Felix Salmon

Counterparties: This time is entirely normal

Oct 17, 2012 21:49 UTC

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How you feel about the American economy right now depends on your answer to one question: are we recovering from a recession or from a financial crisis?

Renowned academics Kenneth Rogoff and Carmen Reinhart aren’t happy with the way a group of economists associated with the Romney campaign are answering this question. “We we have to take issue with gross misinterpretations of the facts,” they write in a Bloomberg op-ed, which summarizes their new white paper (PDF here).

At issue is just how strong America’s recovery has been since 2007. That answer, as Ezra Klein put it, begs the question “compared to what?” Reinhart and Rogoff take aim at Romney advisers Kevin Hassett, Glenn Hubbard and John Taylor, who claim that America’s recovery has been subpar compared those following typical recessions. In a campaign white paper, Hubbard, Taylor and Hassett write: “The historical record is clear: our economy usually recovers quickly from recessions, and the more severe the recession, the faster the catch-up growth”.  

A recession, however, is not the same as a crisis. Reinhart and Rogoff differentiate between a systemic crisis, which is centered on a country’s financial system, and the general ups and downs of the business cycle. (Economies generally recover  relatively quickly from the latter). Nine months before Lehman collapsed, Reinhart and Rogoff write, the US was already displaying signs of a systemic financial crisis, including “a real estate bubble, high levels of debt, chronically large current-account deficits and signs of slowing economic activity”.   

So how does the US recovery compare to other recoveries from big, systemic crises? First, Reinhart and Rogoff argue that recoveries from financial crises are characteristically slow — this was covered in their seminal 2009 book “This Time is Different“. Real per capita GDP took 11 years to recover after the Great Depression; it took five years to recover after the Panic of 1907 and the crises in the late 19th century. We’re four years into the recovery right now, which means that although we still aren’t back to pre-crisis levels, we’re not doing worse than we did before.

Second, they add that US output per capita and employment are doing better than average compared to other countries that suffered recent financial crises. Compared to the periods after other US financial crises, they write, “the recent recovery looks positively brisk”. Paul Krugman agrees with Reinhart and Rogoff’s complaints, saying that the “proposition that financial crises change macroeconomic outcomes is surely one of the big things we’ve learned in recent years”.

A recent study expands on Reinhart and Rogoff’s argument. “This time actually is different – and worse – in one very clear and measurable dimension”, Mortiz Schularick and Alan Taylor write. Excess credit, it turns out, has slowed our economic recovery considerably. Compared to other historical credit busts, they argue, “the US has done quite well.”   

But, could the US recovery have been even quicker? Ezra Klein spoke to Carmen Reinhart, who said: ““I have to wonder whether nationalizing banks during a crisis is the cleanest and swiftest way out. Anything that delays the adjustment, that delays taking the hit, delays the recovery”.  Ryan McCarthy

On to today’s links:

Housing permits and starts are surging — thank Ben Bernanke – Matt Yglesias
Why neither candidate wants to talk about the housing market –

A look at the new headquarters for the world’s largest hedge fund – Stamford Advocate
High-speed traders are now outracing profits –
Why there’s less high frequency trading – Felix

Citigroup’s new CEO likes to quote Spiderman – Bloomberg

What Could Possibly Go Wrong
It’s like “Mint.com for kindergartners” – Marketwatch

Negative correlation of the day: stock prices and food stamps – Tim Fernholz

New Normal
The great American middle class paycut – WaPo
A growing body of research suggests inequality hurts economic growth – Annie Lowrey

Big Ideas
Mapping the potential for solar panels on every roof – Atlantic Cities

Throwing out insiders won’t fix corporate boards – Justin Fox

Social Security keeps 21 million Americans out of poverty – Center on Budget and Policy Priorities

How to (almost) understand Chinese economic data – FT Alpaville

It’s Academic
Richard Posner on taxation, wealth and luck – Becker-Posner Blog

Small Victories
BofA ekes out a profit after $1.6 billion in litigation expenses – Dealbook

France’s president is pushing for a ban on homework – WaPo

Why more disclosure has led to less information – Aswath Damodaran

In Case You’re Wondering
The world economy is getting sicker, and the political class is to blame – Clive Crook



If you think about it, the systemic crisis is two-fold. One is the popping of a credit bubble and a deeply dysfunctional financial system that catalyzed it.

Two is the end-game of the triumvirate forces of digitization, globalization and commoditization, owing to the rise of global broadband. This has disrupted industry after industry (retail + print media to name two) wiping out more US jobs than they create.

