Felix Salmon

Counterparties: China – Your guide to presidential bluster

Oct 22, 2012 22:09 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

Among tonight’s foreign policy debate topics is the vague-yet-lofty “the rise of China and tomorrow’s world”.

Much of the discussion is likely to focus on whether China should officially be labeled a “currency manipulator” for keeping the value of the yuan low, thereby boosting its exports. Romney has said he’d use his first day in office to apply this label, and would hit Chinese imports with tariffs. Obama generally isn’t in favor of naming China as a manipulator — though Treasury Secretary Tim Geithner been calling for China’s currency to appreciate for years. (Treasury is due to release a semi-annual currency report in November).

Ezra Klein has a few key bits of context. First, those who want to deem China a currency manipulator — something the Treasury hasn’t done since 1994 — are, in effect, arguing for a weaker dollar. The Obama administration, which in 2010 set a goal to double exports in five years, has been accused of having a weak dollar policy. Klein also notes that China isn’t even a particularly bad currency manipulator any more: countries like Switzerland and Israel are arguably worse.

Paul Krugman, like Klein, thinks this an odd time to harp about China’s yuan policies: two years ago, the remminibi was a “significant drag on advanced economies” but has since appreciated relative to the dollar. It’s also worth noting that the official currency manipulator label mostly amounts to merely saying “please stop”.

Keep in mind that we’ve been reading headlines about the end of the era of cheap Chinese labor for years. China’s labor costs are now as high as Mexico’s. Tariffs are also tricky: Ramesh Ponnuru points to research that the penalties Obama put on Chinese tire imports have actually cost some 2,500 American jobs.

Arvind Subramanian and Martin Kessler of the Peterson Institute think the blustery China rhetoric is a denial of new economic realities. China’s well on its way toward creating its own currency bloc:

Not only is China, by some measures, the world’s largest economy in purchasing power parity terms, the world’s largest exporter, and the world’s largest net creditor (for more than a decade), but the renminbi bloc has now displaced the dollar bloc in Asia.

If you get tired of the anti-China rhetoric, the folks at Foreign Policy have a much more thought-provoking question for the candidates:

Japan is about to replace China as America’s biggest creditor. Could you please offer us some meaningless bluster about “getting tough with Tokyo?”

– Ryan McCarthy

On to today’s links:

Narrative needs analysis: how to write about poverty – Martha Nussbaum

The airline industry spends between $7-8 billion a year taxiing between runways – Economist

Cognitive Dissonance
The CEO of AIG, sipping red wine, says his company never got a “free lunch” from the government – Jessica Pressler

McSweeney’s Econoblogging
Healthcare spending is “the source of our fiscal problems” – Robert Dittmar

Popular Myths
“The importance of uncertainty remains… uncertain” – FT Alphaville
The fiscal cliff would cut the deficit by $720 billion in one year, but even deficit hawks hate it – WaPo

The Greg Smith Files
Are Greg Smith’s broad, unspecific complaints about Goldman Sachs believable? – Dealbook
Greg Smith’s book mostly rehashes “scandals already litigated in court and the public square” – Matt Levine
Fact-checking Greg Smith’s ping-pong skills against pro competition – Fortune

Corporate Largesse
“You’re paying a partner $800 to $1,000 an hour and they’re charging you because they ordered sushi” – WSJ

Glenn Hubbard: Obama has failed to manage the Fannie and Freddie – Mike Konczal

Easing Ain’t Easy
We’re at the end of very low rates, but not at the end of low rates – The Basis Point

Data Points
Vegetables will make you happier, says science – NBER

Mike Bloomberg wonders if Elizabeth Warren would “bring socialism back, or the USSR” – NYT

Financial Arcana
Forex speculation is dwindling – Bloomberg

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


As someone who is currently living and working in China, and has been doing so on and off for the past fifteen years, it’s amazing what passes for discourse among the US political elite, 99% of which have never set foot in China and have no clue what it is really like.

1) China is about to enter a period of huge demographic problems because of the one-child policy.

2) Because of its horrible pollution, China is going to have huge health problem down the road. It’s already having problems providing clean drinking water (the aquifer underneath Beijing has dropped almost 500 feet in the past ten year), and as more and more farmland is turned into apartment towers, food production will become an issue as well.

3) The public education system is a shambles…trust me, I’ve taught in it. There’s a reason why middle and upper class Chinese parents are desperately trying to send their kids abroad for high school and college.

Posted by mfw13 | Report as abusive

What would happen if investments in people succeeded?

Felix Salmon
Oct 22, 2012 20:54 UTC

Daniel Friedman has a question:

There are now a few companies — Upstart and Lumni to name two — trying to create a market where we can invest in people in exchange for a percentage of future income. If they succeed and reach scale, will student debt problems be alleviated? Will our future incomes be reliably predicted by newly developed algorithms? Will it encourage increased risk-taking?

