Felix Salmon

How and whether to fight insider trading

Felix Salmon
Jun 3, 2013 23:17 UTC

Jim Surowiecki has an excellent column on insider trading this week. He claims — without hyperlinks it’s hard to judge this, but I do trust him — that the increase in insider-trading prosecutions isn’t just a reflection of increased prosecutorial zeal, but actually reflects a real uptick in insider trading itself.

Surowiecki sees three main reasons why this might be happening. The first is Reg FD, which made it unambiguously illegal to tip well-connected traders with inside information. The second is Sarbanes-Oxley, and the general “proliferation of consultants” which has both increased the number of places from which inside information can leak, and which has increased the amount of deniability that any leaker enjoys. Finally, there’s the fact that companies “have a much better real-time sense of how they are doing”, these days, which increases the amount of time that information has to remain secret before it is made public in quarterly earnings reports.

Surowiecki has a potential solution to these problems:

In a world where companies increasingly know about their business in real time, it makes no sense that public reporting mostly follows the old quarterly schedule. Companies sit on vital information until reporting day, at which point the market goes crazy. Because investors are kept in the dark, the value of inside information is artificially inflated… More consistent, if not real-time, data about revenue, new orders, and major investments would help investors make more informed decisions and, into the bargain, would diminish the value of insider information.

This makes a certain amount of sense to me. Indeed, it wouldn’t surprise me to learn that Google, or Amazon, could quite easily provide daily rather than quarterly financial statements, with the quarterly statements basically just being a reprise of information the company had already made public over the course of the quarter. Doing so would be quite Googley, actually.

But there are two reasons why most companies would never go down such a road. The first is just that they’re not technically capable of doing so. And the second is that most companies reflexively seek to keep control of their financial information. Reg FD has stopped them from picking and choosing who gets the information, but they can at least control what information they disclose, and when. Most of the time, they err on the side of disclosing less rather than more, since information is power and the company wants to keep power for itself rather than make it public.

In fact, companies don’t really care whether there’s insider trading going on in their stock. Indeed, as Surowiecki says, in the days before Reg FD they would actively encourage such trading, by dropping tidbits of information into favored analysts’ laps. So long as the information is going to come out anyway, the company should try to curry some favors from it somehow.

The point is that insider trading is a pretty victimless crime: the main damage it does is just to trust in the level playing field of the stock market, and that trust has been damaged much more greatly by various high-frequency algobots than it has by insider traders. If you’re a buy-and-hold investor, you won’t be hurt by insider trading; if anything, the broad knowledge of its existence will just make stocks that much cheaper for you to buy.

So why go to such great lengths to try to stamp it out? The SEC seems to be concentrating on insider-trading prosecutions almost to the exclusion of everything else, and it would cost corporate America billions of dollars to move to Surowiecki’s world of continuous data dissemination. I do understand that we should prosecute things which are illegal, and that there’s something deeply unfair about people making money from insider trading. But let’s not lose sight of the big picture. We’re already spending too much money and effort fighting insider trading, and, as Surowiecki shows, it’s a fight we’re losing anyway. My guess is we’d be better off if the SEC trained its considerable resources on fraud and real abuses of small investors, in the knowledge that there might be a bit more insider trading at the margin. It wouldn’t be an ideal world, but I think there would be more real benefits for the cost expended.


The sec is hunting tall poppies(Martha Stewart, Steve Cohen) because it looks good and plays well for obama.

As you have written they could do a lot for the American economy by cracking down on extortion otherwise known as patent trolling.

This would be efficient use of taxpayer funds so will never happen in America.

Posted by nzl-kz7 | Report as abusive

Counterparties: The revolt of prosperity

Jun 3, 2013 22:17 UTC

Welcome to the Counterparties email. The sign-up page is here,

What began as a four-person protest over the planned destruction of a small park has turned into a battle for the future of one of the world’s great economic success stories.

Thousands have been arrested in cities across Turkey in protests over the authoritarian bent of Prime Minister Tayyip Erdogan. The spark, at least initially, was urban development: Erdogan’s government had a plan to turn “the last significant green space in the center of Istanbul” — a park with a long history of protest — into a luxury mall and apartments.