Case in point, when print media dies, not only do publishers go away, and the jobs housed within them, but so too go the printers, delivery trucks, publicists, books stores, etc. And this hits regional markets the worst. Simply put, one Amazon, one Apple or one Google does not even remotely replace the jobs that are permanently lost.

That may be the nature of creative destruction, but in systemic terms, it’s gaping hole in the economy whose fix has no clear repair date.

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The problems with measuring traffic congestion

Felix Salmon
Oct 17, 2012 18:25 UTC

Back in July, I gave a cautious welcome to TomTom’s congestion indices. The amount of congestion in any given city at any given time does have a certain randomness to it, but more data, and more public data, is always a good thing.

Or so I thought. I never did end up having the conversation with TomTom that I expected back in July, but I did finally speak to TomTom’s Nick Cohn last week, after they released their data for the second quarter of 2012.

In the first quarter, Edmonton saw a surprisingly large drop in congestion; in the second quarter it was New York which saw a surprisingly large rise in congestion. During the evening peak, the New York congestion index was 41% in the first quarter; that rose to 54% in the second quarter, helping the overall New York index rise from 17% to 25%. (The percentages are meant to give an indication of how much longer a journey will take, compared to the same journey in free-flowing traffic.) As a result, New York is now in 8th place on the league table of the most congested North American cities; it was only in 15th place last quarter, out of 26 cities overall.

So what’s going on here? A congestion index like this one serves two purposes. The first is to compare a city to itself, over time: is congestion getting better, or is it getting worse? The second is to compare cities to each other: is congestion worse in Washington than it is in Boston?

And it turns out that this congestion index, at least, is pretty useless on both fronts. First of all there are measurement issues, of course. Cohn explained that when putting together the index, TomTom only looks at road segments where they have a large sample size of traffic speeds — big enough to give “statistically sound results”. And later on a spokeswoman explained that TomTom’s speed measurements turn out to validate quite nicely with other speed measures, from things like induction loop systems.

But measuring speed on individual road segments is only the first step in measuring congestion. The next step is weighting the different road segments, giving most weight to the most-travelled bits of road. And that’s where TomTom data is much less reliable. After all, on any given stretch of road, cars generally travel at pretty much the same speed. You can take a relatively small sample of all cars, and get a very accurate number for what speeds are in that place. But if you want to work out where a city’s drivers drive the most and drive the least, then you need a much larger and much more representative sample.

And this is where TomTom faces its first problem: its sample is far from representative. Most of it comes from people who have installed TomTom navigation devices in their cars, and there’s no reason to believe those people drive in the same way that a city’s drivers as a whole do. Worse, most of the time TomTom only gets data when the devices are turned on and being used. Which means that if you have a standard school run, say, and occasionally have to make a long journey to the other side of town, then there’s a good chance that TomTom will ignore all your school runs and think that most of your driving is those long journeys. (TomTom is trying to encourage people to have their devices on all the time they drive, but I don’t think it’s had much success on that front.)

In general, TomTom is always going to get data weighted heavily towards people who don’t know where they’re going — out-of-towners, or drivers headed to unfamiliar destinations. That’s in stark contrast to the majority of city traffic, which is people who know exactly where they’re going, and what the best ways of getting there are. There might in theory be better routes for those people, and TomTom might even be able to identify those routes. But for the time being, I don’t think we can really trust TomTom to know where a city as a whole is driving the most.

I asked Cohn about the kind of large intra-city moves that we’ve seen in cities like Edmonton and New York. Did they reflect genuine changes in congestion, I asked, or were they just the natural variation that one sees in many datasets? Specifically, when TomTom comes out with a specific-sounding number like 25% for New York’s congestion rate, how accurate is that number? What are the error bars on it?

Cohn promised me that he’d get back to me on that, and today I got an email, saying that “unfortunately, we cannot provide you with a specific number”:

The Congestion Index is calculated at the road segment level, using the TomTom GPS speed measurements available for each road segment within each given time frame. As the sample size varies by road segment, time period and geography, it would be impossible to calculate overarching confidence levels for the Congestion Index as a whole.

It seems to me that if you don’t know what your confidence levels are, your index is pretty much useless. All of the cities on the list are in a pretty narrow range: the worst congestion is in Los Angeles, on 34%, while the least is in Phoenix, on 12%. If the error bars on those numbers were, say, plus-or-minus 10 percentage points, then the whole list becomes largely meaningless.

