Felix Salmon

Counterparties: Revenge of the machines

Ben Walsh
Aug 31, 2012 21:02 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

We might not have reached Skynet-like levels of disaster, but stories of technology biting back continue to pile up. Reuters’ Jessica Toonkel, Lauren Tara LaCapra and Ashley Lau write that a group of Morgan Stanley advisers, including four who manage a total of $47 billion, may leave the company because “widespread technology problems have made it very difficult for them to do their jobs”.

It’s not just the financial workplace, the machines have taken over the stock market, and when things go wrong, they go horribly wrong – to the tune of $10 million in losses, every minute for 45 minutes. Technology companies themselves aren’t immune: Facebook’s IPO was delayed by faulty Nasdaq software that then caused buy and sell orders to go unfilled, while trade cancellations were ignored.

Even the now-mundane technology of email is a source of existential risk, as tech writer Mat Honan recently experienced. Hackers used shockingly lax password recovery procedures to gain access to Honan’s Gmail and Mac mail accounts and proceeded to wipe his entire digital life completely and irretrievably clean.

Or take the case of Aviva, the UK’s second-largest insurer. It intended to fire a single employee. Instead, it mistakenly fired all 1,300 employees of its asset management unit by email, demanding that they “hand over company property and security passes on their way out of the building, and submit all electronic passwords”.

Things are so bad that for a certain type of technophile, Betabeat thinks relinquishing email is the new titillating fantasy. But don’t try too hard to escape: if you’re not on Facebook, you’re probably a psychopath. – Ben Walsh

On to today’s links:

New Normal
The US economy is recovering by adding mostly low-paying jobs – NYT

Primary Sources
The full text of Ben Bernanke’s Jackson Hole speech – Federal Reserve

Bernanke’s speech: “defensive … on the back foot, trying to justify past and future actions against critics on all sides” – Reuters

Plutocracy Now
Panic rooms, gun safes and machine-gun-proof doors are all the rage with London’s wealthy expats – Reuters
World’s richest woman says the poor should stop complaining and work harder – LAT

Financial Arcana
Investors think twice, decide Bob Dylan bonds aren’t all right – FT

JPMorgan rejected 4,000 of the 7,000 stocks Knight tried to submit as collateral – WSJ

It’s Academic
Stop the dishonesty, this is politics! 125 Harvard students may have cheated in “Intro to Congress” class – Outside the Beltway

All of a sudden, big banks are protesting too much – Simon Johnson

Building the world’s tallest building: a sure sign of a construction bubble – FT


Why not mention that a transaction tax would probably kill electronic trading and have other benefits?

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California’s clever opt-out retirement idea

Felix Salmon
Aug 31, 2012 19:13 UTC

Last year, I said that states should not adopt defined-contribution pension schemes: they should stick instead to the defined-benefit plans they’ve had until now. I still believe that — but I’m also a big fan of SB 1234, a bill making its way through the California legislature. The bill would create the Golden State Retirement Savings Trust — a kind of pooled defined-contribution pension plan for the millions of Californians who lack access to a workplace retirement plan.

The point here is that the state of California itself is a good employer, providing retirement benefits to its employees. But not all Californian employers do likewise, and many Californians, especially those on low wages, have no retirement savings at all.

SB 1234 would change that, by asking employers to place 3% of their employees’ paychecks into the Golden State Retirement Savings Trust. This would be an opt-out scheme: if you didn’t want to take part, you wouldn’t have to, but the default would be that you would. The money would be invested conservatively; one detailed paper reckons that the mix might be 47% Treasuries, split equally between bills, notes, and bonds; 43% in the S&P 500; 7% in small-cap stocks; and 3% in corporate bonds.

There are two big distractions here, and it’s all too easy to get caught up in things which don’t matter, and miss the big thing which does matter. The first distraction is the question of investment guarantees. Because these workers can’t afford to lose this money, it would have to be guaranteed, either by the public sector or the private sector. If you’re investing over a long time horizon, and guaranteeing only very modest returns of between 0% and 2%, such guarantees are cheap — but that doesn’t stop alarmists from talking about “another potential pension disaster” in terms of guarantor losses.

The second distraction is the question of investment returns: will the money be invested well, or does California have “a poor record of managing its existing public pensions” which should somehow disqualify it from looking after even more retirement funds? Frankly, this doesn’t matter much at all. Big pension funds nearly always have higher internal rates of return than individuals get on their 401(k) plans and similar, and that’s really all that matters.

