Felix Salmon

Counterparties: European bonus season just got a lot more boring

Ben Walsh
Feb 28, 2013 23:01 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.

For the financial sector, London, and the rest of Europe, just got a little less swinging. As a part of Basel III, the European Union is moving ahead with new rules that will limit bonuses to one year’s salary, or two years’ salary with shareholder approval. The rule will apply to employees at EU-based banks, regardless of where they’re located. It’ll apply to employees of foreign banks working in the EU, too.

London Mayor Boris Johnson isn’t happy: “Brussels cannot control the global market for banking talent”. He thinks the move is “possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman empire”. Europe’s bankers are also predictably unhappy. The WSJ quotes a bank executive who thinks the rules are “crazy” and a “disaster”.

The hyperventilators should probably take a deep breath. Base salaries will likely rise in response to the rules. Or, why not just do what John Carney and Lex suggest, and “increase the salary to the anticipated bonus, hold it in escrow until year’s end, and then subject it to a clawback for underperformance”.

Masa Serdarevic thinks the rule will affect star traders of the world, and particularly, where they’ll want to live. “Working in Zurich for UBS, say, suddenly becomes a whole lot more attractive than any bank in London.” She also says that big bonuses can serve a useful purpose:

It’s also worth thinking about why banks pay bonuses in the first place. It’s mainly because they want their staff costs to have a relatively small fixed component (base salaries) and a larger variable component (bonuses), meaning they can reward and retain individuals at their discretion. It’s sensible budgeting, not something they do because they like to throw money at their employees.

For now, there’s little for bankers to fret about: the regulations face numerous layers of scrutiny and likely revision before they take effect in January 2014. As the Epicurean Dealmaker tweeted, the sure-fire winners in this situation are compensation consultants, who have at least a year to figure the best way around the new rules. In fact, the FT reports that they’re already working on it. — Ben Walsh

On to today’s links:

Businessweek’s latest cover presents “minorities as greedy grotesqueries” - Ryan Chittum

Why Argentina will default this year – Felix

Interesting Failures
The “ownership society” ideal is way past its sell-by date - Mike Konczal

New Normal
Student debt has almost tripled in the last 8 years, average balance up 70% – Liberty Street Economics
Private student loan ABS is so hot right now – WSJ

Popular Myths
Neither the public nor the pundits understand the basics about America’s debt – Dan Drezner
A Nobel-winner on some of the more persistent debt myths – Robert Solow

Nice Try
Lehman is trying to blame its bankruptcy on JPMorgan’s London Whale trader – Reuters

Good Reads
“Brooklyn is a large place, larger than ‘Brooklyn’”: A great essay on 27 years in Brooklyn - David Wondrich

Ang Lee, uncertainty and endurance as the key to success – Jeff Lin

The Supreme Court wants the SEC to work a little faster – Dealbook
For approximately the 87th time, the Volcker Rule is being delayed - WSJ
Occupy the SEC is suing the Fed, SEC, CFTC, OCC, FDIC and Treasury over Volcker delays - Occupy the SEC

Life Is Not Fair
Blogger disappointed to discover that blogging has failed to influence Congress – Matt Yglesias

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



It would not do what you think. A new class of equity would be created with different dividend structures or some other allocation mechanism like capital accounts. Basically, it’s far too easy to find a different way of achieving the same goal, just don’t call it a bonus….

Posted by ckm5 | Report as abusive

Why Argentina will default in 2013

Felix Salmon
Feb 28, 2013 08:12 UTC

Some countries default on their performing debt because they no longer have the ability to pay it. Other countries default on their performing debt because they no longer have the willingness to pay it. Argentina has been in both situations: something of a serial defaulter, it defaulted on or restructured its obligations in 1828, 1890, 1982, 1989, 2001, and 2005.

And it’s going to default once again in 2013.

This time, however, is a little bit different. Argentina has both the willingness and the ability to pay its performing debt. It’s adamant, however, that it’s not going to pay $1.4 billion to Elliott Associates, a hedge fund which has been prosecuting a highly-aggressive litigation strategy against the country, based on the fact that it holds defaulted debt and refused to exchange that debt for performing bonds. Depending on where you sit, Argentina’s refusal to pay off Elliott is either noble or foolish. But after two and a half hours of highly contentious oral testimony in federal appeals court today, it’s pretty clear that the US courts aren’t going to allow Argentina to stay current on its performing debt — not unless the country also writes a ten-figure check to Elliott. Which means that we’re headed straight for default, with almost no realistic chance of avoiding it.

You didn’t really need me to tell you that: one look at Argentina’s 12-month credit default swap (current spread: 5,266bp) will tell you everything you need to know. But this is a pretty big deal all the same — not least because the Second Circuit seems certain to hand down a judgment which is pretty bad law.