And trying to compare congestion between cities is even more pointless than trying to measure changes in congestion within a single city, over time. As JCortright noted in my comments in July, measuring congestion on a percentage basis tends to make smaller, denser cities seem worse than they actually are. 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.

Cohn told me that TomTom has no measure of average trip length, so he can’t adjust for that effect. And even he admitted that “comparing Istanbul to Stuttgart is a little strange”, even though that’s exactly what TomTom does, in its European league table. (Istanbul, apparently, has congestion of 57%, with an evening peak of 125%, while Stuttgart has congestion of 33%, with an evening peak of 70%.)

All of which says to me that the whole idea of congestion charging has a very big problem at its core. There’s no point in implementing a congestion charge unless you think it’s going to do some good — unless, that is, you think that it’s going to decrease congestion. But measuring congestion turns out to be incredibly difficult — and it’s far from clear that anybody can actually do it in a way that random natural fluctuations and errors won’t dwarf the real-world effects of a charge.

When London increases its congestion charge, then, or when New York pedestrianizes Broadway in Times Square, or when any city does anything with the stated aim of helping traffic flow, don’t be disappointed if the city can’t come out and say with specificity whether the plan worked or not. Congestion is a tough animal to pin down and measure, and while it’s possible to be reasonably accurate if you’re just looking at a single intersection or stretch of road, it’s basically impossible to be accurate — or even particularly useful — if you’re looking at a city as a whole.


Auros is right. Between counting cars going past specific points, and accurate point-to-point times, you can make some pretty good estimates of congestion, even if you don’t know the distribution of cars along each route.

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Give Corbat some time

Felix Salmon
Oct 17, 2012 15:08 UTC

Peter Eavis has the most dramatic of the second-day pieces on the shake-up at the top of Citigroup:

Some analysts believe Mr. Corbat could open the door to more radical moves at Citigroup…

The burning question is whether he has the resolve to get out of businesses that the bank doesn’t excel in, even if the near-term costs are high… In particular, some investors would like Citigroup to be quicker about selling assets in Citi Holdings, the bad bank that Citigroup set up for its unwanted and loss-making assets. Mr. Corbat ran Citi Holdings until the end of last year. Faster sales might mean Citigroup would not get the best price possible for the $171 billion in assets in Citi Holdings. That could lead to higher losses when sales took place. But selling assets more quickly could free up the capital the bank holds there…

Citigroup’s investment bank is the other obvious target for shrinkage. Right now, it is enormous… The unit is also seen as a black box, something Mr. Corbat will have to tackle if he wants to regain investors’ confidence, analysts say.

The quandary for Mr. Corbat may be that, if he increases disclosure, investors may balk at any alarming numbers and dump the stock. Even so, he may have to risk that outcome.

This is an intriguing idea, but it’s not going to happen, for various reasons. Firstly, if the board wanted a radical slash-and-burn artist, they would never have hired Corbat, a hugely competent Citi lifer. Corbat has shown very clearly how he likes to deal with the unwanted legacy assets at Citi Holdings: after all, he ran it for most of its existence. And he’s treating those assets much like Treasury has treated its stakes in Citi or AIG or General Motors: he’d love to sell them, but only if he can get a good price.

Secondly, it’s very hard to free up capital when you’re selling assets at a loss. It’s possible, if you sell at only a small discount. But any loss on the deal has to come straight out of the capital you’re supposedly freeing up — and it can easily eat up all of that capital entirely, and then some.

As for Citi’s investment bank, Eavis is absolutely right that with $900 billion in assets, it’s far too big. He’s also right that one reason Citi’s stock trades at such a large discount is that investors really have no idea what those assets comprise, or why the investment bank’s balance sheet needs to be so bloated. And in fact there’s a good chance that if Corbat reckons that Citi needs to get smaller, the investment bank is where he’ll start. He’s already done a good job at shrinking Citi Holdings, and Citi’s global commercial bank is the one core asset that should be encouraged to grow, rather get smaller. Which leaves all those traders and derivatives dealers and the like: Corbat knows how dangerous they are, having had a front-row seat for the Salomon Brothers bond-trading scandal.

What’s more, it’s pretty clear who’s really in charge of setting the strategy at Citigroup these days, and it’s not Mike Corbat, the man hired to implement it. Rather, it’s the chairman, Michael O’Neill, a commercial banker who would surely be much happier seeing traders getting axed than he would with branch closures or the like. In choosing Corbat, he’s chosen someone who can execute on the strategy which already exists, rather than some charismatic leader who promises to lead Citi to a land of high ROE and much-reduced balance sheet.

