Felix Salmon

Counterparties: Deutsche’s hope and “uncomfortable change”

Jan 31, 2013 21:40 UTC

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Today, Europe’s biggest bank posted a $3 billion net loss, but it insists it’s embarking on “deliberate”, “uncomfortable change”. Deutsche Bank’s revenue up was up 14%, and the bank’s losses came from a €1.9 billion writedown on assets and €1 billion put aside for litigation (read: likely Libor scandal-related) costs.

But analysts, including KBW’s Andrew Stimpson, agreed that “the big thing is the capital” that the bank is amassing to comply with future regulations. DB’s Tier 1 capital ratio — the amount of money its regulators require it to hold against losses — jumped to 8%, higher than its target of 7.2%, and the stock market promptly loved it.

The WSJReuters and Bloomberg each suggest much of this capital boost was due to the bank tweaking its internal risk models — changing the way it values assets rather than, say, selling them off. To David Weidner, this kind of dial-fiddling means the bank could be reaching “the limits of financial engineering”. Dominic Elliott argued earlier this month that DB has a long way to go on its capital: “investors want big universal banks with sizable exposure to capital markets to be at around 10 percent as soon as practicable.”  (For the uber-wonky, here are the Basel guidelines for tweaking this sort of formula).

DB has been very busy lately thinking about the future: it’s shrinking and “undergoing the most radical surgery of its global peers”; it’s being asked to simulate its own breakup while possibly facing a version of the Volcker Rule; and its own executives have been actively pushing the industry’s most aggressive messaging campaign. In the bank’s earnings release, co-CEO Anshu Jain said he wants to “place Deutsche Bank at the forefront of cultural change,” a process that will take “years not months”. (Hence, the bank calling this “Strategy 2015+”, which will, likely, mean fewer employees getting paid less).

DB’s main problem, Lex writes, is more mundane: it simply needs to stop paying its employees more than its competitors. On that, Deutsche says it’s making progress. The bank deferred more compensation for senior execs, and it has eliminated multi-year bonus guarantees. Sarah Butcher finds a murkier picture — pay per employee in the investment and corporate banking division is actually up, despite variable compensation (aka bonuses), as a percentage of revenue, falling by 60% since 2006. — Ryan McCarthy

On to today’s links:

Inside network TV’s biggest musical/comedy/critically acclaimed train wreck – BuzzFeed

Long Reads
How North Dakota produced one of the world’s biggest oil booms – NYT

Chinese hackers “stole the corporate password for every NYT employee” – NYT

New Normal
Government is hurting the economy by spending too little – Ezra Klein

Welcome To Adulthood
The latest subprime boom: student loans – WSJ
FICO: Student loan bubble “simply unsustainable” – Zerohedge

Just saying that the deficit is a really big number “isn’t much of an economic argument” – Neil Irwin

White House petitions aren’t about change – Time

Regulatory enforcement is a “positive thing… to a point” – Matt Taibbi

Citi decides that Pakistan, Paraguay, Uruguay and Romania aren’t part of its consumer banking plans – Reuters

National Emergencies
America now only producing 30,000 lawyers a year – NYT

Facebook’s revenue rises 40% over last year – Facebook

5 years of writing the “Is There A Bond Bubble Coming?” story – Matt Phillips

It’s Academic
Fair wages increase productivity – Chris Dillow


About the “simulating it’s breaking up” – the German regulator BaFin published their version of the requirements for the reorganization plan, so this is something all German systemically important banks are working on.

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The SEC’s weird newswire investigation

Felix Salmon
Jan 31, 2013 09:17 UTC

A couple of weeks ago, the WSJ’s Brody Mullins had a big story about the fact that the SEC was investigating a political-intelligence consultancy named Marwood. Marwood doesn’t seem to have done anything wrong, but the very fact that it was being investigated was, at least as far as the WSJ was concerned, front-page news.

This week, Mullins has done it again, this time with an SEC investigation of firms which provide financial data. Once again, there’s nothing in the story to suggest that any of these firms, which include Bloomberg, Dow Jones, and Thomson Reuters, have broken any insider-trading rules. And yet here’s a juicy front-page story all the same, based entirely on the fact that there was an investigation at all, regardless of whether the investigation actually discovered anything untoward.

I’d love to know the story behind these stories. It seems pretty obvious that they’re being leaked by the SEC, in a way that seeks to embarrass the subjects of the probes as much as possible. Marwood and Bloomberg and Thomson Reuters might have done nothing wrong at all, but if the WSJ determines that there’s front-page news here, then its readers are surely expected to conclude something about smoke and fire.