The main thing to focus on here is the same thing I told savers with 401(k) accounts: the best way to save money is to save money. If you take 3% of your paycheck and you put it somewhere which is very difficult to get ahold of, then over time that sum will grow to a nice little nest egg — even if the internal rate of return is zero. And if you want to get millions of largely low-wage Californians to save money, the mere existence of savings accounts and IRAs at banks and credit unions isn’t enough. Those involve effort, while the genius of SB 1234 is that it’s effortless. All you need to do is nothing, and you automatically start saving money.

Anybody who would rather use their own IRA is more than welcome to do so, of course. And anybody who is happy going without retirement savings at all can simply opt out of the scheme and receive their paycheck in full. But most of us want some kind of retirement security beyond Social Security; the problem is that we procrastinate, and we have bigger priorities, and there are short-term expenditures we need to make, and there’s never any spare money in the account, and, well you get the picture.

The financial-services industry is lobbying hard against this bill, for obvious reasons: it provides a simpler, cheaper, better alternative to their own savings products. As a result, this idea will probably never happen. But it makes sense for California, and it makes sense for the rest of the country as well.

As for the details, they can be ironed out relatively easily. But the final scheme could be a bit of a mix between defined-contribution and defined-benefit. Like DC plans, the amount you got out would entirely be a function of the amount you put in. But like DB plans, more would go into calculating your final payout than simply the investment returns on your money. Instead, there would be some kind of a collar: in return for giving up infinite upside, you would be protected on the downside. For instance, the returns might have a floor at 2%, and a ceiling at 8%. The scheme could simply pay excess returns over 8% into a reserve fund which would be used to protect the downside for savers seeing returns of less than 2%.

Similar products exist elsewhere in the world: Denmark, for instance, has a nationwide mandatory defined-contribution pension plan with a minimum return guarantee. This is America, so a mandatory program wouldn’t fly. But a voluntary, opt-out program could. Let’s give it a try.


Wow. I can tell you’re not kidding, although I could easily imagine reading this in ‘The Onion’ or seeing a skit on YouTube. California has turned a putatively golden state into the one with the worst credit rating in the country. With a Dem supermajority, and pols who actually tried to ban an entire genre of music last year, you are out of your gourd if you think they can be trusted with even MORE money. What freakin’ planet are you people on? How many more lies, broken promises, and outright authoritarian police-state maneuvers do you need to convince you it’s all crap? Good grief… No wonder we fell, since 9/11, into about 20TH PLACE on the various ‘freedom’ listings, and not just the libertarian ones, either. California is doomed, period. There is no saving the status quo — to which I say, Yippee!

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Bernanke on the defensive

Felix Salmon
Aug 31, 2012 15:01 UTC

The most entertaining speech of the week came last night, from Clint Eastwood; the most important came this morning, from Ben Bernanke. In his keynote speech at Jackson Hole, Bernanke reviewed the Fed’s actions since 2007, concluded that they have done a lot of good, and ended on a note suggesting that more of the same is in order.

Bernanke is fighting critics on three fronts: those who say that he has over-reached, those who say that zero interest rates have rendered the Fed powerless, and those who say that he hasn’t gone nearly far enough. He has something for all of his critics in this speech.

First, he addresses the most politically powerful faction, especially now that Paul Ryan has been added to the Republican ticket. And so when defending quantitative easing and other non-traditional tools of monetary policy, Bernanke is at pains to paint them as being fully in line with “the ideas of a number of well-known monetary economists, including James Tobin, Milton Friedman, Franco Modigliani, Karl Brunner, and Allan Meltzer”. Translation: this is mainstream economics, even on the right, and if Republicans don’t trust me, they should at least trust Milton Friedman.

Bernanke also addresses those who worry about financial losses associated with the massive expansion of the Fed’s balance sheet: “from a purely fiscal perspective,” he says, “the odds are strong that the Fed’s asset purchases will make money for the taxpayers, reducing the federal deficit and debt” — not that the Fed is worrying too much about such things.

He then moves on to the people who say that the Fed has run out of ammo, and that the only real hope for the economy at this point would come from fiscal stimulus, rather than monetary policy. Not so, says Bernanke: “a substantial body of empirical work” shows that the effects of QE were “economically meaningful” — somewhere on the order of a full percentage point on the 10-year Treasury yield, and on bond yields generally. It even helped boost stock prices.