That makes sense: there’s a lot more competition in the lean-and-mean space than there is in the too-big-to-fail space. Investors don’t particularly like big banks these days, but Citi would be a miserable failure if it were to shrink: it doesn’t have a scrappy mindset, and it never will. Corbat has been on hundreds of sales calls, all over the world, talking about the strength of Citi’s franchise, how it has been committed to [insert country name here] for over a hundred years, etc, etc. Citi needs to stay big for much the same reason that banks used to build their branches out of heavy stone: the perception of weightiness and permanence is exactly what its clients are looking for — especially in the turbulent world of emerging markets, where most of Citi’s future growth is going to come from.

It seems to me that O’Neill knows exactly what he wants, that Pandit tried to deliver but wasn’t actually a very good manager, and that therefore O’Neill fired Pandit and replaced him with Corbat, in the hopes that Corbat can succeed where Pandit never really got traction.

All of which boils down to a very simple question: is Citigroup small enough to manage? The last time that the Citigroup’s senior executives were clearly in control of the company was during the Sandy-and-Jamie years. Ever since Sandy Weil fired Jamie Dimon in 1998, the top brass at 399 Park Avenue have had relatively little ability to steer this particular supertanker. Sometimes they manage to avoid a huge obstacle; sometimes they don’t. But in general, the best they have been able to hope for has been not-going-bust.

O’Neill thinks that he sees a route through the obstacles, at the end of which is a bright open ocean of prosperity and profitability. But he’s well aware that steering Citigroup is orders of magnitude more difficult than slicing off bits and pieces of Bank of Hawaii. And so he’s promoted the best skipper he knows, Mike Corbat, to take the helm.

Corbat isn’t viewed within Citi with the same mistrust that greeted Pandit — or even Chuck Prince, for that matter. For one thing, he has a proven history of actually getting things done at the bank, which is more than either of his predecessors had. That takes no little skill, given that Citigroup is one of the banking world’s most labyrinthine bureaucracies, complete with quarreling dukedoms in various different countries, regions, and asset classes. For instance, Eavis suggests that Corbat might take a leaf out of Santander’s book, and sell a minority stake in its very successful Mexican subsidiary. Corbat’s on-the-record response to that suggestion, on the call yesterday, was “I’ll look at those things and see what the numbers say”. But in reality, there’s no way that Corbat is messing around with Banamex unless and until he can get Manuel Medina-Mora on board — and that’s not going to happen for a while, given that Medina-Mora is probably a little bit sore that he didn’t get the CEO job himself.

As a result, if Corbat is going to succeed in executing on O’Neill’s vision, he’s not going to be able to rush things. The trick is to move with vision and purpose in the right direction, rather than trying to pursue some kind of magical overnight transformation. You can’t transform a company as large and old as Citigroup in a short amount of time: it’s simply not possible, and Corbat would be foolish to try.

Eavis says that “Corbat may have to impress quickly, given the pent-up frustrations among shareholders”. But the fact is that if he tries, he’ll fall flat on his face — and he knows it. Shareholders, and O’Neill, are going to have to be patient here. Given time, Corbat may (or may not) be able to turn Citigroup into a coherent and efficient global banking franchise. But if he feels the need “to impress quickly”, then failure is certain.


Very insightful post….I was a MD in the “old” Citi’s Global Relationship Bank on the product side (Structured Products Division)…the pre-Sandy John Reed perspective on the whole GRB was very negative….compared to the Consumer Bank….the commercial bank was always viewed as event risk just waiting to happen by Reed…

He didn’t get rid of it it was thought because of the need for the Consumer Bank especially in the emerging markets to project the aura of bigness and globality…(“heavy stone”)…which at the end of the day they did not think they could do if they weren’t banking, say, IBM globally…even if at a loss…

The problem was that plain vanilla commercial banking for the Fortune 1000 was a loser in ROE terms, especially when compared to the opportunities to deploy capital in the Consumer Bank….the strategic discpline imposed was to manage a relationship for return….so that awful products like standby revolvers required by the client were offset with…”structured” products or fee businesses….both very like an IB relationship….derivatives were important as were executing capital markets transactions…

So I would say that Corbat will have a tough time making the commercial bank work without some IB offerings.

Your comments about the managwement issues are spot on….