That’s nothing new: in its first decision, the Second Circuit happily ignored lots of settled law about sovereign immunity, among other things, and was downright wrong about pari passu. This time around, the law preventing the Second Circuit from upholding the lower court’s orders is much weaker, and mainly comprises something called Rule 65(d)(2)(C), which is even more obscure than pari passu. Essentially, the Second Circuit has proved itself more than capable of taking a steamroller to formidable legal obstacles; this one should present no real problems at all, by comparison.

The questioning was led, aggressively, by Judge Reena Raggi, who barely let a sentence get finished and who made it clear from the very beginning that she is if anything even more fed up with Argentina’s antics than the district court judge, Thomas Griesa, whose verdict was being appealed. The fact that Argentina’s vice president and economy minister were sitting right in front of her didn’t faze her for one second: this was her courtroom, she was in charge, and it took her no time at all to accuse Argentina of being “contumacious”. (Which is fair enough, even Argentina’s counsel didn’t really disagree on that front.) In Raggi’s eyes, clearly, there’s nothing worse than a contumacious defendant: it doesn’t matter how many footnotes you have or how much precedent you cite, if you’re thumbing your nose at her she’ll find against you.

What’s more, Raggi really doesn’t like being blackmailed. Both Argentina and David Boies, acting on behalf of the bondholders who are currently being paid by Argentina, made the point multiple times that if Griesa’s order was upheld, the certain result would be another Argentine default, a whole new set of cases on Griesa’s docket, and, essentially, a loss for everybody, including Elliott Associates, which still wouldn’t actually get paid. Raggi was unimpressed: “Is that really this court’s concern?” she asked Boies, saying that it was not her job to wonder about “whatever the market might do” as a result of her ruling.

Boies, in truth, was unimpressive: he never seemed entirely on top of his brief, and there was one excruciating episode where he had to go scurrying off to ask Bank of New York’s lawyer to find out the answer to a question which everybody else in the courtroom knew the answer to. Argentina’s tactic today was to spend less time arguing its own case, and to outsource the job of fighting Elliott to Bank of New York and to David Boies, in the hope that they would be more sympathetic and less contumacious. But Raggi made mincemeat both of BoNY’s lawyer — telling him in as many words at one point that he was giving very bad advice to his client — and of Boies, who was clearly out of his depth. Remarked one lawyer, observing the proceedings: “If you’re going to bring in a hired gun, at least make sure it’s fully loaded.”

Argentina’s own lawyer, Jonathan Blackman, started off rockily yet actually finished quite strongly, warning of the practical consequences of what everybody in the courtroom could quite clearly see coming at that point. “You’re making it worse!” he said. “Do no harm!” It was an argument with no legal weight, and it won’t change the final result. But he did give Argentina the use of a “don’t say we didn’t warn you” card at any time the US or anybody else criticizes it for defaulting yet again.

But the clear winner was Ted Olson, representing Elliott, who stayed calm and masterful throughout. In contrast to Boies, he knew exactly what he was talking about, was sure of the merits of his own case, and didn’t feel the need to appeal to Learned Hand precedent every few minutes. In front of more impartial judges, he might have had a harder time of it. But oral arguments aren’t the time or the place for jurisprudential nit-picking: that’s what detailed briefs are for. Rather, Olson’s job was to reassure the three appeals-court judges that they should feel perfectly comfortable upholding their colleague’s decision and standing up for legal rights enshrined in New York-law documentation. And he did that extremely well.

Or maybe the real winner was pretty much everybody in the courtroom, since the one thing that seems certain is that the amount of litigation and dealmaking surrounding Argentine sovereign debt — which has already been enormous — is going to become positively stratospheric. It’s hard to look too far into the future, here, but one likely scenario is that the appeals court will uphold Griesa’s decision at some point in April or May, forcing a big default in June. At that point, Argentina will probably launch an exchange offer under Argentine law, under which anybody holding currently-performing bonds would be able to swap them into bonds with substantially identical terms, just payable in Buenos Aires rather than New York. Given that Argentine-law bonds have been trading at tighter spreads then US-law bonds for some months now, one can assume that nearly all bondholders would jump at the opportunity to keep on getting their coupons.

Argentina might even take the opportunity to give its holdouts a third bite at the cherry, offering them some kind of option to take a haircut and get performing Argentine-law bonds in exchange for their defaulted debt. But many holdouts would still remain, and will surely continue to pester New York courts for the foreseeable future.

All of which helps explain why Argentina’s credit default swaps are trading so much wider than Argentina’s bonds. The bonds will probably default, but bondholders are unlikely to suffer huge losses if they just have a bit of patience for a couple of months — eventually, Argentina will surely give them the opportunity to swap their debt into a slightly different instrument, one which is less susceptible to New York jurists. That said, the credit default swaps will be triggered, and Argentina will probably drop out of key emerging-market indices like JP Morgan’s EMBI.