There’s a clear implication in the latest story, for instance, that the data companies in question (which include the WSJ’s corporate parent) did do something wrong, and that they’re just lucky the SEC can’t prove it in a court of law:

Investigators decided against filing charges because they couldn’t link the pattern to specific actions by media companies, people familiar with the probe said.

A key issue, one of the people said, was whether the government could prove in court that a time advantage for a trader of a sliver of a second—as little as a few thousandths—was enough to conduct profitable trades on confidential information.

Even so, these people added, investigators continue to have general concerns about the handling of federal economic data.

This whole thing has a decided whiff of “doesn’t the SEC have anything better to do”. For one thing, to answer the SEC’s question, it’s not at all obvious that getting information a few thousandths of a second ahead of anybody else would allow some computer somewhere to conduct a profitable trade on the information. Firstly, big economic data comes out before the stock market opens, which means that any profitable trades would have to take place either on the much less liquid out-of-hours market, or else on the bond market. Both of them are largely free of high-frequency traders.

Yes, there’s a lot of trading and jostling and positioning in the bond market in the run-up to a big data release, but I can pretty much guarantee you that all markets are in holding-their-breath mode when it comes to, say, the final couple of seconds. The traders and the algobots are short or flat or long, they’re waiting for the number, and then they’ll burst into action as soon as the number is released. If you want to trade a couple of thousandths of a second before the number is released, you’re going to be looking for a counterparty who doesn’t know what the number is but who is willing to trade anyway. It’s hard to imagine such counterparties exist.

The news agencies can blame themselves a little bit, here, because they have for many years been highly invested in the idea that if you get a certain piece of information first, even if it’s just by a fraction of a second, then you can make a huge amount of money. All of them get incredibly excited about the times when they move the market: when a story comes out, and then some financial instrument — normally a stock, but a commodity will do in a pinch — moves sharply on the news. They charge a lot of money for their real-time news feeds, and the implication is something like this:

  1. The news hits the wire.
  2. A smart trader, staring intently at his newsfeed, sees the headline cross the wire, and immediately groks the implications.
  3. The trader then puts in a monster buy/sell order, picking off a bunch of tortoises who aren’t smart or rich enough to subscribe to the wire service in question.
  4. The price moves sharply.
  5. Monster profit!

It’s a lovely story, but it’s also a fairytale: things don’t actually happen that way. In the real world, when a piece of news hits a wire, at that point it’s public. And once it’s public, the market then reflects that public information in the share price. If you’re a broker-dealer who was quoting a security at one price before the news came out, you’ll now be quoting it at a different price after the news has come out.

The key question to ask is this: how many trades happened (a) at the old price, but (b) after the news became public? Most of the time, the answer is zero, or very close to zero. News headlines often move the market, but that doesn’t mean that someone has gotten financial benefit from reading them first.

The point here is that once a headline crosses the wire, that information is, by definition, public. And if it’s public information, it can’t be insider information. There are lots of good reasons why the U.S. government and rival news agencies would be cross if one of the wires published that information a fraction of a second before the other ones did. But just because someone is cross doesn’t mean that laws have been broken, or that inside information has been traded upon. An embargo is an agreement between a news source and a journalist; it’s not something to be enforced by the SEC.

So I do wonder what the SEC thought it was doing, here, conducting what the WSJ describes as a “technically and legally complex” probe. What exactly was the SEC hoping to achieve? And why is this weird investigation, in and of itself, newsworthy as anything other than a waste of government resources?


I agree with Steve Hamlin’s point, especially since this particular embargo system “grew partly out of a 1905 scandal in which traders obtained confidential cotton-crop estimates”.

It also sounds like the FBI drove the investigation more than the SEC, I suspect because the embargoes in question are with departments of the federal government. Hypothesizing about the motives for the leak, my take is a combination of CYA (“we’re aware of this and being thorough”) and a not so subtle warning to Bloomberg, Reuters, and Dow Jones that they better toe the line.

Imagine the uproar if it did emerge that a few selected organizations were routinely gaming the embargo system to provide government economic reports to their data feed subscribers before the general release – even by a few seconds. I can write the summary of the Gretchen Morgenson column or Jesse Eisinger article: “All taxpayers fund the Labor Department to gather statistics about the U.S. economy. Hedge funds and investment banks then pay data providers for early access to get an edge over small investors.”

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Counterparties: The non-industrious military complex

Ben Walsh
Jan 30, 2013 22:09 UTC

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America’s economy defied expectations and shrank 0.1% in the fourth quarter — analysts expected 1.1% growth. And it’s all the military’s fault. Or at least, the fault of declining defense spending.