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Counterparties: Pandefenestration

Ben Walsh
Oct 16, 2012 21:47 UTC

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Just one day after his company reported third quarter earnings, Vikram Pandit is unexpectedly out as Citigroup’s CEO. Pandit and the board don’t agree on why. Pandit claims that resigning was his decision and that he “been thinking about this for a long time”. The board sees things differently. It reportedly ousted Pandit due to Citi’s subpar financial performance and his “poor execution”.

Pandit is being replaced, effective immediately, by Michael Corbat, the man who until yesterday was responsible for Citi’s business in Europe, the Middle East, and Africa. As recently as August, such a change seemed unlikely. Pandit “told colleagues that he intends to stay [on as CEO] for several years”, according to Suzanne Kapner at the WSJ. Even then, however, there was increasing pressure from the board of directors to outline succession plans and groom his potential replacements.

Citi’s stock is down 90% since Pandit took over as CEO in late 2007, and has lagged all its rivals. More broadly, as the FT’s Tracy Alloway points out, Citi’s share price over Pandit’s tenure is worse than every other financial company in the S&P 500, save AIG. And beyond financial failings, Pandit also had the issue of “regulatory baggage” that he could never seem to shake.

In the past few months, there have been even more setbacks. In April, Citi failed the Fed’s stress test and had its $8 billion share buyback program rejected. In September, the bank was forced to take a $3 billion loss on the sale of its Smith Barney stake to Morgan Stanley. Citi also failed to spot on the surge in housing that drove JP Morgan and Well Fargo’s results. That lead to yesterday’s earnings, which Matt Levine characterized described as an “excellent 88% decrease in profit”.

Pandit worked for $1 in 2009 and 2010, but was awarded a $15 million pay package for  2011. Shareholders, in a move Credit Agricole’s Mike Mayo called a “milestone for corporate America… a wake-up call”, rejected it. That vote, however, was non-binding and Pandit’s pay package was essentially unaltered. In total, Pandit made $261 million while at Citi, including the $165 million he was paid when Citi bought out his hedge fund in 2007 to bring him on as CEO. In 2008, Citi shut down the fund and took a $200 million loss on its acquisition. Now, it appears Pandit isn’t in line to receive any severance pay, but he might get to use the corporate jet at a discounted rate.

It’s unlikely that the board and Pandit will ever get on the same page about who dumped whom. Regardless, both Felix and Dealbook’s Steven Davidoff think Pandit’s removal is a sign that Citi’s board, led by chairman Michael O’Neill, has found its spine. Now it’s up to Corbat to show, in the wake of large missteps by Sandy Weil, Chuck Prince, and Pandit, that Citigroup can too be managed. — Ben Walsh

On to today’s links:

Mortgage lenders could be exempt from certain lawsuits for writing high-quality mortgages – WSJ

Reinhart and Rogoff would like people to stop misusing their work – Barry Ritholtz

Long Reads
Romney’s Bain helped Philip Morris find a new generation of “replacement smokers” – Huffington Post

Goldman Sachs’s revenue more than doubles in the third quarter – FT Alpaville
Goldman Sachs’s full 3Q earnings release – Goldman Sachs

Damien Hirst: butterfly-murdering monster – Telegraph

Strangely Existential
The shame and social estrangement of using a Blackberry – NYT

Vice Chairman at Deutsche Bank said he used bath salts before violent encounter with LAPD – Bloomberg

“The ladies who serve and prepare the food at Currier House all have crushes on senior Mike Corbat” – Harvard Crimson

New Normal
Japan is poised to overtake China as America’s top lender – Businessweek

If foreign policy nerds wrote the questions for tonight’s debate – Foreign Policy


Ah the kleptocracy at work. Rich people voting to reward each other for performance no better than any random college graduate’s.

Isn’t corporate America great?

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When bank boards flex their muscles

Felix Salmon
Oct 16, 2012 13:30 UTC

Vikram Pandit’s resignation might have come as a surprise to just about everybody, but the bank’s website seems to be fully updated: go to the board of directors page, and there’s Mike Corbat, CEO.

A couple of things are worth noting about that page. Firstly, Corbat is only CEO: he isn’t chairman as well. That would be Michael O’Neill, dubbed the “hands-on chairman” by the WSJ, who seems to be throwing his newfound weight around just seven months after taking on on the job. The rest of the board is reasonably impressive too: a good mix of independent thinkers from many walks of life. None of them can reasonably be considered to have been beholden to Pandit — and certainly none of them is beholden to Corbat.

That’s exactly as it should be. The CEO’s job is to run the bank, to answer to the board, and to get fired if he doesn’t perform. Which is what seems to have happened with Pandit.