This is emphatically not what Argentina hoped for when it entered into its exchange offers in 2005 and 2010. Back then, the idea was that it could cure its default, mop up its holdouts somehow, or at least render them irrelevant, and ultimately make it back into the good graces of the international capital markets. Instead, Argentina remains a capital-markets pariah, it can’t really do business anywhere in the world without worrying that Elliott or someone like it is going to attach its property, and pretty soon it will probably have to give up on issuing any foreign debt at all, retreating instead to its own small South American world.

Argentina is a unique and special case on many levels: the failure of its 2005 and 2010 debt restructurings does not mean that debt restructurings in general don’t work, or that we need to resuscitate the idea of a sovereign bankruptcy regime. Still, the precedent being set here is not a happy one — not for international bondholders, probably not even for Elliott Associates, which is still a long way from getting paid, and definitely not for Argentina. This is looking very much like one of those court cases which absolutely everybody ends up losing.

Update: There is one way that Argentina can prevent a default in 2013: by prepaying all its 2013 coupons now, before the ruling comes down. Don’t rule it out: in this case, anything is possible.


I’ve tried to get my head around this a few times before with little success but I’m too interested to just give up:

Can anyone explain how Argentina can issue bonds under New York law denominated in a foreign currency (USD$) and then try to assert their full sovereignty rights?

To me when you issue bonds outside of your own legal system and your own currency those bonds stop being truly sovereign and become something else. Thanks to anyone who can help!

Posted by y2kurtus | Report as abusive

Counterparties: Sequestration nation

Feb 27, 2013 23:20 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.

The sequester, those $85 billion in automatic, immediate spending cuts scheduled to go into effect on Friday, wasn’t even supposed to happen.

Instead, the sequester was included in the 2011 Budget Control Act and was only supposed to kick in if both parties failed to make a deal to cut US debt. The cuts were intended to be so “arbitrary and widespread that they would be unpalatable to both sides”. Months later, we’re left with no debt deal, a package of cuts nobody likes, and our nation’s top lawmakers instead debating more pressing matters like who needs to “get off their ass”.

The economic consequences of the sequester are the only part of this process that are relatively straightforward. The package of cuts could cut as much as 1.25% from GDP this year, Annie Lowrey reports. The Bipartisan Policy Center says this could cost America 1 million jobs over the next two years. Worse, Ben Bernanke told Congress yesterday that the cuts will hurt growth so much, they could actually make the deficit bigger rather than smaller.

The White House, for its part, has been on a campaign to detail how these discretionary spending cuts will hurt first responders, the military, and air traffic controllers. (It’ll also hurt the zoo.) The sequester is already causing immigration officials to release detained immigrants. But Phil Gramm reminds us that the US went through a similar drama in 1986: “The nation survived then. It will now.”

Binyamin Appelbaum has a tremendous piece today that places the sequester in historical context. The Federal government is shrinking at “a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war”. Government spending normally falls during recoveries, he notes:

But this time is different. Growth has remained sluggish and millions remain unemployed even as the federal government, riven by partisan differences, has largely turned its attention to deficit reduction.

The sequester, as a Goldman Sachs analyst told Appelbaum, isn’t like other periods of government shrinkage, when cuts mostly fell on the military. These cuts are focused on discretionary spending — and don’t address the biggest drivers of our debt. It’s as if Congress is trying to do its job poorly: “It is cutting some of the best spending that government does,” economist Tyler Cowen told Appelbaum. — Ryan McCarthy

On to today’s links:

JP Morgan hires JP Morgan to sell the LA Times – Matthew DeBord
Jamie Dimon would like you to know why he’s richer than Mike Mayo – YouTube

Make it Rain
Twitter could be a Google-like “money-gusher” — and may actually be worth $10 billion – Dennis Berman

Right On
Dozens of big companies will sign onto a Supreme Court brief supporting gay marriage – Fortune

The Fed
Bernanke has the second-worst unemployment record of any post-war Fed – Floyd Norris

Tens of millions are suffering unnecessarily because of austerity – Martin Wolf

Good Luck With That
To help itself and its customers, Wal-Mart should embrace socialism – Gawker

Fannie and Freddie’s regulator killed a sensible reform and cost taxpayers hundreds of millions – Jeff Horwitz
It’s time to abolish the FHFA – Felix

“Children are dangerous disease vectors, indiscernible from other vermin” – Ken Layne

The SEC is investigating Michael Milken – Fortune

It’s really hard to tell the difference between investing and speculation – CFA Institute
Morgan Stanley, Russian-mall magnate – Globe St

New Jersey just legalized online gambling – Reuters

The annotated wisdom of Louis CK – Splitsider

Financial Arcana
Sovereign CDS volumes are down nearly 50% since an EU-wide ban – IFRE

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

The no-brainer immigrant-entrepreneur visa

Felix Salmon
Feb 27, 2013 16:33 UTC

Many thanks to the Kauffman foundation for crunching the numbers on a key part of Jerry Moran’s clumsily-named Startup Act 3.0 — the new visa for immigrant entrepreneurs. I don’t have an opinion on the rest of the bill, but it does have two sections which are something of a no-brainer when it comes to immigration reform. One is the immigrant-entrepreneur visa; the second is the idea of giving green cards to up to 50,000 foreign students who graduate from an American university with an advanced degree in science, technology, engineering, or mathematics — so long as they remain in that field for five consecutive years.