The first thing to note here its that this is a market which does not exist. Lumni tried to gin up some interest in it and failed; at this point they won’t even return my calls or emails. Upstart has a bunch of high-profile venture backing (Google Ventures, Kleiner Perkins), and has even managed to launch a pilot with a few hand-picked students and investors. But it’s still very, very early days. Equity-in-people is an idea which comes around occasionally, but so far it has never really taken off, and there’s not much reason to believe that this time is different.

But still, it’s an interesting question: what would the consequences be if Upstart, and/or companies like it, became big and successful?

Firstly, Friedman asks, would student-debt problems be alleviated? The answer to this one, I think, is quite clearly no, for two reasons. The main reason is that tuition fees are induced, in much the same way that traffic is. If you build a nice big new road, traffic will appear to fill it up. And if you build a nice new source of funding for students, universities will raise their tuition fees so as to capture as much of that funding as possible. Yes, high student debt is a consequence of high tuition fees — but at the same time, high tuition fees are a consequence of the ready availability of student loans.

It’s worth pointing out here that Upstart’s model gives out funds at the end of a student’s four-year education, rather than at the beginning. If the student has lots of debt, and wants less debt, then she can use the funds to pay down some of that debt. But many students will choose to spend the money in other ways, simply layering the new equity funding on top of their old debt funding. Alternatively, if the expectation is that students will use their Upstart funds to pay down debt, then that only means, at the margin, that lenders will feel free to extend even more credit in the run-up to the early cash-out.

The other reason why student-debt problems won’t be alleviated is that Upstart funds are debt, if you look hard enough. The documentation is subject to change, but at heart would-be Upstarts are always going to find something along the lines of this in any Upstart contract:


The debt is not a typical loan, of course, and it can end up being repaid at less than face value, if the Upstart enters a poorly-remunerated career. But it’s still a debt. And if the student ends up defaulting on that debt, the penalties are generally enormous. When people take out loans, they nearly always have the best of intentions, and don’t think there’s any way they will end up defaulting — especially if the repayment amounts are tied to their income. But defaults happen. And when they do, anybody who has defaulted to Upstart is going to find out the hard way that Upstart loans are the most expensive of them all.

So at the margin, these kind of schemes are likely to exacerbate the student-loan problem: they’re hurting, rather than helping. Remember that ultimately the money for these schemes is coming from investors, who are taking a substantial risk and being promised returns significantly greater than anything seen in the debt markets. Remember too that a significant portion of the students will end up repaying less than they’re originally given — because they go into low-paying occupations, perhaps, or maybe because they just decide they’d rather settle down and have a family instead of a career. As a result, those students who do go into decently-paying careers will end up repaying sometimes double or triple the amount of money they were originally given. That doesn’t seem like an alleviation of student debt problems to me — not when we’re talking about sums in the $30,000 range. It sounds like piling an extra $60,000 of liabilities on top of all the existing student loans you might have.

Friedman’s second question is whether companies like Upstart will start being able to predict students’ future incomes. That’s certainly something that Upstart is spending quite a lot of time on, but I think the effort is premature: first you need to find out whether students are happy repaying the funds at all. And I, for one, don’t think that Upstart’s algorithms are going to be particularly good at predicting incomes.

For one thing, the students with predictable incomes — the doctors and lawyers and the like — are never going to accept Upstart’s offer. For another, there will always be a certain number of students who are looking to game the system. All these schemes have an adverse-selection problem: Upstart funding is going to be much more attractive to students who are pretty sure they’re never going to make much money. If you aspire to being a part-time primary-school substitute teacher, for instance, while spending the rest of your time working on the Great American Novel, then Upstart might be great for you — and it’s unlikely that any algorithm would be able to capture that.

What’s more, the biggest risk, from Upstart’s point of view, is that they’ll end up funding a student who marries someone very successful, gets pregnant pretty early on, and then never returns to the workforce. This still happens frequently enough that an honest algorithm would charge higher interest rates to women than to men. As a result, the algorithm can’t actually be honest.

Finally, there’s the group of students who want to follow the Silicon Valley dream and become entrepreneurs straight out of college. That’s generally a great time to found a company, and Upstart (slogan: “The startup is you“) is positively encouraging such people. But equally, the chances that any given person will have success as an entrepreneur are pretty much random: such things come mostly down to luck, and can’t be reduced to some algorithm. Especially when the really successful entrepreneurs are going to be the ones who can afford lawyers to shield their income from Upstart.

There is no algorithm which can tell you who’s going to be a successful entrepreneur and who isn’t. Some college dropouts are college dropouts; other college dropouts are Steve Jobs, or Bill Gates, or Mark Zuckerberg. Being dyslexic is generally not a great thing when it comes to total lifetime income, and yet dyslexics are massively overrepresented among highly-successful CEOs. If you’re looking for outliers — and successful entrepreneurs, pretty much by definition, are all outliers — then you can’t really start generalizing.