Brad Plumer runs through just how significant the fall off was:

Government defense expenditures plunged by a staggering 22.2% between October and December… The Pentagon spent significantly less on just about everything except military pay. Had the Pentagon not cut back on spending, the economy would have grown at a weak but positive 1.27% pace.

While Plumer notes that military spending often falls from the third quarter to the fourth, T Rowe Price’s chief economist Alan Levenson pointed out in a note to clients that the decline was the single largest decrease on record. Dylan Matthews has a great chart showing just how out of synch defense spending (and inventories) were from the rest of the economy. On a more granular level, this graph from Reuters shows capital expenditures at Lockheed Martin and Northrup Grumman, everyone’s favorite cluster bomb assemblers and  drone manufacturers, falling off a cliff.

The stimulative effects of defense spending are nothing new. Just think WWII or, more recently, the Washington, DC area, where the economy has grown about three times faster than the rest of the country since the financial crisis. Last fall more than a few economists cut their fourth quarter forecasts despite upward government revisions to third quarter growth. Back then, the surge in third quarter defense spending didn’t look sustainable.

Even more cuts could be on the way: the automatic budget cuts — i.e. “the sequester” — that Republicans look increasingly willing to let go into effect on March 1 are heavily weighted towards the military and are projected to shave 0.7% off this year’s GDP.

All of this is part of the long process of getting military spending down to pre-9/11 levels: the US accounts for 40% of total defense spending globally. As that happens, America won’t be able to rely on the military industrial complex to prop up growth. — Ben Walsh

On to today’s links:

Advice for the new owner of The New Republic: Don’t pretend to be a journalist – Jack Shafer
Statistics abuse, Ross Douthat edition – Choire Sicha

New Normal
The story of the post-crisis recovery: borrowing for college instead of borrowing to buy a home – Matt O’Brien

Chesapeake’s CEO is out after “philosophical differences” with the board (and a year of scandal) – Reuters

The Fed
The Fed warns itself that it could lose money on its massive bond portfolio – WSJ
Everyone at Davos was worrying about the Fed causing a “1994 moment” – Business Insider
January’s FOMC statement – Federal Reserve

Modest Proposals
Smart people confused / not confused by satire, Henry Blodget edition – The Awl

Meet the best-paid Wall Street CEO, whose comp is equal to nearly 14% of his company’s profits - WSJ

Bond investors (Goldman, Oppenheimer) have made a killing off Chavez’s disastrous regime – Bloomberg

MF Doom
MF Global’s European bond trades weren’t to blame! (Given unlimited time and money) – Dealbook

Zimbabwe only has $217 left in the bank – Quartz

Elon Musk calls the Boeing 787 batteries “fundamentally unsafe” – Flight Global


Did the government move 4th quarter purchases into the 3rd quarter to window dress the U.S. economy numbers before the election? (After all, it was an unusual bump in military expenditures that made the Q3 numbers look as good as they did.)

Just asking…

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Europe’s robust financial-transactions tax

Felix Salmon
Jan 30, 2013 11:47 UTC

The details of Europe’s new financial transactions tax won’t be made public for a few weeks, but the FT’s Alex Barker has seen a draft, and it looks impressively robust. The tax is being implemented by 11 countries, including most importantly Germany and France, and it’s going to be levied at two levels: 0.1% on securities trades, and 0.01% on derivatives trades. It’s also going to be very difficult to dodge: any trader whose institutional headquarters is in one of the 11 countries will have to pay the tax, as will all transactions taking place in those countries, and all transactions involving securities issued in those countries.

The tax will have two main purposes. The first is to raise substantial tax revenues on the order of $45 billion per year; the second is to discourage financial speculation. I’m hopeful on the former, but less so on the latter.

As Robert Peston and Avinash Persaud pointed out back in 2011, financial transactions taxes work pretty well: even the UK, which is implacably opposed to the European tax and which won’t ever join such a scheme, levies a surprisingly large 0.5% tax whenever anybody — anywhere in the world — trades a UK stock. And yet, somehow, London remains the first choice for international companies looking for a place to list their shares.

The European tax, which is much smaller than UK stamp duty, will similarly have little effect on how and where financial markets operate. The “if you tax me, I’ll just move elsewhere” threat is a pretty empty one, in practice, especially if you have a carefully-drafted law which makes tax avoidance difficult, and if you’re talking about established financial institutions rather than individuals. Count me on the opposite side of Steve Slater: large banks won’t avoid this tax, because doing so would be both politically suicidal and practically incredibly complex. Especially in a world where tax laws can be changed quite quickly, if any obvious avoidance is noticed.