Meanwhile, further downtown, the exact opposite is happening. Where Citi’s powerful board acted decisively after yet another set of weak results, Goldman’s powerless board is simply sitting back and watching their bank report a much more solid set of earnings. Just how powerless are they? Let me answer that for you:

Every day, on average, investors buy about $1.2 billion of Citigroup shares, and about $500 million of Goldman shares. Without that steady buy-side flow, the stocks — and the banks — would collapse. And while investors care about earnings first and foremost, they also want to know that they’ll ultimately receive those earnings, rather than just seeing them disappear into the pockets of management, or be wasted on silly acquisitions. Governance matters. And on that front, if on few others, Citi can credibly claim to be leagues ahead of Goldman.

As for Corbat, I have no idea how he will perform as CEO. But I can say that the choice of Corbat is clearly a vote for Citi’s global franchise. If Corbat cuts back anywhere, it will be domestically, in the US, rather than in the faster-growing regions of the world where the Citi brand remains strong. Much was made of the fact that Pandit was an Indian leading a big US bank, but in fact Corbat has more international banking experience than Pandit had. He’s also more wonk than visionary. Which is probably a good thing.


Speculators, I mean investors, are so used to getting little or no dividends they have forgotten why corporations even exist. It used to be to spread the burden of financing a company among many owners, but now they just exist as a vehicle for its management.

If the government stops the double taxation of corporate profits, publicly traded companies will have no excuse to not pay a reasonable dividend, and then there will be a great metric for those “investors” to judge performance.

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Padraic Fallon, 1946-2012

Felix Salmon
Oct 16, 2012 01:21 UTC

Padraic Fallon died on Saturday night, age 66. The news came as a shock to me, not least because I was pretty sure that Fallon was 66 years old back in 1995, when I first met him. Euromoney, naturally, is the place to turn for a characteristically warm and spicy remembrance, but you can be sure that across London — and large swaths of Ireland, too — there are thousands more such remembrances being retold tonight, always with an alcoholic accompaniment.

It’s rare to find an English financial journalist who hasn’t intersected with Padraic at some point. (He’s one of those men known universally by their first names; one of the pleasures of working for Euromoney was listening to bankers mangle the pronunciation of “Padraic” while affecting a close friendship with the man.) Thousands of us went through the legendary Euromoney Publications graduate-trainee scheme, where the first thing we were told to do was to read his famous, and quite intimidating, style guide. And then, for those of us who worked on Euromoney magazine, there were the occasional editorial meetings chaired by the man himself in the company boardroom. The first words Padraic ever spoke to me were at one of those meetings. I remember those words to this day: “Are you wearing an earring??”

I realize now — and only now — that Padraic was still in his 40s at the time, but the cigar-chomping chairman was already a legend. Everybody who read his style guide knew that he was a fantastic writer, with a copy-editor’s eye for detail. But then he was so much more: a fantastic reporter, for one. And a fantastic editor. And an excellent publisher, who could sell and charm (or charm and sell) as well as anyone. And a highly-aggressive businessman, to boot, who always paid himself handsomely: last year alone he made about $8.5 million.

On top of that, Padraic was never a man shy about his opinions: one of the ways that he built Euromoney into a powerhouse in the first place was by being unapologetic about being a cheerleader for the then-nascent Euromarkets — basically, the market for offshore dollars, which weren’t taxed by the U.S. government. While at the same time relishing the scoop and the scandal as much as any journalist.

The opinionated founder-editor-publisher, of course, is the kind of person we see a lot of these days: think Mike Arrington, or Nick Denton, or Josh Marshall, or many others. In that sense it’s a very modern role, but it’s also as old as publishing itself, and Padraic was one of the masters. He also understood, long before the World Wide Web was even invented, the power of having multiple platforms: he was early to branch out into conferences, book publishing, and like. He also, I believe, was responsible for the Euromoney Awards: if you haven’t heard of Euromoney magazine, you’ve certainly seen the awards logo appear in the corner of hundreds of bank advertisements all over the world.

Padraic could make mistakes: his ideology and his ambition led him to the board of Allied Irish Bank, where he served from 1998 to 2007, overseeing the very years where the bank overstretched itself massively and then ultimately became insolvent. He also asked me to design a new publication he had decided to put out, called MTNWeek. But to err is human, and in many ways the most attractive thing about Padraic was just how human he was.