Friedman finishes by asking if this model will encourage increased risk-taking. I think the answer there depends on what you mean by risk-taking. It certainly encourages people to accept low-paying jobs with payoffs which get put into corporate shell vehicles or which don’t end up cashing out for a decade. And at the other end of the spectrum, it encourages people to take low-paying jobs which pay non-financial dividends: ski instructor, say. But in general, I don’t think that a new form of private income tax is a great way to encourage innovation. Generally, if you start taxing something, you get less of it, not more of it. And I see no reason why this model should work out any differently.


Private Equity: the way for smart, rich lazy motherflippers to get even richer.

Public investment in people? No percentage in that. Communism by another name.

Remember: passive income is massive income!

Posted by Eericsonjr | Report as abusive

Magazines vs digital startups

Felix Salmon
Oct 22, 2012 06:01 UTC

Simon Dumenco has a question: would you rather own a magazine, or a digital startup? He notes that some magazines are making real money these days, including Marie Claire, even as most digital startups fail. Old Media isn’t sexy, he says, but “a lot of magazines continue to be not only damn good businesses, but are doing better than ever.”

I don’t know about the better-than-ever thing: I’d need to see some numbers before I was persuaded on that front. At any given point in time, statistically speaking, some small set of magazines is going to be having a record year. But in aggregate, ad-supported magazines — which are the magazines Dumenco’s talking about — are ultimately in the business of attracting the attention of readers, and then selling that attention to advertisers. These days, there are more demands on our attention than ever, and they are more convenient than ever. If you have some time to while away , you can still read a magazine. Or, you can pick up your phone, and play Angry Birds, or check your email, or Twitter, or Facebook, or, well, I’m not telling you anything new here.

As a long-term investment, then, I’d be worried about owning a magazine, no matter how profitable it might be today. The fashion books will probably last longer than most, although as their audience spends less time with magazines and more time on Pinterest, inevitably they won’t be able to charge quite as much as they used to for that audience’s attention.

In terms of short-term cashflow, on the other hand, it’s no contest. Digital startups are designed to burn all of their revenues and then some: if you’re making money every quarter, you’re doing something wrong. So if, like Dumenco, you’re looking primarily at current profitability, the choice is clear: magazines will always win that fight, even unto their dying day.

If you’re the kind of owner who likes old-fashioned things like owning a profitable enterprise, then, there’s a decent case for sticking with ink on paper. If you own a digital startup, the chances are that it will lose money either until it goes bust, or until you sell it. But at that point, of course, you could make a fortune.

There are a handful of people who have turned digital media properties into steady money-spinners; Nick Denton springs to mind, and the reason that the Bleacher Report sold for $180 million is just that it was extremely profitable. But Dumenco’s talking about how the press likes to “treat venture capitalists like rock stars”, and venture capitalists aren’t in the business of cashing quarterly dividend checks. The big difference between VC owners and the rest of us is that VC owners expect their companies to lose money. That, in many ways, is their big competitive advantage: they’re sitting on enormous amounts of money entrusted to them by their investors, and it’s their job to spend that money in a no-holds-barred attempt to build the most valuable companies they can. Until, after five or ten years, they have that glorious exit.

What happens after the exit? Well, the company isn’t a startup any more, that’s for sure. And by that point the VC owners are on to their next thing. It’s not their job to build some great eternal franchise like, say, Vogue: they don’t have that kind of time horizon. In any case, the digital world moves so fast that there’s really no such thing as an eternal franchise any more.

The simple answer to Dumenco’s question, then, is this: what kind of owner are you? Do you mark your holdings to market, and reckon that you’ve made money if your company is worth more this year than it was worth last year? Or do you instead want to own a property which makes a lot of money, and which can continue to support your lavish lifestyle indefinitely, just by dint of the profits it makes? Similarly, do you like to take risks, or is it more important to you that the assets you own preserve their value over time?

But of course things aren’t as simple as that. Just look at Variety, which Reed Elsevier recently sold for $25 million, after previously turning down offers as high as $350 million. Or look at TV Guide, which went from being worth billions to being worth nothing at all over the course of two tumultuous decades. Newsweek is not alone in “going to zero”, as the financial types have it: Dumenco might be happily handing out awards to Food Network Magazine, but he sure isn’t giving out any gongs to Gourmet, which was unceremoniously shuttered in 2009, along with a magazine — Modern Bride — which was pretty much nothing but ads. And I myself worked for Condé Nast Portfolio for nearly all its two-year existence, during which time it managed to burn through something on the order of $100 million. Even digital startups don’t generally lose money that quickly.