The immigrant-entrepreneur visa is pretty simple. You create a pool of 75,000 such things, available to anybody who’s here already on an H1-B or F-1 visa. When those people switch from their old visa to their new one, they have to start a new company; employ at least two full-time, non-family member employees “at a rate comparable to the median income of employees in the region”, and invest or raise at least $100,000. After that, they have to continue adding employees at a rate of one per year, so that after three years, there must be at least five employees. At the end of three years, you graduate to a green card, and with it the standard path to citizenship.

The visa addresses the main problem which Ross Eisenbrey has with H1-B visas: the fact that people on such visas are “more or less indentured, tied to their job and whatever wage the employer decides to give them”. The new visa would create an employer exit strategy for H1-Bs, allowing workers to leave companies which pay too little or offer too few opportunities, and instead strike out on their own.

And of course — by definition — it would create jobs. The Kauffman foundation’s math is solid, here: they conservatively estimate job creation at somewhere between 500,000 and 1.6 million new jobs after ten years, and possibly substantially more. (Those estimates don’t include jobs created by the new firms after they’ve left the program, for instance.)

I also like the fact that the new immigrants created by this program would go overwhelmingly to the parts of America where immigration is wanted and embraced: big cities and research hubs. This plan is full of positive externalities: it improves tax revenues, from all the new employment and consumption; it improves America’s share of global innovation, and of course it helps to position America once again as the land of opportunity.

The Kauffman foundation is understandably worried that the visa would unfairly punish failure in an inherently risky world, but we’re living in a world of pivots, these days, where a gay social network can become a discount shopping site — and so long as the immigration people are OK with pivoting business plans, I think the failure problem will be manageable.

Most fundamentally, however, this visa is a great idea just because without it, the incentives are all wrong. As Stuart Anderson demonstrates, “in a practical sense, it may be easier to stay in the United States illegally and start a business than to start a business and gain legal temporary status and permanent residence (green card) as the owner of that business”. If we want to reduce illegal immigration, we obviously have to make it less attractive than legal immigration: as Jeb Bush and Clint Bolnick point out, you can only realistically ask illegal immigrants to “return to their native countries and wait in line like everyone else” insofar as there is, actually, a line to wait in. Right now, there isn’t one.

The only real question, when it comes to this visa, is how it’s going to get signed into law. The proponents of immigration reform tend to fall into one of two groups: US employers, on the one hand, who are looking to increase the size and/or quality of the pool of potential employees they’re choosing from; and illegal immigrants, on the other hand, along with their families and friends, who want to stop living in the shadows. Neither group has much incentive to support an immigrant-entrepreneur visa. But let’s hope we manage to get one somehow, anyway.


Odd. My prior comments were deleted.

Anyway, @Realist50, while not quite stated that way I believe the median wage is for median wage within that particular field/job. It is a semi-ineffective way of preventing wages from being depressed.

The problem with the startup visa is that there’s nothing preventing it from just offshoring more jobs. I’m guessing many domestic companies are already considering programs to help these fledgling companies raise the money.

And the auto-green card is little more than a slush fund to open up the visa cap–only it also automatically brings in the additional workers permanantly.

Posted by John80224 | Report as abusive

More convenience, less privacy

Felix Salmon
Feb 27, 2013 03:57 UTC

Restaurants are the natural home of impulse purchases. Would you like a third bottle of that wine? Would you like to see the dessert menu? What the hell, why not. All you need to do is say the word, and it all just appears, fresh and delectable for your consumption, before you’ve so much as paid a penny. Eventually, of course, the bill comes — essentially, it’s an invoice listing everything that you’ve already consumed. Then you pay that invoice, and leave.

This is a very sensible way for restaurants to operate. They don’t all work that way: at fast-food joints, for instance, or coffee shops, you tend to pay for what you’re consuming before you consume it. At that point, if you want more, you have to pay again. Which is just one reason why you rarely see people doing that. But generally, the extra amount that people order before the bill arrives more than makes up for the fact that some tiny percentage of them might try to dine-and-dash. Paying is never very pleasant, and if you force people to do it before they’re get what they want, that’s going to reduce both the number of people who buy things and the number of things that they buy.