Every so often I’m asked how I ended up doing what I do; ultimately, the man responsible for my entire career, such as it is, was Padraic Fallon. He pretty much invented the idea that journalists could have huge success writing about bonds for a living, and he instilled in me a deep understanding of the bond market (and its corollary, a deep mistrust of the stock market) which served me very well indeed, first when I was writing about sovereign debt restructurings in the early 2000s, and then when I started blogging the financial crisis.

Padraic was very old-fashioned in many ways: the cigars, the dinners at the Savoy, the chauffeur-driven car. But he was also a great believer in modernity and change, and in particular the ability of small groups of badly-paid twenty-somethings to out-work, out-report, and generally beat much larger groups of much more well remunerated veteran reporters. Padraic gave thousands of us hugely valuable transferrable skills, as well as the idea the bond market is always the most important market, anywhere. He was surely right about that.


Vale Padraic. Memories of him striding down the hall revelling in the latest country to default in the early 80s. He couldn’t possibly have been in his mid thirties back then…

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Counterparties: Economists who did good

Ben Walsh
Oct 15, 2012 22:20 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

Lloyd Shapley and Alvin Roth have won the Nobel Prize in economics “for the theory of stable allocations and the practice of market design”. To put it differently, they won the Nobel for their work on “matching markets” through investigations into marriage, or dwarf tossing, or illegal horse meat.

Alex Tabarrok of Marginal Revolution drills down into exactly why matching markets matter to our everyday lives: “Matching is a fundamental property of many markets and social institutions. Jobs are matched to workers, husbands to wives, doctors to hospitals, kidneys to patients.”

As Josh Gans explains in the best post on Shapley and Roth’s work, those are markets defined by their lack of prices. Shapley, a professor emeritus in the economics department at UCLA, is best known for creating, along with D. Gale Johnson, the Gale-Shapley algorithm that creates “stable allocations when two groups of people are to be matched with one another”.

This matching has big impact in the real world: Roth, a Harvard professor who is recently accepted a new position at Stanford, is most heralded for his development and implementation of Shapley’s theory in kidney donation waiting list policies. Roth’s key insight was figure out a practical way of expanding matching beyond pairs. Here’s Tabarrok again:

Your spouse is dying of kidney disease. You want to give her one of your kidneys but tests show that it is incompatible with her immune system. Utter anguish and frustration. Is there anything that you can do? Today the answer is yes. Transplant centers are now helping to arrange kidney swaps. You give to the spouse of another donor who gives to your spouse. Pareto would be proud. Even a few three-way swaps have been conducted.

But why stop at three? What about an n-way swap?

Catherine Rampell writes in the NYT the answer to this question is also the basis for an algorithm used by “New York, Boston, Chicago and Denver to… help assign students to schools”. This Forbes profile, and other great background on both Shapley and Roth (who blogs here), has been culled by Tyler Cowen and Tabarrok at Marginal Revolution. As you read though the quotes of adulation for both men from economists assembled by Mark Thoma, it’s hard to miss the pride they take in work with such clear social benefits. Steven Levitt offers this compliment: “When I talk about economists, one of the greatest compliments I give is to say that they changed the way people think about the world”. – Ben Walsh

Sprint announces deal to sell 70% itself to Softbank for $20.1 billion – Dealbook

Good Questions
Will central banks cancel government debt? – Gavyn Davies

The thin line between makers and takers - Tyler Cowen

Billionaire Whimsy
“If a man is not an oligarch, something is not right with him” – Chrystia Freeland

The buyback epidemic: Why corporate America is squandering its resources – Josh Brown
Get ready for the dividend cliff – WSJ

The joys of refinancing, where “everyday is Groundhog Day” – Chris Taylor
A detailed case against worrying about the housing market - Calculated Risk
A bubble we can use: mortgage refinancing – Ben Walsh

Tax Arcana
From lattes to losses: How Starbucks avoids UK taxes – Reuters

The Fed
On second thought, we should have done more to help the economy, Fed’s Dudley says – Binyamin Appelbaum

Under Armour CEO: worrying about the fiscal cliff is “loser talk” – Business Insider

Old Normal
Ag bailouts, industrialization, and the rise of finance: Downton Abbey’s economics – Somewhat Logically

Crisis Retro
Up for bidding at $4.99: “Lehman Brothers fancy paper napkin” – eBay

You can support Keynesianism without supporting big government – Stumbling and Mumbling

Pizza Hut decides it shouldn’t bribe someone to ask a pizza-related question during the presidential debates – AP

Rupert Murdoch calls phone hacking victims “scumbag campaigners” – Guardian



Congratulations – you’ve managed a difficult feat – take a medioce blog-site and make it worse, without hardly tryin’. Small wonder then that you can find something allegedly good to say about economics as a profession and/or any of those who peddle it.