The fact is that owning a magazine is a risky proposition. It might not be as risky as owning a single digital startup, but by the same token owning a stable of magazines could well be riskier than owning a portfolio of startups. Silicon Valley types love to moan about how difficult and expensive it is to hire good engineers these days, but the cost of running, printing, and distributing a national magazine dwarfs the costs of any startup not called Color. And what’s more, most of those costs are fixed, not variable. The economics of magazine publishing are ruthless: if your revenues exceed your costs, then any marginal money you bring in is almost pure profit. Which is why profitable magazines tend to be very profitable. But if your revenues are lower than your costs, it’s incredibly difficult to cut back, and you’re probably doomed.

My answer to Dumenco, then, is that given the choice, I’ll choose the startup. Just look at his winners, this year: they’re all worthy awardees, I’m sure, but there’s no one on the planet who could have predicted even a few years ago that Harper’s Bazaar, Allure, and Traditional Home were particularly well positioned for this kind of glory. There’s something scary and random about the magazine industry — and in the world of magazines, failure hurts, much more than it does in Silicon Valley, where it’s a veritable badge of pride.

I’m not saying that print is dead: it isn’t. That said, it’s definitely showing symptoms of old age and decline — and all those high-tech pill bottles labeled “mobile strategy” or “native advertising” aren’t going to change the underlying diagnosis. Venture capitalists don’t mind pouring money into digital startups, because the value of those startups, if things go well, will rise ten dollars for every dollar the VC spends. That’s an attractive business to chase. In the magazine industry, by contrast, it’s still very much possible to make profits. But how much is your magazine worth? If you make $10 million a year, but the value of your magazine is $40 million lower each year than it was the previous year, you’re not in a good position.

Moreover, what happens if you do fail? The failed magazine publisher has a dim future indeed; the failed digital-startup visionary is immediately showered with new opportunities.

I’m no great fan of VCs, while I’ve been a lover of magazines all my life. But the overwhelming majority of my media consumption these days is digital, and magazines in general are beginning to seem a bit slow and uninspired. I go to the airport newsstand because I know I’ll be asked to turn my electronic devices off — and even then, more often than not, I end up buying nothing.

All the magazines I’ve had over the years have had some kind of “wow” factor — something which made them seem a few steps ahead of wherever I happened to be. I still get that “wow” factor today — but I get it almost entirely online. The age of the magazine is coming to an end, slowly; the age of digital is only in its infancy. And that is why, Simon, the uncertainties of digital ultimately trump the storied legacy of print.


It’s worth noting that the decline of general-circulation magazines became noticeable well before web publishing became a significant factor. Newsstand sales fell rapidly during the early 90s and paper and postage costs escalated. Some were being affected by the changes in the mass-market distribution system (i.e., to supermarkets and drugstores) that was decimating the paperback book business.

Posted by Moopheus | Report as abusive

When Taleb met Davies

Felix Salmon
Oct 19, 2012 21:59 UTC

This morning, Nassim Taleb returned to Twitter, posting one of the technical appendices to his new book. And immediately he got into a wonderfully wonky twitterfight/conversation with Daniel Davies.

I don’t pretend to understand all the subtleties of the conversation between the two, but, for Tom Foster, here’s an attempt. Davies has promised a Crooked Timber post on other parts of the appendix; I’m really looking forward to that.


Actually a positive first derivative for the utility function (harm is bad, etc.) + stochasticity giving a nonzero probability for the state may be sufficient to reverse the allocation.

Posted by NassimNTaleb | Report as abusive

Counterparties: The Jetsons were Keynesians

Ben Walsh
Oct 19, 2012 21:53 UTC

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

In the future, we’ll only work 15 hours a week. So said John Maynard Keynes in 1930. Keynes’s utopianism is nothing new – it’s been a common refrain since the Enlightenment, when French philosopher Condorcet pushed it to absurdity by suggesting that an infinite expansion in human height was just around the corner.

John Quiggin has a great, nuanced re-evaluation of Keynes’ prediction. He writes that “for the first time in history, our productive capacity is such that no one need be poor” and that it is possible to achieve Keynes’s vision by 2060. The biggest obstacle won’t be productivity, but social norms:

What is needed most is a change in attitudes to work that would make a guaranteed minimum income socially sustainable. The first is that the production of market goods and services needs to become pleasant enough that those doing it don’t mind supporting others who choose not to. The second is that the option of receiving a guaranteed minimum income does not become a trap, leading into the kind of idleness that produces despair.

According to Gary Becker and Robert Frank, there are two reasons why Keynes’ prediction won’t fully materialize. Per Becker, Keynes was too influenced by the economic model of the landed British gentry, whose wealth was based on land values uncorrelated to their own labor. Frank, meanwhile, thinks Keynes didn’t anticipate the ability of technology to create new goods that would attract our buying desire.