Just don’t call this the Arab Spring, Pawel Morski writes. First, unlike many of its neighbors, Turkey’s got a booming middle class, low falling income inequality, and has been the fastest growing OECD country since Erdogan’s government took power in 2003. GDP per capita has tripled under Erdogan. “Having become wealthy in the past decade, the people are now embracing a new attitude toward capitalism,” one expert told Bloomberg Businessweek. “They are telling the government, ‘We do not need shopping malls instead of parks.’”

As Reuters writes, the Taksim Square development  “is one of a few huge government projects that include the world’s biggest airport, a $3 billion third bridge across the Bosphorus and a $10 billion shipping canal that would turn half of Istanbul into an island.” Beyond the government’s religious conservativism and its new restrictions on alcohol, Turkey’s populace is bristling at Erdogan’s economic policy. “Istanbul is seen as a place where you earn a living, where you get rich. It is a gold rush,” a professor and lifelong Istanbul resident told the NYT. The urban poor meanwhile, are being paid to leave so that contractors can build gated communities.

Erdogan’s economic successes, the always excellent Dani Rodrik writes, aren’t quite what they seem:

On the economic front, the best that can be said is that his government avoided big mistakes. Growth is based on unsustainable levels of external borrowing, and has not been particularly distinguished by emerging-market standards. Public works have been marked by widespread cronyism.

The protests, Emre Deliveli writes, come at the worst possible time economically.  Emerging markets have been crushed lately — and Turkey’s markets tend to do worse when its peers struggle. Turkey, which also is heavily reliant on short-term debt, saw its stock market fall 10.5% on Monday, the biggest drop one-day drop in a decade.

For more, check out Gawker’s solid explainer and Reuters’s Turkey stream .  – Ryan McCarthy

Zynga will lay off 520 employees and shut down its NYC and LA offices – Kara Swisher

China is the biggest beneficiary of the new Iraqi oil boom – NYT

Apple’s going to save $724 million on its particularly well-timed bond sale – Mary Childs

Hot new trend: Dorm-room living for adults – Reuters

Primary Sources
The state of the global unemployment: It’s getting worse, and risking social unrest – ILO
Rich countries are creating jobs, albeit low-quality jobs – Tim Fernholz

Investors are pulling an estimated $3.5 billion out of SAC Capital – WSJ
Blackstone intends to “fully redeem” most of the $550 million it has invested with SAC – Reuters
After years of short-selling in China, Carson Block turns to rooting out all the posers in Silicon Valley – WSJ
Carson Block’s problematic Standard Chartered short – Euromoney

The SEC is, um, “bringin’ sexy back” to accounting fraud – DealBook
The lawyer-heavy commission’s new algorithm “applies high-tech quantitative methods to, basically, close reading of dense texts” – Matt Levine

Tax Arcana
The tax break state: “This is one of the most important battles over who will benefit from our economic progress, and how” – Mike Konczal

Has the Fed been propping up inequality? – Annie Lowrey

Every business cliche ever, in one toast – Chris Sacca

The Fed
Ben Bernanke’s (actually rather funny) Princeton graduation speech – Ben Bernanke

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


i have no idea why that went through 3x, sorry

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Chart of the day, billionaire edition

Felix Salmon
Jun 3, 2013 20:31 UTC


Many thanks to Peter Rudegeair for pulling this data from Factiva: it shows how often the word “billionaire” has appeared in headlines from 1984 to date. We’re looking, here, only at three publications: the NYT, the WSJ, and Reuters News. (And we’re excluding Bloomberg, which has its own dedicated billionaires section.) For 2013 the dark-blue line is the year-to-date figure; the light-blue line is what happens if you extrapolate what we’ve seen so far to the year as a whole.

There’s a billionaire bubble here: we’re on track to see 158 billionaire headlines this year, or more than three a week. In most of those headlines the term is entirely gratuitous: “Cyprus rescinds citizenship of Assad billionaire cousin”, for instance. In many cases, it’s not even entirely clear that the people being referred to are billionaires.