And it’s not just markets which have been affected, he says, citing one study showing that quantitative easing “may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred”.

Even Bernanke admits that it’s incredibly hard to measure such things, however — and as Matt Yglesias points out, there’s an element of “he would say that, wouldn’t he” here:

For the Federal Reserve to alter its intellectual approach at this point would amount to admitting that the Fed is in part at fault for our current predicament. As an institution, it is naturally reluctant to do this.

Finally, Bernanke addresses those — like Yglesias — who say that the Fed really ought to be doing much more. And he starts out by admitting that things aren’t going according to plan:

In light of the policy actions the FOMC has taken to date, as well as the economy’s natural recovery mechanisms, we might have hoped for greater progress by now in returning to maximum employment.

Bernanke says that it’s not all his fault: between them, the sluggish housing market, the tight fiscal situation, and the ongoing European crisis have had a substantial negative effect as well. On top of that, he says, “the hurdle for using nontraditional policies should be higher than for traditional policies”, since nontraditional policies, like QE, are untested and could have unintended consequences.

Still, it’s the Fed’s job to counteract such things like housing and fiscal gridlock and European chaos. Which brings me to Bernanke’s final two paragraphs. The first is rousing, and strong, and undeniable:

We must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

But then he ends on a much weaker note:

Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Bernanke, here, is basically saying “we’ve done a lot, we should do more, but there are limits to what we can do”. And the final two words are “price stability”, which is Bernanke’s way of saying that he’s actually worried about inflation, and that he might ease more were it not for the fact that he has to keep inflation down.

The overall tone here, then, is defensive: Bernanke’s on the back foot, trying to justify past and future actions against critics on all sides. And when an institution is in a defensive crouch, it’s not going to do anything bold. The Fed was bold in 2008-9, at the height of the financial crisis; those days are over now. And so, whether we like it or not, any real boost for the economy going forwards is not going to come from the Fed, and is going to end up having to come from Congress instead. I’m not holding my breath.


The problem with Bernanke is pretty much the same as the whole government/ergulatory apparatus. The American people were being fleeced, defrauded, scammed, robbed and made to endure FORGERY on a historic scale. The “naionally recognized statistical rating organizations” (I like the imprinteur that “statistical” gives – so government like), Fannie, Freddie, and how many regulatory agencies that just can’t see any fraud acitivty going on. Really, to make a speech about finance and ignore that 99.9999999 – oh hell, one hundred precent of the problem was FRAUD means that Bernanke is part of the fraud and CODONES it.
http://www.ritholtz.com/blog/2012/02/hol der-obama%e2%80%99s-propaganda-is-%e2%80 %9cbelied-by-a-troublesome-little-thing- called-facts%e2%80%9d/

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What I did on my summer holiday

Felix Salmon
Aug 31, 2012 13:20 UTC

I’m back! I apologize for the fact that this blog — and all of blogs.reuters.com, for that matter — was down for the past two weeks. I did put a few posts up in the interim at felixsalmon.com, but I’m back where I belong now.

In a way, the outage was well-timed: I’d already booked a trip to Maine, and could take the opportunity to really get off the grid and enjoy hiking and biking and camping and things like that. And it was while I was up in Maine that Quarterly came out with the announcement I would be one of their latest contributors. I’m rather excited about this: I’m basically in the ideas industry, which means I rarely get to professionally indulge my passion for things.

I’m still in the process of putting together my first Quarterly package, but I will drop a hint and say that it’s going to be much closer to my offline sojourn than to my normal online existence. If you subscribe, I can guarantee you that no matter what hackers do to any website where I’m hosted, any Quarterly packages you have of mine will be serenely unaffected.

And with that plug, I’ll now have a short day of econoblogging, followed by a long Labor Day weekend. It’s always good to let oneself back into these things gently.


Nice to see you back, but what does it say for Thomson Reuters as a company if they can’t keep a website up and take two weeks to fix an issue?

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Counterparties: The new “nice guy” at Barclays

Ben Walsh
Aug 30, 2012 22:38 UTC

At the top of its list of criteria for a new CEO, Barclays seems to have had “not Bob Diamond”. That’s the message the under-fire bank sent three weeks ago with its appointment of vocal corporate governance hawk David Walker as its new chairman. And it’s been reinforced by today’s announcement of Anthony Jenkins as its new CEO. Jenkins will be paid £1.1 million ($1.7 million) annually and be eligible for bonus and incentive pay of up to £7.15 million ($11.3 million). 