When Quiggin writes that “the culture of conspicuous consumption… is on the wane”, he misses how quickly what is coveted can be rebranded to appear inconspicious (see “artisanal”) and how rapidly what he views as outmoded consumption is being adopted in emerging markets. We have also created a new elite with asset-based wealth, and their stress levels, if not work hours, are low compared to their financial inferiors.

We may be closer to Keynes’ prediction than we’re willing to admit. Catherine Rampell writes that we have an inflation problem, and that the more we work, the worse it gets:  ”Americans overestimate how many hours they work in a typical week by about 5 to 10 percent, according to a Labor Department study, with the biggest exaggerators being people who work longer weeks.” Productivity can reach cult-like levels of devotion for some, but its benefits can be distributed unequally. There’s strong evidence that the productivity revolution of the last two decades hasn’t benefited workers much.

There are also many ways of thinking about productivity, and how to improve it. Bike commuting provides a good example:

Motorists may think they are saving time with their cars when it takes 20 minutes to drive to work, compared to 30 or 40 minutes on a bicycle. However, motorists might be spending one or two hours per day (or more) earning the money to cover the cost of their cars, while cyclists spend only a few minutes per day earning the money to pay for their bicycles.

Another way to think about productivity is to concentrate on unlocking the value of your own ideleness. Start viewing vacation as a patriotic duty: not only does it increase national national and personal productivity, it can help prevent fraud. — Ben Walsh

On to today’s links:

The day where the market fell by 22% – a firsthand account of 1987′s Black Monday – Art Cashin

Popular Myths
Who makes up the 47%? Mostly working Americans and the elderly – Timothy Noah

JPMorgan says the payroll tax cut is a goner, which could kill growth next year – WaPo

The Greg Smith Files
Greg Smith says he saw Lloyd Blankfein naked in the Goldman locker room – WSJ
Greg Smith “conned” the New York Times, says the New York Times’ Andrew Ross Sorkin – Zach Seward
“I gave Ted a look – he was smiling – and took my Donic out of its case.” – Dealbreaker

Central banks are the “only game in town”, may be doing more harm than good – Raghuram Rajan

Private equity firms are once again loading companies up with debt to pay themselves – WSJ
Why dividend recaps are private equity’s most inexcusable technique – Fortune

Gender income inequality by state – Slate

If you’re a private banker, business is only getting tougher – All About Alpha

Does the IMF ignore its own research on inequality? – Oxfam

New Normal
“Markets that rise on both good and bad news are not stable markets” – Nouriel Roubini
Now veterans are stuggling with student loans – Reuters

Seattle Times starts buying its own ads to promote candidates, gay marriage – Seattle Times

Financial Arcana
Morgan Stanley and a tale of two VaRs – Tracy Alloway

There’s a lot less “dark social” traffic than we think – Buzzfeed

Eric Clapton, Greg Smith, and the art of constructing narratives

Felix Salmon
Oct 19, 2012 17:40 UTC

After a Gerhard Richter painting owned by Eric Clapton sold for an astonishing $34 million last week, Bloomberg’s Scott Reyburn called around for some expert reaction.

“People are still ready to pay top prices for great paintings,” Christophe Van de Weghe, a New York dealer, said in an interview. “While the market is selective, the Clapton provenance made a difference. It could have added as much as 20 percent to the price.”

The first part of the quote is something which should be banned from all reporting on the art market; it says nothing at all, in a market where the quality of a painting is determined, first and foremost, by how much money it sells for.

The second part of the quote, by contrast, just sets up the obvious “who’s the idiot?” question. It’s conceivable that the buyer is an idiot, for paying an extra $5 million just because the painting used to be owned by a rockstar. It’s also conceivable that Christophe Van de Weghe is an idiot, for thinking that Clapton provenance could be worth anything like that much. It couldn’t: the absolute maximum that Clapton provenance can be worth is $959,500 — the value, also set at auction, of his “Blackie” guitar. “This painting once hung on Eric Clapton’s wall” is never going to be worth more than “This guitar was played with every guitar great, at legendary concerts, and on multiple timeless albums.”

But taken as a whole, the quote is actually quite revealing — not of any particular idiocy, but rather of the incredibly strong human drive to turn any event, or sequence of events, into a narrative. Any time something surprising happens, the first question we ask is “why?” — and the way we try to answer that question is by telling stories. Stories are the way we make sense of the world, the lens through which we see it. And so if “Abstraktes Bild (809-4)” sold for more than Christophe Van de Weghe thought it was worth, then Christophe Van de Weghe is likely to come up with some kind of ex-post explanation of why that might be the case. Eventually, if he tells that story often enough, and builds a whole world-view around it, then it will become incredibly difficult to disabuse him of his notion.

Which brings me, naturally enough, to Greg Smith, and whether he’s a con man. Bill Cohan says that he is:

He conned the Times into thinking he was resigning from Goldman Sachs on principle, when he was really nothing more than a disgruntled and ambitious former employee who wanted a bigger bonus and a bigger title and got, and merited, neither.