Back in 2006, 59 appearances of the word “billionaire” in headlines was an all-time high — but that record was obliterated in 2007, when it popped up 103 times. Never again would we see anything near 2006′s relatively modest total, not even in the depths of the Great Recession. And now, it seems, there’s no limit to how high the totals can go. Can anything burst this bubble? Please?


Just wait until “billionaire” is redefined as someone making over $1 billion per year, as the term “millionaire” has been redefined recently. Will there be a billionaire’s tax?

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Felix Salmon smackdown watch, cov-lite edition

Felix Salmon
Jun 2, 2013 19:35 UTC

Stephen Foley was clearly thinking along the same lines that I was on Friday: shortly after my piece on cov-lite loans came out, he published his own, coming to much the same conclusion. (But expressing it better: I love “the bearable liteness of covenants”.)

Not everybody was convinced, however. David Merkel has the meatiest pushback, starting with this:

Ask a loan holder, “All other things equal, would you rather have a cov-lite loan or a normal one?” The answer will always be “Normal, of course. Why are you asking such a dumb question?”

Loan holders would prefer more defaults with lesser severity than fewer with higher severity. What is flexibility to the borrower is a higher degree of expected credit costs to the lenders.

I think both Foley and I would disagree here. All other things equal — including one’s position in the credit cycle — I for one would rather have a cov-lite loan than a normal one. For one thing, as Moody’s discovered, cov-lite loans do not default with higher severity than normal loans; in fact, their recovery rate, even for loans originated in the frothy years of 2005-7, was a whopping 90%. Intuitively, one might expect cov-lite loans to have “a higher degree of expected credit costs to the lenders”. But empirically, that just doesn’t seem to be the case.

More conceptually, if I’m lending to a company, I want it to concentrate on survival, when it gets into trouble, rather than being thrown to financial wolves whose interests are not even aligned with each other, let alone those of the company. Here’s Foley:

Potential covenant breaches excite lenders more for the opportunity they present to take some fees and reprice their loans at a higher interest rate.

And even this is not a straightforward matter. Since leveraged loans are parcelled out and traded on the open market, companies may have to satisfy many, often competing, interests – from fund managers concerned mainly with interest income, to vulture funds who may be playing in a company’s debt in the hopes of pressuring management into merger and acquisition activity. The process is about as far away from a friendly chat with your sympathetic bank manager as it is possible to get.

Such negotiations come at a time when a company’s energies might be better focused on steering the business through a tough patch.

In other words, I can see the attraction of covenants both to banks and to hedge funds who might be looking for the perfect leverage point from which to take over control of a company. But as a passive investor, I’m happier in cov-lite, especially if I have any exposure to the company’s equity.

Merkel then makes a second point, which is slightly stronger. Look at the credit cycle, he says: first debt is an attractive buy, and then yields fall, and then covenants weaken, and then defaults rise and the market crashes, at which point debt is an attractive buy again. If that’s the cycle, then a rise in cov-lite issuance is a clear sign that the debt markets are toppish.

I’m not sure I buy this either. For one thing, actual default rates turned out to be much lower, in the wake of the credit crunch, than the level of defaults that everybody was pricing in and expecting after Lehman Brothers collapsed. And the reason is simple: monetary policy, which loosened up considerably and unleashed a wave of liquidity into the debt markets, allowing troubled companies to refinance. Right now, monetary policy is still loose, and companies have never been more profitable. The combination makes it unlikely that we’ll see a spike in default rates any time soon.

And then there’s the case I was trying to make in my post — that investors have finally realized that cov-lite loans are just as good, if not better than, their covenanted siblings. As a result, the spike in cov-lite issuance isn’t a function of investors giving up protections they’d really rather retain; instead, it’s a function of investors happily giving up protections which in practice only serve to make the borrower’s life more difficult and expensive.