So I think that the financial transactions tax will actually be very good at raising money — possibly even good enough, over time, that the rest of the EU will come around to it. Maybe even London could decide to swap out its stamp duty and join a unified European system instead, especially if a less City-friendly government is elected in 2015. That’s one reason I like the idea of half the EU going ahead with this scheme while the other half stays out: it will provide a proof of concept to persuade the nay-sayers.

On the other hand, I doubt that speculators will find this tax particularly off-putting. Europe doesn’t suffer from the high-frequency trading that has overtaken the U.S. stock market, and these taxes are low enough that any remotely sensible financial transaction will remain sensible on a post-tax basis. It’s possible that total trading volume might decline a little bit in some markets, and that would be fine: no one thinks it’s too low at the moment, and in the derivatives markets especially, increase in volumes generally just translates into increased rents being paid to big sell-side banks. But I’m not someone who believes that speculators are causing a noticeable amount of harm in European markets: as far as they’re concerned, the financial transactions tax is likely to make very little difference to a group of people who are not much of a problem in the first place.

One of the themes in Davos this year was a series of EU politicians pushing pretty hard for a big EU-U.S. trade deal, while the U.S. seemed to feel much less urgency. The financial-transactions tax won’t help on that front: it will widen the gap even further with respect to the treatment of the crucial financial-services sector. Still, it’s good to see real leadership here from France and Germany. They’re going to implement a sensible tax, which will raise much-needed revenues at minimal societal cost. What’s more, if you pierce corporate veils to find out which individuals will end up paying the tax, it’s going to look a lot like a wealth tax, rather than an income tax. That’s good news, in a world where the wealthy tend to pay much lower taxes than those with high incomes.

So let’s hope that this tax gets introduced; that it works; and that the rest of the world, seeing the costs and the benefits, starts to follow suit and sign on too. The area covered by the initial 11 countries is big enough that the tax will work well at inception, but as more and more countries join the scheme, the tax will become increasingly efficient and effective. Maybe, eventually, it could even incorporate the U.S.


Thinking that this wouldn’t help the big banks is optimistic. Assuming the law would be changed to close such a loophole is just naive.

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Counterparties: Winner winner prison dinner

Jan 29, 2013 20:13 UTC

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Let’s say your job is buying and selling mortgage-backed securities in a market that is generally illiquid and difficult to price. How much truth do you owe your clients, who can’t rely on any sort of public exchange to determine just how much they’re being screwed?  To Jesse Litvak, the ex-Jefferies trader who’s just been charged with defrauding clients, the answer to that question would seem to be zero.

At least since the days of “Liar’s Poker”, the price of an illiquid fixed-income security has always been whatever you can sell it for. Litvak’s job was not so far from that of the Salomon bond traders of old: he would simultaneously buy and sell the same mortgage security, leaving Jefferies, per the complaint, with “minimal or no risk”.

Matt Levine describes Litvak’s thoughts on what he owed his clients: “‘Why should I tell my customers what I paid for these bonds?,’ he asked himself, like any used-car dealer would, and now he’s under arrest”. To Federal prosecutors, Litvak went too far by doing things like lying about the prices he was paying for securities, not to mention detailing nonexistent transactions with imaginary sellers:

winner winner chicken dinner…he is gonna sell em to me at 75-28 as I told him to not get cute and just sell the bonds so you can own them at 76….he said cool…..its 6.23mm orig….a’ight?

Of course, there was no seller, and Jeffries had paid a lot less for that particular security than Litvak told clients. This trade generated $150,000 of the roughly $2.7 million that Litvak improperly made for Jefferies. But misrepresenting the price of securities to clients, Peter Lattman writes, “might typically prompt the loss of a job or civil lawsuits”; it “rarely, if ever, rises to the level of a federal criminal prosecution”. As Zero Hedge writes, this is time-honored bond-trader behavior:

It wasn’t necessarily an easy job – it required an extensive rolodex, a keen ear for who held what securities in one’s given space, constant schmoozing, and manning the phones constantly. More, importantly, everyone knew how the game is played: everyone knew that the middlemen would usually skim a few basis points on the top or bottom of the bid-ask spread, in exchange for having the first call the next time a juicy security was being shopped around, or whenever one had to offload some debt in a hurry.

So why did the SEC and the Feds target Litvak? Lattman points to the “aggressive prosecutorial stance of the special inspector general for TARP,” Christy Romero. The government, which used TARP to help stabilize the mortgage securities market, was allegedly a victim of Litvak’s actions.