Whereas Bob Diamond was an American investment banker, Jenkins is a British commercial banker. That could mean a change in priorities, write the WSJ’s David Enrich and Max Colchester: 

Barclays’s board is hoping that installing a mild-mannered Brit to replace the assertive American will help move the bank forward, according to people familiar with the board’s thinking … One of Mr. Jenkins’s challenges will be figuring out what to do with Barclays’s lucrative but risky investment-banking arm. Mr. Diamond spent years building that business, partly through the 2008 acquisition of Lehman Brothers’s North American operations.

Jenkins also faces a fresh criminal investigation of Barclays by the UK’s Serious Fraud Office. At issue is whether payments Barclays made to a unit of the Qatari sovereign wealth fund were properly disclosed. The Guardian’s Simon Goodley writes that in June 2008, when Barclays was raising capital in the country, the fees Barclays paid the Qataris were listed at £100 million. By November, that amount had risen to £300 million. Barclays was also hit at the end of June with a fine for mis-selling interest rate swaps to small business. And all that’s on top of the embarrassing Libor scandal that cost the bank $450 million to settle.

Given the context, Barclays’ choice of a “talented ‘nice guy’” who prides himself on his “very measured style” makes a lot of sense. – Ben Walsh

On to today’s links:

The media is still waking up to the “post-truth” age of politics - The Atlantic
“Factual shortcuts”, or how the AP says “lies” - Associated Press 

“The financial system rests on quicksand” because of failed money-market reform - FT 

For some reason, Julian Robertson offered Romney $30 million a year to run his hedge fund - NYT
What’s $30 million to an 80-year-old tycoon? – Ben Walsh
The SEC confirms: Leave the stock picking to the pros - NY Mag 

Why you shouldn’t fear interest as a percent of GDP, in one soothing chart - Dean Baker 

“Investor euphoria” over Apple is still nothing like ’90s-era Microsoft - Felix Salmon

Citigroup pays $590 million to settle charges it deceived investors over subprime debt - WSJ 

Waning Superpowers
Bane protests Bain - Buzzfeed 

BofA shows Housingwire data indicating that it, in fact, it has modified mortgages under settlement - Housingwire
BofA, which has the biggest settlement obligations, hasn’t modified a single first-lien mortgage as of the end of June - WSJ

“I can hear music for the first time ever, what should I listen to?” - The Atlantic

Romney probably wouldn’t kill Dodd-Frank, but he would revamp it - Bloomberg

US companies are making more money in the US - WSJ


Good to see you back on the board, Benny. Thanks for the opportunity to call ‘bullshit’ on this –

Why you shouldn’t fear interest as a percent of GDP, in one soothing chart – Dean Baker”

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HFT charts of the day, trading-cost edition

Felix Salmon
Aug 14, 2012 15:33 UTC

14speed-articleInline.jpg The Nanex HFT chart I posted last week went viral, becoming by far my most popular post of the year; I even did a version of it for Buzzfeed. In the comments to that post, Kid Dynamite defended high-frequency trading by saying that spreads have tightened in substantially for everyone as a result of HFT. But neither of us really had the numbers — until now.

The NYT’s Nathaniel Popper, today, runs this pair of charts, which basically tells us everything we need to know. The main thing you need to notice is that the x-axis is the same on both charts, running from 2000 to the present day; my HFT chart from Nanex ran from 2007 to the beginning of 2012.

What’s clear from the top chart in the NYT (and from my Nanex chart) is that the explosion in HFT took place from 2007 onwards. And what’s clear from the bottom chart in the NYT is that benefits to small investors more or less stopped at that point.

First, let’s be clear about what these charts are showing. HFT is maybe a bit misnamed, since what we’re seeing here is two separate eras. From 2000 to 2006, trading got faster and cheaper. From 2007 to date, trading itself hasn’t actually risen much, or got faster. the huge spikes are in quotes, rather than trades, and it’s not uncommon for certain stocks to see more than a million quotes over the course of a single day, even when they are only traded a couple of dozen times.