When we order food in a restaurant, we know that we’re going to be paying for it, literally, in the future — but thanks in part to hyperbolic discounting, even pushing the moment of truth back half an hour or so makes us more prone to running up a tab right now. Similarly, we spend more on credit cards than we do on debit cards: it’s always easier to spend money in the future than it is to spend money in the present.

Online merchants, especially ones who have a lot of mobile shoppers, face a similar problem to restaurants. They want to encourage impulse purchases, but it’s hard to make an impulse purchase when you’re laboriously typing in your name and address and credit card number. The ideal solution would be for would-be purchasers to be able to just press a button, and presto, the item is ordered: the buyer can worry about exactly how to pay for it tomorrow.

That’s the promise behind Klarna, in Europe, and Affirm, which launched today. You click a button, and the item is ordered and on its way to you; the merchant is actually paid by Klarna or Affirm, and not by the purchaser. It then becomes the job of the intermediary — Klarna, or Affirm — to invoice the buyer and chase down the payment, long after the actual purchase has been made.

The two companies work on slightly different models. Klarna uses credit: it’s essentially lending money to the purchaser, and charging interest. Affirm, by contrast, charges the merchant, rather than the customer. Merchants already pay an interchange fee so that they can accept credit cards as payment; paying a similar fee to Affirm will surely be worth it, if they can convert a greater percentage of shopping carts into actual purchases. Also, Affirm seems to be a lot more mobile-native than Klarna.

At heart, however, the two shops are selling much the same product: a way of making online shopping as painless as possible, with payment pushed off until tomorrow. It’s a pretty good idea. But what’s interesting to me is the way that Affirm founder Max Levchin is touting Affirm’s know-your-customer algorithms: the site will identify who you are using Facebook, pull in lots of other data including your Zip code and your mobile device ID, and use all of that information to predict how likely you are to pay the bill once you receive it.

Levchin’s a big fan of such predictive usage of data:

At PayPal, where I was the CTO, we succeeded because we gained deep understanding of the immense quantities of behavioral data that we captured in processing millions of transactions per day. We learned so much about our customers, that we could predict their intentions, and prevent vast majority of intentional fraud.

This is clever, but it can also be a weakness. The reason why so many fintech startups are aiming at PayPal is that people don’t like PayPal; and the one of the main reasons that people don’t like PayPal is precisely its sophisticated fraud-detection algorithms, which tend to throw up a lot of very annoying false positives.

Obviously, Affirm needs to know who you are, and where to find you, so that it can invoice you for the stuff that you’ve bought online. And if you do end up being rejected when you try paying with the Affirm button, then the worst-case scenario is that you’re just back to the status quo ante, forced to pay with a credit card or similar. Still, people don’t like being instantly profiled as untrustworthy; the problem, of course, is that it’s precisely the untrustworthy people with no intention of paying who are likely to be flocking to Affirm in an attempt to order free stuff.

Affirm is trying to make buying stuff on your phone as easy as two taps, without being sunk by massive coordinated fraud. If it works, merchants will surely love it — and won’t much care about the fees it charges. Also, if it works, it will probably end up being bought by Facebook. Which would only exacerbate the worries that people already have about multi-billion-dollar corporations monetizing their personal data. Buying stuff online might become a lot easier. But there’s bound to be a privacy cost, somewhere.


“But there’s bound to be a privacy cost, somewhere.”

And now you worry about this? You seem to be all for convenience and electronic (easily traceable) payment when it’s to the benefit of the likes of BofA. You poo-poo the use of cash. If you use any form of electronic payment, some piece of that ends up in a database, held by the bank, or the card servicers, or the store you are shopping in, databases that get used for marketing purposes. How is this different?

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Counterparties: Bigger slices, bigger pie

Ben Walsh
Feb 26, 2013 23:10 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.

Right now is a lucrative time to be a banker. Profits at US banks rose almost 20% in 2012, to a post financial-crisis high of $141.3 billion*. The securities industry, while still unable to match its record-setting 2009 profits, is also doing well, earning $23.9 billion last year, up from $7.7 billion in 2011.

Despite America’s persistently high unemployment and tepid growth, its financial employees are doing well. New York State’s Comptroller Thomas DiNapoli, in his annual report on the state’s financial industry, reports that securities firms increased cash bonuses 8% to $20 billion in this bonus cycle. As the WSJ’s Brett Philbin notes, that’s down 42% from the lofty levels of 2006 — but it still comes to more than $122,000 per banker. What’s more, the comptroller’s annual estimate is conservative: it fails to capture many types of deferred pay. For instance, $6.3 million of Citigroup CEO Michael Corbat’s $11.5 million 2012 pay is deferred.