Alternatively, the Epicurean Dealmaker suggests, Litvak simply screwed the wrong people, including making Jefferies an extra $50,000 off George Soros and a measly $10,000 off Blackrock. — Ryan McCarthy

On to today’s links:

A block by block map of Detroit’s $444 million property tax mess – Atlantic Cities

Billionaire Whimsy
Scientology’s biggest donor is a newly-minted billionaire with a promising cancer drug – Bloomberg

Revolving Doors
The woman in charge of policing Wall Street made millions representing big banks – Andrew Ross Sorkin

EU Mess
Labor minister fails to reassure nation by declaring France a “totally bankrupt state” – Telegraph

What’s the point of bringing criminal charges against banks and not its execs or employees? – Felix
The US wants criminal charges against UBS in the LIBOR case – WSJ

Vintage Bess
You can’t just eat limitless quantities of Italian deli meats – and other life lessons from Charlie Gasparino – Dealbreaker

Citibank is pulling out all the stops to boost its performance (in surveys) – WSJ
Banks didn’t lend too little, says bank – American Banker

Right On
Google puts North Korea’s mass torture on the map – BuzzFeed

New Normal
How dishwashers, maids and taxi drivers are organizing without unions – American Prospect

Chipotle to express its burrito-based value system by selling organic hoodies – Bloomberg

A great roundup of the Senate’s new immigration reform plan – Ezra Klein and Evan Soltas

A Russian family was cut off from society for 40 years, unaware of WWII – Smithsonian

Home prices rise 5.5%, in yet another killer Case-Shiller report – S&P

Baby Steps
The surprising long path to a US monetary union – FT Alphaville


We just saw Breuer and Shapiro leave their post.
Obama has been pounded as being soft on fraud.
This is low hanging fruit.

But seriously, how does this compare to EPD mortgages, Abacus & MF Global? It doesn’t. And what’s the charge? Violating the SEC 5% rule?

Given how FINRA watered down it’s MBS trace reporting requirements, that the more serious frauds go scott free and that buyers always need to do their own due diligence before selling this is at most a slap on the wrist, a fine and being barred from the SEC, one has to wonder how politically motivated this is.

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When banks face criminal charges

Felix Salmon
Jan 29, 2013 11:25 UTC

Once again the question raises itself: what is the point of filing criminal charges against a bank — not a bank’s executives or employees, but the bank itself? The WSJ today says that the US wants RBS to plead guilty to such charges, in addition to paying the inevitable fine over Libor fixing. But only, it seems, insofar as such an admission wouldn’t have any visible practical consequences:

As part of UBS’s settlement last month, the Swiss bank’s Japanese unit pleaded guilty to wire fraud, a felony. Justice Department officials were heartened by the lack of a negative reaction in the markets and among regulators around the world to UBS’s guilty plea. Before the settlement deal, some officials had worried it could destabilize the bank. That has emboldened officials to pursue similar actions against banks like RBS.

Does “banks like RBS”, here, mean all of the banks which are going to settle Libor-rigging charges in the future? If so, it almost certainly includes US banks. And that in turn means that shareholders in such banks should be worried about potentially owning stock in a self-admitted criminal enterprise. On the other hand, maybe shareholders care only about the share price, and can take solace in the fact that Justice only seems to want to file criminal charges insofar as there’s a “lack of a negative reaction in the markets”.

The spectre everybody’s afraid of here is that of Arthur Andersen, which was prosecuted for obstruction of justice in the wake of the Enron scandal, went out of business as a result, and only later saw its conviction overturned by the Supreme Court. By that point it was too late: 25,000 jobs had been lost, and the accounting industry had become even more consolidated than it was before.

As a result, Justice seems to be treading very carefully here, prosecuting UBS — and, now, probably RBS as well — only with respect to activities in far-flung Asian outposts that no one cares much about. Think of it as the diametric opposite of the way that prosecutors went after Aaron Swartz: the US in this case is being minimally rather than maximally aggressive.

The problem is that this m.o. seems to violate a basic principle of justice — the principle that where there is a crime, there should be a punishment. Put the fines to one side: they will happen anyway, whether the bank admits to criminal activity or not. The criminal prosecution, in these cases, seems to be little more than a CYA move on the part of the administration, which can now have a slightly straighter face when saying that it’s being tough on the banks.

Still, maybe the markets should be more worried about such admissions than they’ve shown themselves to be until now. If a bank with a substantial US retail operation — JPMorgan Chase, say — admits to criminal misconduct, that doesn’t just open itself up to lawsuits from people who bought instruments linked to Libor, but also hands a whole new ammunition clip over to the opponents of big banks generally. Remember that most of the Dodd-Frank law still has yet to be written, including the details of the Volcker Rule; the worse the light the big banks are seen in, the tougher that regulators are going to allow themselves to get.

And then there’s the question of local prosecutors and regulators. The Justice Department might be very solicitous here, but that doesn’t mean that aggressive state attorneys general will follow suit. Once a bank has admitted criminal wrongdoing, its banking license in New York or any other state could surely be in jeopardy. And once a bank loses its banking license in New York, it’s basically dead in the water.