Cohan says that Grand Central Publishing was conned, too, along with CBS’s “60 Minutes”. And Andrew Ross Sorkin agrees.

The question is not a new one — the day that the op-ed appeared, I said that “it’s much easier to see the disgruntled ex-employee here, quitting in a huff, than it is to see someone genuinely trying to do his part to reconstitute the Goldman Sachs of Gus Levy and John Whitehead.” But the accusation of conning the NYT is a serious one, and implies more than mere disgruntlement — it implies bad faith on the part of Smith. We now know that Smith was angling for a huge bonus and was underperforming at Goldman; his days there were numbered in any case, and it seems pretty obvious that his attack of the ethics was in large part Smith coming up with a way of feeling good about himself as he tore up his golden ticket.

Smith’s op-ed didn’t come out of thin air: it was the culmination of months of writing, “on airplanes, in airport lounges, in hotel rooms, and in my flat late at night”. Smith was literally constructing a narrative, in these writing sessions: he was building a new, non-squidian way of looking at the world, in large part because he surely knew that, one way or another, his days at Goldman were numbered. (He was already, at that point, the lowest-paid employee of the VPs in his training class.)

After Smith’s op-ed appeared and went viral, Smith was forced to own the narrative he had been constructing for a while; naturally, given a $1.5 million offer from Grand Central, he then turned that narrative into a book. Goldman is doing a good job of presenting a counter-narrative, and now those of us on the outside are being asked, essentially, to choose between two very different stories.

The con-man accusation, however, goes one further. It doesn’t just accept Goldman’s narrative and reject Smith’s; it says that even Smith believes the Goldman narrative, and is presenting himself as some kind of natural occupant of the moral high ground, despite the fact that he knows full well that in reality he’s little more than an underperforming money-grubber who never got the seven-figure bonus he desired.

I have very little time for Smith’s tale of being shocked that the equity derivatives desk was selling equity derivatives to clients, regardless of what the in-house view on European banks might be, or whether Goldman was advising European sovereigns at the time. Smith was part of the problem much more than he is part of any possible solution. But I don’t think he’s a con man, either. When you’ve devoted your entire career to Goldman Sachs and then you suddenly leave in a blaze of publicity, you tend to be carried along by events much more than you are controlling them.

Accusing Smith of being a con man gives him too much credit: it implies that he cynically orchestrated this whole thing, rather than simply striking a lucky chord on the NYT op-ed page one day. Smith wasn’t very good as a Goldman banker, and he didn’t suddenly find some secret reserve of Machiavellian cunning upon his departure from the bank. He’s just a human, like the rest of us, constructing a narrative lens through which he can view the world, and his career, in a non-self-loathing manner. That’s a perfectly natural thing to do, from his perspective — and it’s so normal and boring that there’s really no reason for the rest of us to read his book. Sorkin says it’s boring; I believe him on that front. I just don’t think it’s a con.


Being able to sort the wheat of actual information from the chaff of post facto self-reported/constructed narratives is a huge part of wisdom.

Posted by QCIC | Report as abusive

Counterparties: Fragile China

Ben Walsh
Oct 18, 2012 22:16 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

As goes China’s growth rate, so goes the world economy — slowly. In the third quarter, Chinese growth dropped to 7.4% from 7.6% in the third quarter, the NYT’s Bettina Wassener reports. That’s the slowest growth rate since 2009 and below the government’s target of 8%.

Despite companies like Nestlé and Nokia saying that China’s slowing demand hit their profitability, indicators like industrial production and retail sales did increase. It’s also worth remembering that the Chinese economy has the wind of a $157 billion infrastructure program at its back.

China’s official economic data is notoriously difficult to interpret. Kate MacKenzie offers a guide to help you sort through its intricacies. Just as we’ve seen recently in the US, some are quick to say that the fix is in. In this case, electricity consumption, railway freight, and loan volume suggest that growth is lower than officially reported.

China isn’t just an economic bellwether; it’s also a political football. Josh Barro labels the idea that the US should “get tough on China” one of the five worst ideas that both Barack Obama and Mitt Romney agree on. The value of China’s currency has risen 11% since 2009, and Paula Dwyer argues that calling China a currency manipulator decreases any leverage Washington might have over Beijing. Beyond that, labeling a country a currency manipulator is largely an empty gesture: “you ask them to stop it“, the Treasury Department investigates, and then there are negotiations over the exchange rate. But since the US and China are already engaged in these discussions, it’s unclear what the label itself adds.