You know the track cycling at the Olympics, where the beginning of the race is entirely tactical, and the trick is not to go fast but to actually position yourself behind the other person? HFT is a bit like that: the algorithms are constantly putting up quotes and then pulling them down again, in the knowledge that there’s very little chance they will be hit and traded on. The quotes aren’t genuine attempts to trade: instead, they’re an attempt to distract the rest of the market while the algo quietly trades elsewhere.

As such, the vast number of quotes in the market is not a genuine sign of liquidity, since there really isn’t money to back them all up. Instead, it’s just noise. But don’t take my word for it. Here’s Larry Tabb, the CEO of Tabb Group, and a man who knows vastly more about HFT than just about anybody else:

Given the events of the past six months, the SEC should think hard about the market structure it has created, and do its utmost to rein it in. While the SEC can’t stop computers from getting faster, there is no reason it can’t reduce price and venue fragmentation, which should slow the market down, reduce message traffic and lower technology burdens.

Until we can safely manage complex and massive message streams in microseconds, fragmentation is making one of the greatest financial markets of all time about as stable as a McLaren with its RPMs buried in the red.

HFT causes stock-market instability, and stock-market instability is a major systemic risk. No one’s benefitting from the fact that the entire market could blow up at any second. So why isn’t anybody putting a stop to it?


It hardly worth considering the facile size of the spread without considering how much one might transact at that price as well as the cost of transacting orders of increasing size. One needs to ruminate upon such a chart in (at least!!) three dimensions – the third being size. For what is the utility of a tighter inside spread if HFT creates a feedback loop from initial transaction/quote-change information that elevates the ultimate cost of completing one’s transaction? I’m not saying it definitively does increase the cost, and comparatively specialists of old and NASDAQ mmkers were no angels or altruists, but it serves little purpose outside positive PR for HFT to make less-than-sensical definitive and categorical statements about HFTs relative and absolute virtue without a little more substantiation.

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HuffPo Live: The Fox News of the knee-jerk left?

Felix Salmon
Aug 13, 2012 22:04 UTC

Huffington Post Live launched today. Don’t call it streaming video: “it’s really a platform for engagement,” in the words of its founding editor, Roy Sekoff. What does that mean in practice? Let’s play Celebrity Google Hangouts! Here’s your host, Josh Zepps. Take it away, Josh:

John Cusack, you brought this to our attention. What struck you about it? It’s one of those ideas that sounds just crazy enough to work?

Amazingly, they’re talking about Mortgage Resolution Partners, and its plan to make lots of money by buying up performing mortgages on the cheap using eminent domain. I wrote about MRP here, and here, and here; suffice to say, it’s a bad idea. But! Let’s see what John Cusack thinks!

Yeah, I just thought it was a, seemed to be a question of um, you know, um, fundamental fairness, um, and, I, these, these, er gentlemen, um, John, um, Vlahoplus, who’s, who’s a Rhodes Scholar, and who’s studied this stuff and worked in the financial industries, and has a long history of working with that, and Kevin McCabe, who is, is working with the, er, is a founder of the Community Partnerships, which is an independent group which is working with Mortgage Resolution Partners, er, gave us a view from 30,000 feet, and, um, they really feel like this eminent domain thing can work, and kind of reset the markets.

There’s actually a certain amount of timeliness to this subject: Joe Stiglitz and Mark Zandi have one of those bipartisan op-eds in the NYT today, praising Jeff Merkley’s excellent proposal to help underwater homeowners. That proposal could scale to hundreds of billions of dollars and make a real dent in the problem; it also wouldn’t exclude you if, say, your mortgage is owned by Frannie, or a bank.

But over the course of more than 18 minutes, Merkley and his proposal are never mentioned. Instead, we have that guy from Hot Tub Time Machine explaining that “I would imagine from our discussions that the opposition is a very narrow group of people, as opposed to the very broad public good this would do… All the smart people that I talk to, and believe me I’m no expert even though I have a big mouth, tell me that this is in everybody’s best interest except a very narrow group of people”.

To which Arianna Huffington can only respond: “That’s what it comes down to, a very narrow group of people versus the public interest”.

In reality I’m far from alone in being a big supporter of principal reductions, while opposing this particular idea, which seems to benefit Mortgage Resolution Partners first and everybody else only as an afterthought. But HuffPo didn’t invite anybody like me along for their chat: instead, they invited John Vlahoplus, the chief strategy officer at… Mortgage Resolution Partners. And he was allowed to get away with saying that he has “the overwhelming support of communities and of homeowners” and that the only opponents to his scheme are “a very narrow group of companies who’ve bought these securities very cheaply, and they’ve been fighting really hard, together with Sifma and the American Securitization Forum, to stop this. And they’re intimidating local communities. They’re threatening to red-line local communities”.