Justice, then, needs to ask itself what exactly it’s trying to achieve with these criminal admissions. In principle, I’m all in favor of holding criminal organizations to account for their actions. But only if doing so does more good than harm.


Felix Salmon appears to be in the short term thinker camp in that his ability to understand what underlies a successful society is limited. I know it is difficult to think beyond the expediency of the moment for those predisposed but adult action requires that you do not have ants in your pants driving your logic.

Believe it or not there is a role for justice and morality in the equation concerning a successful society (and that includes a successful economy). You rig justice and the economy of a society for short term goals and what you achieve is the disincentive of those who make that society work. That idea may be difficult for the current batch of thinkers (and powers that be) to comprehend but was not very difficult to those who founded the United States.

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Counterparties: Not so golden, still delicious

Ben Walsh
Jan 28, 2013 19:30 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.

Apple’s stock is down 23% in the last six months. Last week’s earnings report caused an overnight drop in shares from $514 to $461. Earnings growth is decreasing. Investor Jeff Gundlach thinks it’s a “broken company” where innovation has been reduced to “just changing the size of… products”. Fast Company explains “Why Apple is losing its aura” while the WSJ asks “Has Apple Lost its cool to Samsung?”

Not so fast. Legendary VC Michael Moritz, who first bought Apple equity in 1978, has stepped into the doomsaying to decry the lack of “any sense of perspective”. Quarterly revenues, he notes, grew 18%, and topped $50 billion for the first time. And while Apple does face stiff competition, it’s only because it is so successful:

Almost every company in the world suffers from acute Apple envy. Apple has thrown several mainline industries, including music, movies, television, publishing, cameras and 35mm film, into convulsions… It is difficult to think of a company of the past 50 years whose influence and ingenuity have been as profound or widespread.

John Abell voices the nagging concern that Apple just doesn’t tell shareholders enough about what it’s up to. That’s really nothing new: Steve Jobs was notoriously hostile to shareholders, and seemed to relish ignoring them. Tim Cook hasn’t changed tack.

It’s not just more information some Apple shareholders want — they’d like management to be fixated on the stock price. In practice, that seems to mean a monomaniacal preference for buybacks as far as they eye can see, rather than investments in product development or the company’s supply chain. But Apple’s view on this issue won’t change: Jobs ignored Warren Buffet’s advice to use cash to buy back stock.

The difference between a CEO obsessed with products and an investor obsessed with finance, is the difference between Apple and Berkshire Hathaway. In turn, that might help explain why, as Farhad Manjoo writes, “the market attitude toward Apple seems unmoored from its actual performance”. — Ben Walsh

On to today’s links:

The personal finance industry thinks women have a problem (and it’s not unequal pay) – Slate

Crisis Retro
What the Fed really missed: the declining financial health of consumers – Mike Konczal

Baby Steps
America’s ridiculous immigration system may be nearing semi-reform – NYT

How online retail was saved by shutting down the “shopping cart” patent – Ars Technica

SAC is in so much trouble it’s paying its employees more – Peter Lattman

IAmA Glencore Trader AMA – Reddit

Time Inc said to be laying off 700 people – All Things D

“The beard does not judge the one-percent” – A Continuous Lean

The gushing MSM headlines about the stock market are back – Sober Look


My few cents on AAPL:

#1 no way no how do they ever repatriate that foreign cash for anything like a 20% rate. Why on earth would they pay 20 billion in taxes to uncle Sam on iphones built and sold outside of America? Unless the laws change the foreign cash will stay where it lays.

#2 one off the wall idea I could see Apple wasting/investing some big money on would be to lock up their own spectrum. If I was running AAPL I would have bought Clearwire when it was at $2 and then used the spectrum exclusively to deliver paid iTunes content.

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You keep using that word. I do not think it means what you think it means.

Felix Salmon
Jan 28, 2013 10:04 UTC

This year’s Davos was all about tail risk — or, more to the point, the absence thereof. The ECB’s Mario Draghi said — more than once — that he had “removed the tail risk from the euro”. His colleague Ignazio Visco went almost as far, saying that only a few tail risks remain. The EU’s Olli Rehn talked about how there’s “no tail risk” any more. The IMF’s Zhu Min said that “In Europe, the tail risk has been moved off the table”, which was exactly the same language also used by Ray Dalio. Bank of America CEO Brian Moynihan said that “euro tail risk is now sorted”. The FT editorialized about the best policy response when “the tail risk of renewed financial chaos is reduced”. Even Nouriel Roubini declared that tail risks have declined in the past six months, although they haven’t gone away. And that was just the on-the-record comments: off the record, many more people, including at least one official US representative, were saying the same thing.