Shen Dingli notes in Foreign Policy that “China won’t have as much to worry about with a President Romney… he and presumably Xi Jinping will likely shake hands and forget” the rhetoric of the campaign — much as Obama and Hu Jintao have largely done since 2008. Still, Mohamed El-Erian thinks Romney should mute his rhetoric before his potential inaguaration. — Ben Walsh

On to today’s links:

“PENDING LARRY QUOTE”: Google blame’s midday earnings release on financial printer – WSJ

Strangely Existential
The profound pessimism of America’s corporate executives – WSJ

Inside the rift between Vikram Pandit and Citi’s new board chairman – Dealbook

Newsweek is ending its print edition in 2013 – Huffington Post
When Newsweek dies, who will tell us if our babies are racist? – Vanity Fair

“The government has criminalized whistle-blowing” – Bloomberg

Why “we must deliberately set financial forest fires” at random – Interfluidity

White Collar Punishment
Rajat Gupta would prefer to join the Peace Corps instead of going to prison for insider trading – Dealbook

The Greg Smith Files
Goldman: Greg Smith quit after he was denied a raise to a salary of more than $1 million – Bloomberg

Good Timing
Mega Millions Jackpot winner: My girlfriend just dumped me – Boston Globe

Possibly Useless Data
How much time do you spend online? The failures of self-reporting – Noah Brier

Equity is the new cash (again) – PandoDaily

The moral hazard of too big to fail, pension edition – Asset International CIO

Big Numbers
Italian corruption, the 76th largest economy in the world – WaPo

True Truisms
Breaking: “The banking industry must work much harder” to restore its reputation – American Banker

TOP 10-Q
Morgan Stanley catching on to this whole fixed income trading thing – Reuters


Must agree with MrRFox…

You are a decent writer, Felix, and raise some interesting questions. But I don’t come here just to listen to you. Nor do you have any more value to add than the many commenters here. Why do your words get front-page billing while theirs get buried?


Posted by TFF | Report as abusive

Why keep Newsweek on life support?

Felix Salmon
Oct 18, 2012 14:28 UTC

It’s hard to make money in journalism, and even harder to make money in print journalism. But here’s what I don’t understand: invariably, every time a print publication fails, it announces that it’s not going to die, it’s just going to “transition to an all-digital format”. Newsweek, of course, is no exception. But this is supposed to be the clear-eyed, hard-hearted world of Barry Diller:

If doesn’t work out? Move on! “Sell it, write it off, go on to the next thing,” he says.

Once upon a time, Newsweek was a license to print money; from here on in, it will be a drain and a distraction. Merging it into the Daily Beast never made a huge amount of sense, and now it’s being de-merged: instead, its journalism “will be supported by paid subscription and will be available through e-readers for both tablet and the Web”. Some of it, I guess, will be syndicated to the Daily Beast.

The chances that Newsweek will succeed as a digital-only subscription-based publication are exactly zero. If you had a team of first-rate technologists and start from scratch trying to create such a beast, you’d end up with something pretty much like Huffington — which lasted exactly five issues before bowing to the inevitable and going free. There’s no demand for a digital Newsweek, and there’s no reason, either, to carve off some chunk of the NewsBeast newsroom, call it “Newsweek”, and put its journalism onto a platform where almost nobody is going to read it.

What you’re seeing here is, basically, path-dependency. If Barry Diller were given the Newsweek brand on a plate, he would never invest in turning it into some kind of subscription-based digital-only operation. The opportunity costs alone are too big: the same money, invested in the Daily Beast or in some other property with a chance of succeeding in an increasingly social world, would surely have a much higher probability of generating positive returns.

Instead, Newsweek is hitching its fortunes to a motley group of e-readers (Zinio!), all of which are based on pretty clunky old publishing technology, and none of which have any ability to take advantage of the social web. Magazines are dying, and millions of people are buying tablets and e-readers: that much is true. But I simply don’t believe that Barry Diller and Tina Brown really think, in their heart of hearts, that they have the unique ability to build the world’s first successful subscription-based tablet-first publication where so many before them have failed. Especially not when that publication is forced to bear the legacy “Newsweek” name.

Brown, remember, killed off Newsweek.com as soon as she took control of the magazine: she decided that while the brand had some kind of meaning in print, the digital future belonged to the Daily Beast. With today’s announcement, she seems to be attempting some kind of freemium strategy: give away the Beast for free, and then charge for the, er, premium content in Newsweek. The problem being, of course, that the whole point of merging Newsweek with the Daily Beast was that in an online world where nothing is more than a click away, Newsweek content isn’t more valuable than anything else. That’s certainly not going to change after today’s layoffs.

All of which is to say that today’s announcement (the “all-digital” bit, that is, not the killing-off-print bit, which was simply inevitable) is basically an exercise in face-saving. When it comes to the optics, it’s always more respectable, more techno-visionary, to do something new and digital than it is to simply close down and write off a failed acquisition. Newsweek’s journalists have already been incorporated into the Daily Beast newsroom: shutting down the printing presses and moving on would simply be recognizing the reality of a world where neither Sidney Harmon nor his family wants to subsidize the magazine any more.