Not only have America’s bankers had a good year, they’ve had an excellent two decades. As the Atlantic Wire’s Philip Bump points out, the “last time bankers took home bonuses that were less than the median household income was 1991″.

All is only well, as Susanne Craig points out, if you’re still employed. The financial industry continues to cut jobs: Goldman Sachs will go slightly beyond its annual routine of firing the bottom 5% of its workforce, and JP Morgan announced today that it will cut 19,000 jobs, primarily in its mortgage arm and its retail Chase branches. Those employees’ jobs and pay levels tend to be more Duluth than Darien. — Ben Walsh

*UPDATE: I initially wrote that total US bank profits were for 2012 were $22.9 billion. That number is the increase over 2011, not total profits for 2012, which was the much larger $141.3 billion.

On to today’s links:

“Shareholder democracy” basically now just a way for billionaires to sue each other – Andrew Ross Sorkin

Home prices rose 7.3% last year, per Case-Shiller – S&P

Low rates and longer life spans are killing corporate pensions – WSJ

How to (maybe) end Too Big to Fail – Mark Thoma

EU Mess
Italy’s election in one headline: “The Winner is Ingovernability” – Reuters
“This is the way the euro ends: not with the banks but with bunga-bunga” – Paul Krugman
The ECB should pledge not to do anything stupid – Tim Duy

Nate Silver analyzes your failing relationship – McSweeney’s
Inside the making of Pulp Fiction – Vanity Fair

New Normal
Budget cuts are already forcing the government to release detained immigrants – Suzy Khimm

How to fix the financial media: forget trading and cover investing – Josh Brown
Thom Yorke on content: it’s “just a filling of time and space with stuff, emotion, so you can sell it” – Guardian

“Roman Pontiff emeritus Bendict XVI” – Reuters

The Fed
“A slower recovery would lead to less actual deficit reduction” – Ben Bernanke

Bad Metaphors
Poker is America because it involves money and luck and diversity and stuff – Charles Murray

Big Qustions
How long would it take to run out of original tweets? – What If

It’s time to abolish the FHFA

Felix Salmon
Feb 26, 2013 17:31 UTC

Remember the force-placed insurance scandal, which first came to light back in 2010? Well, despite being addressed in Dodd-Frank, the problem is still there: loan servicers are buying massively overpriced home insurance on behalf of homeowners, and getting enormous kickbacks from the insurers — if they don’t own the insurers themselves. The victims, here, are usually the investors who own the mortgages in question — which means that the biggest victims of all are Fannie Mae and Freddie Mac.

Fannie alone has seen its hazard insurance costs rise from around $25 million a year before the financial crisis to $631 million in 2012. That’s real money, and so Fannie came up with a plan to save hundreds of millions of dollars. Rather than paying through the nose for the most expensive insurance the servicers could find, Fannie decided to buy the insurance itself.

Fannie ran this idea past its regulator, FHFA, on February 17, 2012, reports Jeff Horwitz in another one of his fantastic articles on this issue today. Back then, the FHFA had no objections. So Fannie put out an RFP, asking 12 insurers for their ideas. The results can be seen here: the winner was a proposal from Overby-Seawell Company, which proposed a system anybody could join.

OSC excelled at program design, Fannie concluded. It had also pulled off a coup by partnering with Zurich Insurance, a Swiss reinsurer with a $400 billion balance sheet, a superior A+ rating from insurance rating company AM Best and historical experience in the force-placed market.

Zurich stood ready to take on all of Fannie’s business if necessary, but under OSC’s model any qualified insurer could take a piece of the GSE’s business by joining a consortium of carriers willing to divide Fannie’s risk. Among the proposal’s attractions were “market driven pricing,” and “one entity fully accountable to Fannie Mae and servicers,” Fannie documents state.

Fannie put thought into preventing excessive market disruption as well, the documents show. Incumbent insurers willing to match Zurich’s prices would be permitted to retain existing business. If they didn’t, banks could still hire them to administer force-placed programs. Insurers were also welcome to join the Zurich consortium.

Fannie showed OSC’s proposal to the FHFA on May 9, and again faced no objections. The “final project recommendations” were then run by the regulator on September 28, as well as on follow-up calls on October 12 and October 22. Everything was in place: the only thing left was formal FHFA approval.

Which never arrived.

Instead, faced with lobbying from the American Bankers Association and others, the FHFA vetoed the whole plan on February 8; once the news was made public, shares in the largest force-placed insurer, Assurant, immediately surged. At this point, Fannie’s plan seems to be definitively dead — replaced with a group of committees whose objective isn’t obvious and which have every incentive to drag things out.

The result is that Fannie has seen at least $150 million of savings evaporate — and homeowners are going to wind up overpaying even more, for insurance their servicers have chosen for them.

