggest banks, eminent domain would not cause losses but reveal losses.

But this isn’t true. If anything, the holders of the second liens would make money from this scheme, rather than losing money. Remember that MRP is not planning to buy houses using eminent domain, which would make much more sense. Instead, it’s only planning to buy mortgages — and it’s refusing to buy any mortgages held directly by banks. Instead, it’s only buying mortgages held by special-purpose investment vehicles, which tend not to have expensive lawyers willing and able to contest any and every valuation.

“Involuntary sales of seconds at fair market value would end fictitious valuations and require an immediate accounting loss,” writes Miller — and he’s right about that. Sadly, there’s nothing in the MRP plan which suggests that MRP has any interest at all in buying up second liens from banks. If MRP were buying houses rather than mortgages, then the banks holding the second liens would be forced to take an immediate loss. But it’s not. Instead, it’s just buying up performing first liens, and leaving everything else intact, including all second liens. At the margin, then, by reducing the amount of money that homeowners owe on their first liens, the MRP plan will increase, rather than decrease, the value of the second liens.

Why won’t MRP buy up second liens at what it considers to be a fair market value? For the same reason that it won’t buy up first liens directly from banks, either — the two sides will never be able to agree on a price. By MRP’s calculation, if the first lien is worth much less than par, then the second lien has to be worth something very close to zero. By the bank’s calculation, on the other hand, a performing second lien is a valuable revenue stream, worth a significant amount of money. And because MRP will be willing to pay very, very little for that second lien, it will not be willing to spend a substantial amount of money defending that near-zero valuation in court: its legal fees would almost certainly be greater than the amount it was willing to pay for the second lien in the first place.

If Brad Miller can point me to a plan where eminent domain is used to buy underwater houses rather than underwater mortgages, or if he can point me to a plan where eminent domain is used to by delinquent mortgages rather than performing ones, including seconds — then he’ll have me persuaded. But sadly the plan on the table is not the plan that Miller thinks it is. Which is why it’s a bad plan.


For a congressperson who is “arguably the most sophisticated and well-informed member of the House when it comes to housing finance issues”, Brad Miller seems more of an illiterate, based on the points raised in Felix’s article just for starters.

The obvious problem with the eminent domain approach for acquiring mortgages is that a mortgage is in no way “property”. Eminent Domain doesn’t even apply.

Miller’s article draws a ludicrous comparison between mortgages and intangible/intellectual property. The word “use” in the Fifth Amendment applies rationally to the latter, but not the former:

A mortgage is not “used” in any reasonable sense of that word. The government may acquire real property and build a bridge on it – that is “use”. The government can’t “use” a mortgage in anything approaching the same sense as the word applies to tangible property. Even in routine financial dealings, one company doesn’t “buy” a mortgage in the same sense that one “buys” a banana – buying a mortgage is merely a reassignment of the right to collect on the loan and to foreclose on the underlying backing property.

2) Intangible property such as a patent does fit the “use” notion, but the US government doesn’t buy patents. Miller states “Existing law allows the use of eminent domain to buy any kind of property, however, including even intangible property like trade secrets”, a reference to “Ruckelshaus v. Monsanto”. Again, even in this grayest of gray areas, those trade secrets (data about pesticides) were intended to be “used”, unlike the mortgages.

The city of San Bernardino’s problems can only be solved by:

1) Reversing the last 50 years of housing madness.
2) First mortgage holders reneging on their loans – aka, “jingle mail”.
3) Not paying their employees so damn much. Unionized government employees in California make twice the comparable wages in flyover island.

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Media ethics and transparency

Felix Salmon
Jul 11, 2012 06:42 UTC

I’ve just been told that it’s International Media Ethics Day in September, which is so far away that I’m bound to forget to post something. But I have been thinking a bit about media ethics of late, and especially the ever-increasing list of rules designed to ensure that journalists are neither conflicted nor seen to be conflicted. And the more I look at such things, the more I come to the conclusion that all too often they do a very good job of banning harmless activity, while at the same time proving quite ineffective against situations which are far more ethically problematic.

It’s easy to come up with a list of cases where ethics watchdogs in high places have come down too harshly on infractions which were pretty harmless. Think of Mike Albo being fired from his NYT column, or for that matter Neil Collins being fired from Reuters. In neither case did the punishment fit the crime, notwithstanding of the letter of the law as unilaterally interpreted by the news organization in question.