This kind of uncontested demagoguery is decidedly unpleasant, and feels as though HuffPo has decided it wants to be the Fox News of the knee-jerk left. Or, as Cusack might put it, “What’s beautiful about this” is that “it’s a real grassroots thing”. It’s a rare — and quite scary — window, directly into the psyche of how HuffPo thinks. Let’s just hope they don’t decide to start covering autism the same way they’re covering underwater mortgages.


Nice try, but HuffPost is completely off the wall. No serious person reads it or contributes to it, but if you want to try and equate them with Fox News, go right ahead. No one really believes that.

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Counterparties: Robo-suing is the new robo-signing

Ben Walsh
Aug 13, 2012 21:56 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

Of all the bad practices of the mortgage boom and collapse, robo-signing was among the worst. Unsubstantiated and at times fraudulent foreclosure documents submitted by banks affected more than a 138,000 US homeowners. Following the great series by the American Banker’s Jeff Horwtiz, the NYT’s Jessica Silver-Greenberg reports that some of the same tactics are being employed collecting credit card debt:

As they work through a glut of bad loans, companies like American Express, Citigroup and Discover Financial are going to court to recoup their money. But many of the lawsuits rely on erroneous documents, incomplete records and generic testimony from witnesses, according to judges who oversee the cases.

Lenders, the judges said, are churning out lawsuits without regard for accuracy, and improperly collecting debts from consumers…

“I would say that roughly 90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt,” said Noach Dear, a civil court judge in Brooklyn, who said he presided over as many as 100 such cases a day.

Americans may be reducing their outstanding credit card debt, but an overhang of unpaid loans remains. And lenders are looking for ways to maximize the value of those loans: JP Morgan is settling claims that it improperly raised minimum credit card payments, and then charged borrowers a fee if they couldn’t pay the new, larger amount. The Consumer Financial Protection Bureau may force American Express to refund customers who paid for “identity-theft protection services” without actually receiving the services. It has already won $140 million in refunds from Capital One for selling add-on products customers “didn’t understand, didn’t want, or in some cases, couldn’t even use”. That money fully compensated customers for their losses, which is a far better deal than penalizing a firm $4.8 million after costing customers $300 million. – Ben Walsh

On to today’s links:

B of A is not the bank of Obama’s America: the Democratic National Committee moves its capital to a union-owned bank – WSJ
“The Ryan brand is rooted in his ostentatious wonkery…[a] blend of fact, pseudo-fact, & pure imagination” – Jonathan Chait

You say that now
The underwriters and media hyped Facebook pre-IPO, and the sell-side hyped it after – NYT

Settling Limits
From $5 million to $500 million: StanChart’s cost of settling skyrockets – FT

Magazines desperate – NYT
Google buys Frommer’s travel for less than $66 million – WSJ

EU Mess
Merkel confronts a crisis: “I don’t do dinner parties, but I’d like to have Vicente del Bosque to supper” – Economist

Criticism of Standard Chartered, Godwin’s law edition – WSJ

Quotes From The Id
Jamie Dimon: “This is not the Soviet Union. This is the USA. It’s a free. Fucking. Country”. – NY Mag

Anti-Social Media
“The iPhone sadly lacks the ability to process a constant stream of hate-filled text messages” – Fast Company


Missing the comments? It looks like the HTML skin is SNAFU. The only way to the blog is through the Reuters front page, not through bookmarks.

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The art of earnings reports

Felix Salmon
Aug 13, 2012 18:14 UTC

Arthur Brisbane, the NYT public editor, has a characteristically skittish column on earnings reports. He quotes lots of journalists (Dean Starkman! Gretchen Morgenson! Larry Ingrassia! Jim Cramer!), and ends with advice worthy of Polonius:

Always be sure to meet company spin with appropriate skepticism. If nontraditional profit metrics are involved, bring the reporting back around to good old-fashioned net income. If a company wants to strip out adverse factors, be sure to strip them back in.

And don’t get swept away by the Kabuki theater of gerrymandered expectations.