So, what does the FHFA think it’s playing at, here? It’s not exactly being forthcoming on the subject: a spokeswoman said only that “FHFA will work with Fannie Mae, Freddie Mac and key stakeholders… to address issues associated with force placed insurance,” although the FHFA’s Meg Burns has said that the regulator has no timeframe and no particular idea what approach it’s going to take on these issues.

I’ve heard of regulators being captured by the organizations they’re supposed to be regulating — that happens all too frequently. But the situation at the FHFA seems to be even worse: it looks as though it has been captured by the banks which are extracting rents from the regulated organizations.

Indeed, it’s hard to think of a single good reason why the FHFA should exist at all. By all means regulate Fannie and Freddie — but give that job to the same regulators who are in charge of overseeing all the other major financial institutions in the country. The FHFA has been useless and obstructive pretty much from day one, and this latest decision only serves to underscore how counterproductive it’s being. If the Obama administration can’t get rid of its head, Ed DeMarco, maybe it should just abolish the entire thing.


Replace Ed Demarco already !!!!

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How to get people excited about education

Felix Salmon
Feb 26, 2013 01:10 UTC

Following a recommendation from Bond Girl on Twitter, I spent a 95-minute chunk of Saturday night on YouTube, watching the first of five Leonard Susskind lectures on cosmology and very much looking forward to the rest. By coincidence, it’s targeted pretty much at exactly my level: you need a decent grounding in Newtonian mechanics and basic calculus, but nothing too sophisticated.

It turns out there are a lot of people like Bond Girl and me out there: a slightly different version of the same lecture already has well over 200,000 views on YouTube. Give people the opportunity to learn interesting material by watching lectures by the best professors in the world, and it turns out they’ll do just that. This is fantastic for the Stanford brand: it gets it out into the world in the best possible way, and will surely, at the margin, drive up demand in terms of the number of people wanting to attend the university. And it’s also fantastic for the hundreds of thousands of people who are learning new and fascinating things by watching these lectures.

The free YouTube content can be considered to be an extra column on the far left side of this chart, which Barry Nolan put together after watching a Fred Wilson video:


YouTube is even more democratic than MOOCs: there’s basically no structure at all, you can drop in and drop out as you please, and the yield is effectively zero, since no one ever “graduates” with any kind of credential from watching videos online. It’s 100% education, 0% credentialing.

This is an important point: even if 99% of the people who enroll in MOOCs never graduate, that doesn’t mean they never learned anything along the way. What you get when you move from left to right, in this chart, is an increase in structure: some kind of organized, disciplined way of getting a group of people to basically experience the same thing at the same time. It’s not so much that the content gets better (although it might); it’s more that the formal architecture surrounding the content becomes increasingly elaborate and expensive.

This phenomenon is not confined to education, of course. Think about the Metropolitan Opera. There’s the real deal, on the far right, where you pay hundreds of dollars for a ticket, sit in a darkened hall with a few thousand other opera-goers, and experience a full-on live performance. Then, one step over to the left, you have the Live in HD performances — you spend a couple of dozen dollars, sit in a darkened cinema with many others, and experience the performance on screen, over an excellent sound system. It’s not exactly the same experience, of course, but in some ways it’s better, especially when compared to the view from the cheaper seats at the Met. Take another step to the left, and you have the storied Metropolitan Opera radio broadcasts — they’re still live, but you lose the visuals, and the physical architecture of the opera house or cinema.

If you’re willing to break the operas up into tiny chunks, you can head over to the Met’s YouTube channel, which has over 1.5 million views already, and allows people to dip in and out at their pleasure — just like they can fire up a DVD they’ve bought or rented, watching it at home. (Netflix, sadly, doesn’t have a lot of opera available for streaming yet, although it does have Zeffirelli’s much-disliked Otello.)

Fred Wilson’s advice to Wharton, then, is basically to be more like the Met: take what you do, and put it out there with varying degrees of structure and architecture, at various price points from $0 to $133,600. The more discoverable you are, the richer your brand will become — and, just like TED discovered when it started putting its talks online for free, the more you give such things away, the more demand there is for the very expensive live product.

In education, the worry isn’t really about the future of schools like Stanford and Wharton, but rather about the future of smaller universities: could their full-price offerings be pushed out of the market by the cheaper versions from elite colleges? It’s possible, but it hasn’t happened yet, and it might not happen at all. After all, my intuition is that people are more likely to want to go see a performance at their local opera house after seeing a Live in HD performance from the Met. And the more Leonard Susskind lectures you watch online, the more you might want to take a proper course at your local college.