It’s also easy to come up with instances of news organizations tying themselves up in rather hilarious knots in order to meet their own self-imposed ethical standards. Len Downie and Mike Allen never vote, for instance, for fear that their private and secret ballot might in some way inform their journalism. And I was particularly tickled by the contortions that the WSJ went through when faced with an extremely good-natured wager by Dan Neil:

The Wall Street Journal, which I joined in February 2010, does not permit its journalists to engage in this kind of wagering, regardless of subject or beneficiary — even by critics and columnists like me who are paid to have and express their opinions. And that’s perfectly reasonable: You wouldn’t want a theater critic betting a play will succeed or fail. Moreover, it’s better for journalists to write about the story than to somehow become part of the story. However, since I undertook this obligation before my tenure at the WSJ, and since the outcome is a charitable contribution, the Journal allowed me to follow through.

There’s an implication here that if Neil had promised to pay Elon Musk $1,000, rather than Doctors Without Borders, then the WSJ would have considered his welshing on his bet to be more ethical than his making good on it. We don’t know, which is a bit problematic in itself.

The theme running through all of these cases is that of reductio ad absurdum. Organizations decide that their journalists should be above reproach, and draft a set of rules to that effect. They then consider themselves bound by the rules, rather than by the principle underlying those rules.

The risk of absurdity is particularly high when it comes to social media in general, and Twitter in particular. As Twitter inexorably erases the professional/personal distinction, sophisticated organizations are increasingly adopting social-media policies based on simple “don’t be stupid” principles, rather than on hard-and-fast rules.

What goes for Twitter goes more generally, too. Twitter has proved that journalists are human, which has upside as well as downside. Journalistic ethics should embrace that, rather than trying to force all journalists into being magisterially impartial observers.

What would ethics look like in a world which is messier and more transparent? For one thing, we would spend less effort ring-fencing journalists’ lives and conflicts, and more time simply being open about them. The end result could actually be a significant improvement.

The reason is that the single biggest problem, when it comes to journalistic bias, has nothing to do with journalists owning stock in companies, or being paid speaking fees. (Although with speaking fees, a simple would-you-be-happy-being-transparent-about-this test is often a very good place to start.) Rather, by far the most common way in which journalists are captured by corporate interests is precisely the same way that journalists get scoops: source cultivation.

Journalists don’t always have sex with their sources, but when you’re having long and often boozy meetings with people, it’s statistically inevitable that many journalists are going to end up liking some subset of those people. After all, sources aren’t necessarily bad or evil: some of them are very good, very charming people. And often journalists end up working incredibly closely with sources for weeks or months on end as stories progress. Sometimes, that work becomes formalized: after Gretchen Morgenson used Josh Rosner as a source during much of the financial crisis, she then co-authored a book with him. Other times, the source ends up marrying the journalist: think Alan Greenspan and Andrea Mitchell.

But most of the time, it’s not nearly as obvious as that. Especially when it comes to background dinners with no particular agenda, a lot of what’s going on is a complex game of two people trying to get comfortable with trusting each other. That trust needs to be built up over time, and building it up takes a substantial amount of effort. It can be hard to distinguish, sometimes, from friendship. And if the journalist writes something bad about the source or the source’s company, the whole relationship can be jeopardized.

Keith Winstein has a fantastic way of explaining why beat reporters don’t make great investigative reporters; it basically comes down to the fact that beat reporters need access, which is the one thing that no company wants to give to an investigative reporter. But all reporters, be they beat reporters or investigative reporters or opinion journalists or anything else, have human sources and understandably feel bad if they write something that upsets the sources they get along well with. And that ends up shaping news stories, at the margin, much more than any financial incentives they might have.

Source relationships are particularly fraught when it comes to short-sellers, most of whom have good relationships with a certain subset of the financial-journalism world. That makes perfect sense: short-sellers often uncover newsworthy frauds, and it’s in everybody’s interest for those frauds to be uncovered in a public manner. But the closer a short-seller gets to a journalist, the more problematic the relationship, just because the short seller is likely to have advance notice of a key precipitating event — the publication of the story in question.