Suggest you emulate Felix – save it ’till they’re dead.

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Why there’s less high-frequency trading

Felix Salmon
Oct 15, 2012 16:50 UTC

Nathaniel Popper arrives today with something that looks like good news on the high-frequency trading front: there’s less of it!

Profits from high-speed trading in American stocks are on track to be, at most, $1.25 billion this year, down 35 percent from last year and 74 percent lower than the peak of about $4.9 billion in 2009, according to estimates from the brokerage firm Rosenblatt Securities…

The firms also are accounting for a declining percentage of a shrinking pool of stock trading, from 61 percent three years ago to 51 percent now, according to the Tabb Group, a data firm.

This is all true, and in fact it probably is good news, at the margin. But it’s not very good news, and it’s not as good news as it might look at first glance. Because while the number of trades is indeed going down, the number of orders is going through the roof. Here’s how I put it in my Radio 3 essay:

One reason that volumes are dropping is that the algobots are getting so sophisticated at sparring with each other that they’re not even trading with each other any more. They’re called high-frequency traders, but maybe that’s a misnomer: a better name might be high-frequency spambots. Because what they’re doing, most of the time, is putting buy or sell orders out there on the stock market, only to take those orders back a fraction of a second later, and replace them with new ones. The result is millions of orders, but almost no trades.

Call it the Stalemate of the Spambots: the HFT algos are all so sophisticated, now, that they just ping each other with order spam, rather than actually trading shares. Naturally, if you don’t trade shares, you can’t make money. But at the same time, anybody who does trade shares risks getting picked off by the very algorithms which are increasingly circling each other like prizefighters who never land a punch.

All of which is to say that just because HFT algobots aren’t trading as much any more, doesn’t mean that the waters are any safer for real-money accounts to re-enter. Indeed, the exact opposite is more likely: that the bots have poisoned the stock-trading waters so much that even the bots themselves fear to go in.

As a result, market regulators still have a huge amount of work to do, starting with a serious attempt to cut down on quote-spam. There’s no reason why regulators shouldn’t effectively ban the practice of putting in non-serious orders which disappear in the blink of an eye — although the risk, of course, is that if the algobots are banned from confusing each other with quote spam, then they’ll just revert to dominating trading instead. Which is why I still like the idea of a financial-transactions tax.

Popper says that “now that the high-speed firms are shrinking from the market, there are some indications that trading costs may again be rising.” This might be true, but it’s negligible: we’re talking here about a tiny uptick from 3.5 cents per share to 3.8 cents per share, after a long fall from a level of 7.6 cents in 2000. There’s no indication that this is either a trend or anything to be worried about.

In any case, let’s not assume that rising trading costs are always and necessarily a bad thing. Trading costs right now are incredibly low — low enough that they can, actually, rise a little bit without doing any visible harm. Fear of rising trading costs must not prevent us from continuing to prosecute the war on HFTs — especially if there are indications that we’re slowly beginning to win it.


This and other topics that are relevant for speed traders and institutional investors will be discussed at High-Frequency Trading Leaders Forum 2013 London, next Thursday March 21.

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Chart of the day, pumpkin edition

Felix Salmon
Oct 15, 2012 13:11 UTC


I have a short piece about pumpkin in the latest issue of New York magazine, trying to work out why has started to become almost as ubiquitous as bacon at this time of year. After all, bacon is delicious; pumpkin, not so much.

The secret, it turns out, is in the semiotics. No one ever feels virtuous eating bacon, but pumpkin has connotations of locavorism, as well as warmth, and sweetness, and family, and the toasty colors of fall. And yet the pumpkin in “pumpkin” dishes is even less healthy than the bacon in bacon dishes: it’s mainly sugar, along with autumnal spices like cloves, cinnamon, and nutmeg. Partly because few of us ever eat pumpkin straight, the taste of pumpkin in the public mind has basically just become a sugar-and-spice combo.

Which helps explain the chart. Pumpkin is found mainly in desserts (lots of sugar), and beverages (lots of sugar). A venti Pumpkin Spice Latte at Starbucks runs 470 calories — that’s double the 240 calories in an identically-sized 20-ounce bottle of Coca-Cola. Or, to put it another way, it’s the same number of calories that you find in seventeen rashers of bacon. Would that Starbucks were selling out of the stuff. (It isn’t.)


PS: My own recipe for Kadu can be found here:


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