It seems to me that the rise of what you might call these “diffusion lines” is the rise of a brand-new marketing platform for the asset class as a whole, be it education or opera or anything else. Up until now, it’s been hard to get many people interested in opera, because the barriers are so high, and because most of us need a bit of structure in order to be able to sit through it and appreciate it. (I love going to see live opera, for instance, but never listen to it on the stereo at home, because I’ll end up getting distracted almost immediately.) Similarly, the arguments for going to college tend to center on the value of the credential, rather than the inherent value of the education itself. Once we bring first-rate educational experiences to everybody, then the proportion of those people who want to go to college can only go up. And that, in turn, will be great for everybody, and for the economy as a whole.


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Counterparties: Italy’s protest vote

Feb 25, 2013 23:44 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.

The votes in the Italian election are in — and it’s not likely that Italy will be able to form a government.

The FT writes that Italy is facing a second election, after voters delivered a “resounding rebuff to austerity policies.” Fabrizio Goria, who’s been tweeting up a storm throughout the election, put it this way: “So, Italians said FU to Merkel, isn’t it?” Joe Weisenthal thinks Monti’s demise is emblematic of Italy’s turn against “elite Europe”.

This has been an election which featured an ex-prime minister who’s about to face trial for allegedly having sex with an underage night-club dancer and who was sentenced to four years in prison for tax evasion; a comedian running on an “antisystem” message; and Mario Monti, the country’s current prime minister, whose campaign a rival compared to a coma, and whose alliance is set to finish in fourth place.

Polls showed Silvio Berlusconi’s center-right party leading in the Senate vote over Pier Luigi Bersani’s center-left coalition. (Bersani’s party was ahead in the house). Comedian-turned-politico Beppe Grillo, beloved by Italy’s 40-somethings, was expected to win 64 seats in the Senate — the largest vote haul of any individual party. The Bersani and Berlusconi coalitions, by contrast, will both get only 116 or so seats each — nowhere near the 158 seats needed for a majority. Because a government needs to have a majority in both houses to pass laws, the split Senate vote could make the country ungovernable and lead to another election.

If you’re confused already, Reuters has a quick explainer on how the Italian election works. In short, it’s just as dysfunctional as we saw in Greece last summer.

Markets, not surprisingly, hate the whole “ungovernable” thing. Nicholas Spiro of Spiro Sovereign Strategy warned the FT of the consequences of a Berlusconi win: “financial markets are facing the worst of both worlds in Italy: a full-blown political crisis in the eurozone’s third-largest economy and a severe setback for the liberal economic agenda championed by Mr. Monti.”

Late last year, Monti said that his economic agenda may have saved the Eurozone. But his $43 billion austerity project, which included budget cuts, higher taxes, and raising the retirement age, certainly seems to have cost his party the election. Paul Krugman, probably austerity’s most prominent critic, agrees that Monti had placated the debt markets. But unless austerity is rolled back, he writes, Italy’s populist turn will be just a ”foretaste of the dangerous radicalization to come” in Europe. — Ryan McCarthy

On to today’s links:

What the sequester will do: Furloughs, layoffs & benefit cuts for nearly two million long-term unemployed – NYT

America may now have a housing shortage – Sober Look

Crisis Retro
Saying CDOs “could be structured by cows and we would rate it” apparently won’t get you fired at S&P – WSJ

“You always see a lot of M&A activity when the market is overvalued” – James Stewart

Massively subsidized banks are tired of the handouts minimally subsidized credit unions are getting – American Bankers Association

EU Mess
The eurozone never followed its own rules in the past and will break them in the future – Quartz

Healthcare, shame and why “our problem is not a matter of shitty policy arrangements” – Steve Waldman

Fat, sterile, and depressed: the effects of increasing light pollution – Mother Jones

For Sale
The Japanese government is selling part of its stake in the world’s third largest tobacco company – Dealbook

Inside a NYC brokerage firm that ex-employees describe as a Red Bull-fueled boiler room – Bloomberg
Banks are dumping their crisis-era CDO books, and hedge funds are buying – IFRE
The top 50 companies that hedge funds are shorting – Business Insider

British court bans the use of Bayesian probability – Understanding Uncertainty

Facebook is a bad Tupperware party – Douglas Rushkoff

“People who don’t inhale news simply don’t notice bylines” – Kevin Drum

Totally Unsurprising
Dave Eggers thinks we need more handmade things – FT


Well, there’s the small matter of the €100 million post electoral “expenses reimbursement” Beppe Grillo’s party are eligible for but have refused to take – and then the 15 MPs in Sicily who instead of taking the standard salary of €10,700 a month are taking only €2,500 a month, thereby saving over €7 million between them over the course of a five year legislature.

With a debt of more than 120% of GDP why aren’t the politicians from the other parties making similar sacrifices? They get paid twice as much as French and British legislators, and four times as much as Spanish ones – why? OK, if you compare them to US Congress and Senate salaries of over $170,000 they are smaller – but why do the US salaries need to be so high as well? It’s not like such salaries keep them away from the hands of the lobbyists and special interest groups…

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