Here’s the problem: let’s say I’m a short seller, and I’ve uncovered a big fraud. I can go short the stock, but doing so is fraught with danger: so long as the fraud isn’t public, the stock can rise a lot and I can get stopped out. And if I simply sit back and wait for some journalist or government agency to find the fraud on their own, I could be waiting a very long time indeed. So I make things happen by talking to a journalist I know I can trust. And somewhere along the way I get a reasonably good idea for when that journalist’s story is going to appear — a story which I’m pretty sure is going to result in the company’s share price falling. At that point, I have the holy grail for any short-seller: knowing not only that a stock is going to fall, but also when it’s going to fall. And I have that information just because of how close I am to the journalist. You can see how the journalist, in this light, looks a bit less like the impartial crusader of Truth, and a bit more like the willing patsy of the short-seller.

I don’t know how or even whether this problem can or should be addressed, but I suspect that a bit more transparency could only help. And that’s not the only area where more transparency would surely be a good thing. I’m a long-time reader and fan of Joe Nocera, for instance, and so I know that he has featured Westwood Capital’s Dan Alpert in his column numerous times, as well as letting Alpert guest-blog for him on occasion. Last August, Nocera introduced him, quite explicitly, as “my friend Daniel Alpert”.

Yesterday, Nocera wrote about the eminent-domain plan for seizing underwater mortgages; he concluded that “it’s time to give eminent domain a try”. In doing so, he ducked all of the questions I’ve raised about the plan he’s writing about: how Mortgage Resolution Partners is buying mortgages rather than homes, and performing mortgages rather than defaulted mortgages, and indeed is trying to buy performing mortgages for a fraction of their face value, even as investors are valuing them at or even sometimes above par. “Since the home has dropped dramatically in value, the mortgage is worth a lot less than its face value,” asserts Nocera — ignoring the fact that once a mortgage is seasoned and performing well, it has to be worth at least as much as a performing unsecured loan of the same amount.

Why was Nocera so seemingly blind to the weaknesses in the MRP plan? Maybe he considered and rejected them; maybe he didn’t consider them at all. Or, maybe, he was predisposed to like the MRP plan because his friend Dan Alpert is one of the principal movers behind it. I knew that Nocera had written about the MRP plan before I knew what Nocera had written about the MRP plan — but because I also knew about the Nocera-Alpert connection, I didn’t need to read the column to know what Nocera’s conclusion would be. Nocera was under no compulsion to write about the plan, and I’m reasonably certain that if he can’t say something nice about Dan Alpert, he’s not going to say anything at all.

Dan Alpert wasn’t mentioned in Nocera’s column, and neither was his company, so even a close reader of Nocera’s work would have found it difficult to notice what you might call the friendship conflict. Nocera gives paid speeches, including to securitization professionals, and I don’t think that the money he gets paid for giving those speeches affects his columns one bit — any more than his cruise-ship seminars do. But the NYT keeps very close tabs on all that extracurricular income, because it’s seen as raising potential ethical issues. Nocera’s connection with Alpert, on the other hand, isn’t scrutinized at all — it’s a perfectly unexceptional journalist-source relationship — despite the fact that it must have had some significant effect on the column.

This, then, is where a bit of first-person transparency would come in useful. “I’m biased: I’ve known Dan Alpert for years, and he’s a friend. But I still think this is a good idea.” It doesn’t take up much space, it’s perfectly natural, and it helps readers understand where the writer is coming from.

Was it unethical for Nocera not to disclose his relationship with Alpert? I wouldn’t go that far. But then again, I don’t think it’s particularly helpful to try to draw rules-based bright lines between “ethical” and “unethical”, and say that anything on one side of the line is fine, while anything on the other side of the line is unacceptable. We don’t want journalists to become like corporate executives, who, in the words of Eduardo Porter, “behave as corruptly as they can, within whatever constraints are imposed by law and reputation”.

Instead, I’d encourage all journalists to consider every action they do, every day, and ask whether it’s helpful or unhelpful, good or bad, at the margin. And the point here is to spend as much time trying to do things which are good as you do avoiding things which are bad.

Right now, US journalism has a rather Calvinist view of ethics: it’s all downside and no upside. But it seems to me that if publications encouraged their journalists to be more ethical, rather than just requiring them not to be unethical, things might get a lot better. We’d see more detailed disclosures like Kara Swisher’s at All Things D. We’d see fewer anonymous quotes, since there’s always something a bit dirty and secretive about them. We’d have fewer journalists automatically saying “yes” whenever anybody asked them if they could talk off the record. And we’d have columnists like Nocera explain their personal connections to the subjects they were writing about, even when doing so isn’t strictly necessary: it would still at the margin be better than not doing so.