It was enough for both incoming Bank of England chief Mark Carney and UBS’s Alex Weber to start cracking jokes about how tail risks had been reduced on Wednesday and downright eliminated by Friday. As Stephanie Flanders says, Davos wouldn’t be Davos if people weren’t constantly talking about the need to avoid complacency — but for once, this year, “there seemed a genuine risk of it breaking out”.

There’s a worrying trend here, and it’s not complacency. Rather, it’s the use of the term “tail risk” to mean “priced-in and foreseeable euro crisis”. Last year, everybody was worried that Greece could end up leaving the euro, and those worries were reflected in European markets. This year, those worries have abated somewhat. But please, let’s not use the term “tail risk” to refer to such things.

We live in a fat-tailed world: everybody at Davos would probably agree on that. But here’s what none of them seem to understand: tail risks, by definition, can’t be measured. If you can look at a certain risk and determine that it has gone down, then it’s not a tail risk: it’s something else. Let’s say that last year there was a 25% chance that Greece would leave the euro: if something has a 25% chance of happening, it’s not a tail risk any more, it’s just a risk. If you’re planning a trip to the Grand Canyon, you might think about buying travel insurance to cover yourself in the event you are seriously injured. But when you’re right up at the edge of the canyon and the ground starts slipping beneath your feet, at that point you have to actually do something to avoid injury or death. The risk has gone from being theoretical to being real — and at that point it’s not a tail risk any more, it’s a real possibility with a scarily high probability.

The World Economic Forum spends many millions of dollars every year looking at risks both imminent and remote. It’s a useful exercise, and helps to remind us how complex the world is: with so many moving parts, it’s impossible for anybody to have much success as a predictor of the future. What’s not a useful exercise is to try to quantify the world’s risks, and to make determinations as to whether the tails are getting thinner.

And it’s certainly not a useful exercise, when markets have calmed down a little, to turn around and say that something as momentous as a fully-fledged euro crisis was only ever a “tail risk” to begin with. It wasn’t: it was much more imminent than that, and in order to avert it the EU had to venture far into the realm of policy actions which only a few months earlier would have been unthinkable. (Including effectively writing off a large amount of the money Greece owes the official sector.)

Tails are the realm of unknown unknowns. They can be positive, like the discovery of antibiotics, or they can be negative, like the uncovering of Bernie Madoff. In markets, they’re not even real-world events at all: they’re just any large move of say three standard deviations or more. Such moves happen almost every week, in some market somewhere, and they happen pretty much randomly. Measuring risks is good; seeing those risks diminish is pleasurable. But let’s not refer to measurable risks as “tail risks”. Because tail risks are always hidden, and unexpected.


Great article and great comments.

Posted by M.C.McBride | Report as abusive

Branding and anti-branding, Davos edition

Felix Salmon
Jan 28, 2013 09:10 UTC

Frank Tantillo has a good overview of the inescapable country-branding exercises that happen in Davos every year; this year Azerbaijan was rivaling India in the ubiquity stakes, while countries like Peru and Japan made do with events.

Countries in Davos behave much like corporations: they brand themselves, they throw parties, they maneuver to ensure that their high-level representatives appear on the most important panels. And while the highest-profile heads of state, like Angela Merkel, are at the very top of the Davos pecking order, the general mass of presidents and prime ministers (there were more than 50 heads of state in attendance) are clearly less important, here, than Davos stars like Larry Summers, Henry Kissinger, or even Nouriel Roubini. The question to ask yourself is: given the choice, who would the average global CEO or hedge-fund manager rather meet. And put like that, it’s easy to see how Danny Kahneman outranks the president of Guatemala.

As a result, countries and corporations alike (including Thomson Reuters) put a significant amount of time and money into trying to capture the attention of the assembled plutocrats. Those efforts range from big public ad campaigns (Azerbaijan) to small intimate dinners (Google), with lots of off-the-record schmoozing in between. If you’re a high-level journalist in Davos (Fareed Zakaria, say), you’ll be swamped with invitations to have an informal discussion with various presidents and prime ministers: while it’s commonplace to note how Davos is great at allowing CEOs to set up dozens of meetings with each other, it’s less well understood how Davos serves the same kind of speed-dating function for interactions between governments and the international press.

There’s always the risk, however, that a carefully-orchestrated branding strategy will backfire. For instance, the prize for the most obnoxious party in Davos — which was won by the Wine Forum in 2011 — was easily snaffled this year by Sean Parker and Ian Osborne, who spent some mind-boggling amount of money putting together a party which (I swear I’m not making this up) was billed as a “future of philanthropy nightcap”. (In Davos, for reasons I’ve never understood, any party which starts after dinner has to call itself a “nightcap”.)