Instead, Newsweek is going to have to suffer a painful and lingering death. There’s no way that first-rate journalists are going to have any particular desire to write for this doomed and little-read publication, especially if their work is stuck behind a paywall. At the margin, it will certainly be better to work for the Beast than for Newsweek: the supposedly “premium” arm will in reality be the bit which smells like old age and irrelevance. It’s not going to work. So, really. Why even bother?


Excellent piece. I would love to hear you elaborate on your statement that “in an online world where nothing is more than a click away, Newsweek content isn’t more valuable than anything else”. Such an elaboration might be worthy of an entire book.

Posted by saiena | Report as abusive

Felix Salmon smackdown watch, corporate-governance edition

Felix Salmon
Oct 18, 2012 06:10 UTC

Justin Fox is not a fan of the video where I take the Goldman Sachs board to task. Yes, he says, the Goldman board is packed with insiders and fails just about every rule of corporate governance — but so what?

There’s little or no evidence that the modern criteria for good corporate governance actually lead to better-governed corporations. What’s generally seen as the most important good-governance move of them all, pushing insiders off boards in favor of independent directors, may actually hurt performance. At least, that’s my reading of the voluminous academic research on the topic.

What’s more, says Justin, I’m wrong about the idea that the job of the board is to represent shareholders and to keep management under control.

As Cornell Law School professor Lynn Stout explains here, the board is actually responsible to the corporation, not its shareholders. And no, the shareholders don’t own the corporation — they own securities that give them a not very well-defined stake in its earnings, and the freedom to flee with no responsibility for the corporation’s liabilities if things go pear-shaped…

In the case of financial firms like Goldman Sachs, shareholders contribute only a small portion of the balance sheet and lenders (and taxpayers) are in many ways truer owners. Multiple studies have shown that it was financial firms with the most shareholder-friendly governance and executive compensation schemes that got into the most trouble during the financial crisis. That only makes sense — shareholders pocket the gains if big risk-taking pays off, but they aren’t on the hook when a bank collapses. Goldman’s relatively smooth sail through the crisis was in part the product of a governance culture that doesn’t put the short-term interests of shareholders first.

So who’s right, me or Justin? Easy: it’s Justin, completely, on this one. My video was a lazy recapitulation of this article by Eleanor Bloxham, and the opportunity to indulge in a bit of squid-bashing was just too juicy to resist. If Goldman Sachs fired its current bunch of muppets and replaced them with, say, the Citi board, or in any case a group of vertebrates, it’s not entirely obvious whether or how the bank would be improved.

Justin says that “a truly effective board” is “one full of committed, expert members who generally have a constructive, supportive relationship with management but are curious enough to keep digging into the company’s business and tough enough to take a stand when management begins to lose the plot”. Which sounds great, but risks being tautological: as he says, on paper, the HP board should fit the bill, and it’s been a complete and utter disaster. And in general, while it’s easy to spot bad boards, like HP’s, and utterly ineffective boards, like Goldman’s, it’s hard to point to boards which are particularly good. Often, good boards are like a good movie soundtrack: if the job is done well, it’s not noticed at all.

What’s more, great leaders neither want nor need great boards: they just want people who’ll get out of the way. After all, when boards do take matters into their own hands, they end up doing things like firing Steve Jobs from Apple. More generally, we’ve reached a level of CEO turnover these days which is clearly excessive: boards seem to be making up for their day-to-day spinelessness by panicking every so often and overreacting by firing the boss. Which rarely does much good.

One of the problems is that the job of directors is not well defined. Many of them think it has something to do with increasing the share price as fast as possible; almost none of them have clear roles like representing unions. In general, it seems, directorships are a nice prize you get for being Important; they can pay very well, but most of the time they end up going to people who don’t need the money. The real problem is not with any individual board but rather with the whole lot of them, as a group: they’re an insular group, made up largely of CEOs and former CEOs, and as such they tend to sympathize with senior management and pay those executives much more than they’re worth.

In the judicial system, juries are made up of randomly-picked members of the general public — and the jury system tends to work surprisingly well. I’m not saying that corporate boards should be chosen the same way. But I do think that the universe of potential board members is, as a rule, far too small. You want real diversity? Don’t put Dambisa Moyo on the board of Barclays. Put Cathy O’Neil on the board of Goldman. That would be awesome.



You got it right the first time. Goldman Sachs needs a corporate governance revamp. Here’s one more example of how screwed up the board is: Goldman has three key committees… audit, compensation and corporate governance/nominating. Each has the same 10 “independent” directors. The reason boards have committees is so that a few of them specialized in each area can delve in depth and report back to the board. Not so at Goldman.

A proxy access proposal is desperately needed to get new blood on the GS board.

Posted by Corpgov.net | Report as abusive