My suggestion for Media Ethics Day, then, is that, this year, we stop talking about rules: what behaviors are OK, and what behaviors aren’t. I don’t have a problem with those rules existing, but I worry that an unintended consequence of putting those rules in place is that journalists end up worrying much more about the rules, and what side of the rules they’re on, than they do about the underlying ethics of what it is that they’re doing, or not doing. Similarly, I’d like to see a little less emphasis on what constitutes unethical behavior in journalism. While that’s an important topic, it’s also a constrained one. What I want to see more of is discussion of what constitutes ethical behavior in journalism — what kind of things can all journalists do to make their practice ever more ethically sound?

I’d particularly love to see that conversation take place in the context of an increasingly social world, where friendships and relationships are more out in the open than they have been in the past, and where grown-ups recognize that conflicts are a fact of life, rather than something which should always be avoided.

If you study ethics in a philosophy department, it’s a tough nut to crack, with lots of very difficult questions. In a journalistic context, by contrast, everybody seems far too keen to boil everything down to simple yes/no answers.


And what is journalism these days anyway? A few years back I had no doubt what it was, but now I don’t know where the definition begins and where it ends. “The transmission of a single message, other than a sales promotions, via means capable of reaching more than 50 people”?

Posted by tindale | Report as abusive

Counterparties: The incoherence of trade negotiations

Jul 10, 2012 21:39 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

A few hours after filing a complaint with the World Trade Organization about China’s duties on American car exports, President Obama last week told an Ohio crowd that ”Americans aren’t afraid to compete”.

Competition is one of those loaded, euphemistic campaign terms. Last fall, the Obama administration passed the biggest group of free-trade agreements since NAFTA and even created an enforcement squad on the subject. But there’s no agreement on whether this will create or destroy American jobs.

If you’re interested in the slippery notion of free trade, read Zach Carter and Sabrina Siddiqui’s fascinating piece on the Obama administration’s attitude toward the international pharmaceutical market. India’s government, rather than leaving its citizens to pay $5,000 a month for the cancer drug Nexavar, opted to allow a local company to produce a generic version of it, which costs $157 per month. India’s actions, according to recent testimony from US Patent and Trademark Office Deputy Director Teresa Stanek Rea, were an ”egregious” violation of WTO trade rules.

The only problem with that contention, Carter and Siddiqui report, is that this “compulsory licensing” is one of the WTO-sanctioned ways countries offer versions of drugs like Nexavar to their citizens. Indeed, they add, the US uses the same technique. Strangest of all, Bayer, which owns the patent on Nexavar, isn’t even an American company:

Rea and others at the briefing also failed to note that Bayer is a German company. During a lengthy discussion of the Obama administration’s efforts to prevent the Indian government from providing affordable medication to its citizens, Rea declared, “We are doing everything we can to respect the rights of U.S. innovators.” But she didn’t mention that her efforts weren’t actually supporting an American corporation.

That’s the “spaghetti bowl effect” of bilateral trade negotiations for you: It’s so incredibly recondite that it almost never makes any sense when viewed dispassionately from the outside. – Ryan McCarthy

On to today’s links:

MF Doom
“We’re doomed” – An MF Global-like implosion, a suicide attempt and more missing customer money – Reuters

Bob Diamond could lose out on $31 million in compensation over the LIBOR scandal – DealBook
We’d really like to know what happened at the NY Fed’s 2008 meeting on “Fixing LIBOR” – Reuters
LIBOR-fixing may have cost muni issuers tens of millions of dollars – Bond Buyer

EU Mess
Europe decides to release Spanish bailout funds now (as opposed to eventually) – Bloomberg
“The ECB is guilty of malpractice” – Christopher Mahoney

Rents reach record highs, vacancies drop to lowest level since 2001 – WSJ

“It has become transparently clear that the central bank has failed to take the actions its own principles demand” – Bloomberg View
President of the St. Louis Fed: Current Fed policy is “appropriately calibrated” – WSJ

New Normal
Every Scranton city employee now earns minimum wage – NPR
Economic mobility still elusive for the poor, African Americans and non-college graduates – Pew Charitable Trusts

Wall Street employees lost $2 billion last year on their own company’s stock – Bloomberg
Wall Street CFO pay raises outpace all other sectors, up 21% in 2011 – WSJ

What is a bank loan? – Interfluidity

A firsthand account of how the Pulitzer fiction finalists were chosen – New Yorker

Plutocracy Now
For just $2,500 you could eat boudin with Nouriel Roubini or do squat thrusts in the vicinity of George Soros – Bloomberg

God’s Work
A quarter of Wall Street execs see wrongdoing as a key to success – Reuters

Consumer credit rose like crazy in May – WSJ

Must Watch
“Share it Maybe”: Cookie Monster’s version of “Call Me Maybe” – YouTube


Re: We’re Doomed. Am I the only one who sees this and MF Global as clear-cut cases of criminal fraud and grand larceny? These funds are known to belong to the clients, and have significant protections against use by the holding entity. Yet they were pretty clearly misused, and almost certainly with intention. But the clients are being treated worse than creditors of these brokers. If you were ever looking for a textbook definition of wrong in the strong sense, this is it.