This is what you get when long-in-the-tooth journalists with no business-desk experience try to parachute in and tell financial types how to do their job: “On the assumption that a lot of Times readers are also investors,” writes Brisbane, “I wondered how earnings articles could be tailored to help readers with investment decisions.”

Let’s dispatch that one quickly: there are things which help investors with their investment decisions. And there are NYT articles about corporate earnings. And there is no reason at all for the latter to attempt to be the former.

Brisbane does, dimly, understand that earnings reports are problematic, from a journalistic perspective. But he doesn’t understand the fundamental tension that explains why they’re so difficult, which is that the news value of earnings reports is entirely orthogonal to the value that the market finds in them.

As far as the market is concerned, earnings reports are all about short-term tactical positioning. Everybody’s trying to position themselves against what they think the earnings report will say, and how they think the market will react. At its simplest this is just a question of whether the company will “beat expectations” or not, but there are second-order and third-order effects as well, and much of the smart money is doing all manner of highly-complex trading in the options market rather than the cash market. As a result, the reaction of the share price to the earnings statement, unless it’s huge, generally tells you almost nothing about the substance of that statement.

The sensible reaction to such a world, if you’re a journalist, is Larry Ingrassia’s: to ignore nearly all earnings reports, unless there’s real news value in them or unless there’s broad public fascination with the company and its fortunes. And when you do cover a company’s earnings, the sensible thing to do is to try to use them as a window onto a broader story, rather than as a significant news event in and of themselves.

Doing so naturally opens yourself up to the kind of gotchas that Brisbane opens his column with. He seems to be shocked that different news organizations might have different takes on the same earnings report, and concludes that such stories are nothing more than “a Rorschach test for reporters: what they see is what they think they see”. That’s incredibly unfair: the reality is that precisely because the news value of most earnings reports is so slim, smart news outlets treat them as a way to provide a broader perspective on the company. And there are as many ways of doing that as there are reporters.

On the other hand, the financial press doesn’t have that luxury — if you’re working for a financial newswire, or for the Wall Street Journal, then you have to be focused on the stock at least as much as you are on the company. As a result, you have no choice but to talk about market expectations. What’s more, you have to go into some detail about the actual earnings, and you have to write about whatever metrics the market is paying most attention to. Sometimes, that will be “good old-fashioned net income”. Often, it won’t be.

If you own stock in a fast-growing company in a young market, for instance, you would probably be rather worried if that company started posting outsize profits, rather than reinvesting them in growth. And right now, when companies are sitting on enormous cash piles and the last thing they need is even bigger cash piles, a large net profit is in many ways a sign that the company in question has reached the limit of what it can do, and has no real ability to reinvest capital or to boost future growth.

Dell, for instance, had net income of $635 million in the last quarter, and $3.2 billion over the past 12 months; that’s good for a market capitalization of just over $20 billion. Amazon, by contrast, had net income of $7 million in the last quarter, and $377 million over the past 12 months: a tiny fraction of the kind of profit that Dell is making. And yet it has a market cap of more than $100 billion.

So let’s not pretend that the One True Earnings Report is the one that concentrates on net income as the most important indicator every quarter. Especially when you have things like large one-off write-downs, net income becomes downright misleading unless its components are properly explained. And let’s not pretend, too, that there’s some unique truth underlying every earnings report, and that if journalists were only perspicacious enough, they’d all write exactly the same thing. Your audience matters: are you writing for traders, or are you writing for general-news consumers? And if it’s the latter, then in many ways the faster you get away from the earnings and move onto something more interesting, the better.

As for general readers, there’s really no point in reading the typical earnings report in a financial publication. If you’re a trader, and you don’t already know what happened with the earnings, then, well, you shouldn’t be a trader. And if you’re not a trader, these reports are not for you. If, on the other hand, you find yourself reading about an interesting company’s earnings, somewhere, and the story grabs your attention, then there might well be something worth reading there. But if there is, then the chances are that the worthwhile information is informed mostly by reporting that preceded the release of the earnings. They’re just a news hook, really.


I used to work on the earnings reports of companies like 3M. They are mostly a joke and tortured beyond much correlation with the truth. Multi-page sections which could be summarized by the sentence “if we sell less stuff next year we will make less money, and likely we will sell less stuff”. A desperate desire to obscure obscure obscure.

Just invest in some index funds and leave the earnings report to the full-time professionals and the suckers (the overlap of which is quite extensive).

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