Parker and Osborne, who decided to throw their party under the auspices of a semi-fictional special-purpose company called The Montagnard Group, flew in both John Legend and Mark Ronson for the event: the scuttlebutt was that Jay-Z turned them down. There wasn’t just an expensive sommelier with a very high-end wine list; they brought in someone else to do the same thing with whisky. They also transformed a local Davos nightclub, putting up walls, installing taxidermy, and getting half of Davos asking why on earth these guys thought it was a good idea to schlep a stuffed water buffalo up an Alp, especially one with green lasers shining out of its eyes. Generally the whole thing reeked of excess, which maybe explains why Lloyd Blankfein stayed for hours, and how the party was the hottest ticket in town, with normally-sensible CEOs all but begging for an invite.

The Montagnard party was particularly weird because it wasn’t promoting a company or country: it felt like a piece of obscenely expensive performance art, sending up the way in which conspicuous consumption gets rebounded as “philanthropy” in order to give it a veneer of sophistication. Or maybe the whole thing was just an elaborate joke, decipherable only to Parker, Osborne, and their co-host, Marc Benioff of Salesforce. Either way, it was exclusive, expensive, and excessive: it allowed the real Sean Parker to handily trump anything the Justin Timberlake character in The Social Network could have dreamed of.

Which brings me to Russia. The Russian Federation, like most countries at Davos, was engaged in both overt and covert branding. And while the overt branding was a huge success, the quieter schmoozing backfired massively.

The big Russian Federation party, interestingly enough, took place at exactly the same time as the Sean Parker party, and it was a triumph. Where Parker had a carefully-tended guest list, the Russian doors were wide open; where Parker had fine wines, the Russians had trays of vodka shots; where Parker’s party was dominated by men in suits, the Russians found a much happier crowd, determined to party, dressed down rather than up. The entertainment was Leningrad, a 14-piece gypsy-punk band (think Gogol Bordello, but better), and the venue was a huge white tent erected across from the train station, which helped to avoid the overheating problem endemic to popular Davos parties.

The event was as unapologetically Russian as the Olympic opening ceremonies were unapologetically British: rather than putting a tasteful national twist on a standard Swiss party, those of us who couldn’t speak Russian or decipher cyrillic were happily baffled by most of what was going on. (The bafflement chez Parker was rather different.) The vodka and Champagne were flowing freely, the crowd was pogoing madly, and the whole thing succeeded spectacularly in being that rarest of Davos events: a place where you could genuinely enjoy yourself and let your hair down, rather than eyeing name badges and mingling politely.

There was corporate sponsorship — Vadim Belyaev, the chairman of Otkritie Financial Corporation, joined the band gamely at the end of the evening — but the night really belonged to the revelers. This was the party where you found the TV-station technicians who had been freezing on top of the Conference Center all day; the drivers and waiters and musicians and other support staff whose job is to be as invisible as possible most of the time; generally, the 99% of Davos, rather than the 1% that you normally hear about. This year in particular, when the number of parties shrank and door policies tightened up across the board, it was fantastic to see a party where literally everybody in Davos was welcome.

The morning after its party, however, Russia ran straight into a PR nightmare stemming from a much more exclusive event. Prime minister Dmitry Medvedev was in town, and gave an off-the-record press briefing to some 20 international journalists. The ground rules were clearly designed so as to prevent any of Medvedev’s comments being made public, but when Medvedev said something which could easily be interpreted as a direct threat against Hermitage Capital’s Bill Browder, a number of the journalists in the meeting went immediately to Browder to tell him what the Russian prime minister was saying about him. And then Browder, who understandably cares more about his own personal safety than he does about the nuances of Chatham House attribution, immediately went on the record to Reuters, telling the world what he had heard.

In the space of less than 24 hours, then, Davos saw Russia at its best and at its worst: open and closed, free and fearsome, fun and deadly. On net, maybe the country would have been better off just buying a bunch of ads on the side of buses. But probably no one in Russia — least of all Dmitry Medvedev — much cares.

Russians know how to have a good time, and they also live in an incredibly violent state-dominated society. Neither of these things is exactly a secret, and no one’s looking to change anybody else’s mind on either front. Anybody doing business in Russia today is doing so with their eyes wide open. Let the rest of the world go to Davos to present itself in the best possible light. Russia will just continue being Russia — in good ways and in bad.


Not surprised to hear this take on Sean Parker’s party. I’d be more surprised if he’d done something classy and tasteful.

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