Posted by Curmudgeon | Report as abusive

Traffic congestion datapoints of the day

Felix Salmon
Jul 10, 2012 16:12 UTC

TomTom has released its first congestion indices today, comparing 31 cities in Europe and 26 cities in the US and Canada. (They call that North America, which is a bit disappointing, because I’d dearly love to see how Mexico City compares to other North American cities, and it’s not on the list.) The rankings are interesting, but even more interesting, to me, are the way that the rankings have changed over the past year.

Consider Edmonton, for instance: a town in the midst of a massive oil boom, where road construction can’t even begin to keep up with population growth. That was obvious back in September 2009, in the city’s transportation master plan:

As Edmonton evolves from a mid-size prairie city to a large metropolitan area, it is inevitable that congestion levels will increase, particularly during peak periods. Physical, financial and community constraints in many areas make it unfeasible or even undesirable to build or expand roads to alleviate congestion.

TomTom doesn’t give data as far back as 2009, but at least we can see what direction the city is moving in. Last year, Edmonton had a congestion index of 24%, which means that on average, travel times were 24% longer than they would take if traffic were flowing freely. That meant Edmonton was the 8th most congested city on TomTom’s list. This year, the Edmonton congestion index has plunged to just 13%, placing Edmonton 23rd out of the 26 cities, with an enormous decrease particularly during the evening rush hour:


I have no idea why traffic in Edmonton has improved so much over the past year; certainly I wouldn’t have been at all surprised if it had gotten worse rather than better. But the point here is that there’s an important stochastic element to congestion. Consider New York: in 2008, Mike Bloomberg proposed a congestion charge, which passed muster with city legislators but which was ultimately killed in Albany. Again, we don’t have data for what congestion was like in 2008. But between 2011 and 2012, congestion rates in New York overall fell from 23% to just 17%: a very impressive improvement. And today, New York is only the 15th most congested city on the list — behind metropolitan areas like Tampa, Ottawa, and San Diego.

What’s happened in New York to cause the drop in congestion? You can’t say higher gas prices, since those are a nationwide phenomenon, and don’t explain the drop in relative congestion. Plus, congestion in North America overall has stayed stable at 20% even as gas prices have risen. So if it’s not gas prices, what is it? Could it be all those bike lanes? Could it be that John Cassidy needs to eat some crow, and admit that bike lanes reduce congestion, rather than increasing it?

Perhaps: the jury’s still out. And maybe what we’re seeing here is more a function of random variation, and less a function of anything under the control of New York’s Department of Transportation.

What this report does tell me is that it’s going to be very difficult indeed to judge how effective any congestion-charging system is, just by looking at what happens to congestion after such a charge is introduced. I’m sure that if Edmonton had introduced a congestion charge at the beginning of 2011, the city would have claimed a huge amount of credit for the drop in congestion that resulted. But in fact, as we’ve seen, that drop in congestion would have happened anyway.

I’m planning to talk to the people at TomTom next week, and I’ll ask them whether they have any bright ideas when it comes to separating out causative factors for changes in congestion. In the meantime, we now at least have reasonably reliable league tables for the least pleasant cities to drive in. In North America, you want to avoid Los Angeles and Vancouver; in Europe, you want to avoid pretty much every major city. (Stockholm and London, with congestion charges, both have 27% congestion rates, putting them on a par with the very worst US cities.) But especially avoid driving in Warsaw, Rome, and Brussels. They’re even worse than LA.

Update: JCortright, in the comments, makes the excellent point that these numbers are much better at showing congestion changes within a city than they are at comparing congestion between cities. If you have a 45-minute commute in Atlanta, for instance, as measured on a congestion-free basis, and you’re stuck in traffic for an extra half an hour, then that’s 67% congestion. Whereas if you’re stuck in traffic for 15 minutes on a drive that would take you 15 minutes without traffic, that’s 100% congestion. So this methodology makes denser, smaller cities (like Europe’s) look worse.


I live in London. I’ve said it before, and I’ll say it again: scooters are the way to go. More practical for longer distances, and with filtering, excellent in cities. I effectively don’t experience any congestion at all in London. You have to live quite a long ways out, and positioned right beside stations on either end of your trip, for any rail-based public transport to be remotely competitive. Trips that take an hour+ owing to bus to and from tube station at one end normally take less than 30 minutes, and the primary thing slowing you down is red lights.

@JustinCormack: I can’t speak for Copenhagen, but central Amsterdam is very small and doesn’t really accommodate cars at all. Probably the traffic flow is structurally different – if you draw straight lines between start and finish, I’d bet fewer would cross in Amsterdam.

Posted by BarryKelly | Report as abusive

How economists get tripped up by statistics

Felix Salmon
Jul 10, 2012 05:05 UTC


Look at this scatter chart. There will be a quiz. Another dot is going to be added to this chart, in line with the distribution you see here. You get to choose what the X value of the dot is — and your aim is to get a Y value of greater than zero. So here’s the question: at what value of X are you going to have a 95% chance of getting a dot above the axis, in positive territory on the Y axis?

Emre Soyer and Robin Hogarth of the Universitat Pompeu Fabra, in Barcelona, recently asked a group of economists that question — all of them were faculty members in economics departments at leading universities worldwide. There’s a right answer: it’s 47. And there’s a spectacularly wrong answer: anything less than 10. The economists being asked the question are smart, highly-educated people who are intimately familiar with regression analyses. And it turns out that as a group, they did very well: just 3% got the question very wrong.

But the economists also like being precise. They don’t like eyeballing answers: they like to be certain. And so, Soyer and Hogarth write:

Most of the participants, including some who made the most accurate predictions, protested in their comments about the insufficiency of information provided for the task. They claimed that, without the coefficient estimates, it was impossible to determine the answers and that all they did was to “guess” the outcomes approximately.

This is fair enough. So Soyer and Hogarth found some other economists — chosen randomly in exactly the same way. And they presented those economists with all the coefficients and data they could want, just as it would be presented in an academic paper. It looked like this:


Everything’s there — the formula for the random perturbation, the means and standard deviations for both variables, the OLS fit, the lot. With all this information to hand, economists can be much more accurate when being asked to do something like work out a value for X such that there’s a 95% chance that Y will be greater than zero.

But here’s the thing: when the economists were shown both the graph and the detailed numbers, the number of economists getting the answer spectacularly wrong — the number giving an answer of less than 10 — soared. Just working with their eyeballs, 3% of economists got it wrong. Working with the numbers as well, that proportion rose to 61%! And when a third group was given the numbers and no chart at all, fully 72% of them — professional economists all — got the answer badly wrong.

What the authors conclude is that economists tend to overstretch when they read academic papers — they think that papers show much more than in fact they do. And the more academic papers that economists read, the more misguided they’ll become:

By reading journals in economics they will necessarily acquire a false impression of what knowledge gained from economic research allows one to say. In short, they will believe that economic outputs are far more predictable than is in fact the case.

We make all of the above statements assuming that econometric models describe empirical phenomena appropriately. In reality, such models might suffer from a variety of problems associated with the omission of key variables, measurement error, multicollinearity, or estimating future values of predictors. It can only be shown that model assumptions are at best approximately satisfied (they are not “rejected” by the data)… There is also evidence that statistical significance is often wrongly associated with replicability.

I’m certainly guilty of this kind of thing: I see a paper demonstrating a statistically significant correlation between one variable and another, and I generally assume that if the experiment were repeated, we’d see the same thing again. But that’s not actually true.

And so it’s easy to see, I think, how economists become convinced of things that the rest of us aren’t sure of at all — and how the economists often end up being wrong, while the rest of us were right to be dubious.

What’s more, if economists are bad at this kind of thing, just imagine what other social scientists are like, or even doctors. Next time you see a piece of pop-science talking about interesting findings from some paper or other, bear this in mind. A lot of papers are written; a few of them have interesting findings. Those are the papers which tend to get publicity. But there’s also a very good chance that they don’t actually show what the headlines say that they show.

(Via Dave Levine. And please, don’t get me started on all the meta-implications of this post; suffice to say I’m fully aware of them.)


Ah, I get it now, thanks!

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