Merkel’s credit cycle makes sense, but it’s not inviolably true. And yes, we’re certainly in the bull-market phase of the credit cycle right now; whenever that happens, a bear-market phase is bound to arise sooner rather than later. Cov-lite loans will get hit in that bear market, along with all other credit instruments. But there’s no particular reason to believe they’ll be hit harder than loans with covenants. In fact, I suspect that, once again, they’ll end up outperforming.


I should also point out that underwriting standards are likely not the only confounding variable. Maybe if you could find them all there’s some statistical analysis that could prove your point; maybe there isn’t.

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Bikeshare: Threat or menace?

Felix Salmon
Jun 1, 2013 19:29 UTC

Presented without comment, a few quotes from the WSJ’s “Death by Bicycle” video:

  1. “Do not ask me to enter the mind of the totalitarians running this government.”
  2. “We now look at a city whose best neighborhoods are absolutely begrimed by these blazing blue Citibank bikes.”
  3. “It’s not just shocking; it’s also a fire hazard in some cases, because the fire trucks can’t get into subway stations.”
  4. “Before this, every citizen knew, who was in any way sentient, that the most important danger in the city is not the yellow cabs. It is the bicyclists.”
  5. “Tourists are going to get onto these bikes as well!”
  6. “The bike lobby is an all-powerful enterprise.”

(h/t: Josh)


Favorite objection so far: someone at Gawker grousing that one set of the racks is near a bike shop that makes a good deal of its money from renting bikes to people.

Any bike shop that cannot beat the prices ($9.95 plus tax for Not More than 30 minutes at a time, at which point it’s $27 for the first hour and $24 each additional hour) and conditions (bikes that are designed for commuting, and therefore horrid for recreational riding or riding by any non-adult) of Citibike for recreational rentals shouldn’t be in the business of renting bikes for recreational use.

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Regulatory failure du jour, overdraft-fee edition

Felix Salmon
Jun 1, 2013 18:44 UTC

This is a chart of US banks’ overdraft revenue over the past 13 years. It was growing steadily until the Dodd-Frank Act passed in 2010, at which point it dropped for a couple of years, but now it’s back on its upward path, and it’s projected to hit a new all-time high by 2016. (The source is Moebs, here and here.)

This chart is not what I expected to see when I wrote an NYT op-ed last year, talking about the way in which the new rules governing overdrafts were resulting in banks charging monthly fees for checking accounts instead. I said in that piece that the standard checking-account business model had been “upended” by Dodd-Frank broadly and by the end of automatic overdraft protection in particular. No longer, I said, could big banks count on a steady source of income from relatively poor Americans paying $30 in charges for a $4 cup of coffee.

But if you look at this chart, the drop-off in overdraft income was relatively modest. Overdraft fees fell from $37.1 billion in 2009 to $31.6 billion in 2011 — which was still higher than they had been in 2006, or any year previously.

This, it seems to me, is a clear failure of behavioral economics — or, to put it another way, shows the degree to which a determined corporation can circumvent rules designed to prevent fee-gouging. Under the new regulations, banks could no longer automatically sign account-holders up for these huge overdraft fees; instead, those account holders had to opt in. But a study last year from the Pew Charitable trusts — which came out a couple of months after my op-ed — found that “more than half of those hit with overdraft fees did not believe they had opted in to the policies”.

Back in 2010, I was depressed that so many frequent overdrafters had opted in to the schemes, but hopeful that the FDIC would put an end to banks sucking hundreds of dollars a year in overdraft fees from the very customers who could least afford them. Evidently, that didn’t happen: with Moebs now projecting that overdraft fees will continue to rise indefinitely into the future, it looks like all of the reforms did little more than to force a temporary  setback in terms of banks’ overdraft-fee income. The regulators, it seems, have lost again.


@Twinkbait – the article to which you linked does not address my question. I am not disputing that overdraft fees are a profit center for banks. My question is – but for overdraft fees, are these customers profitable for a bank?

How much revenue does a bank generate from someone with an average checking balance of say $2,000 to $3,000? Outside of fee income, it is minimal. Fee income needn’t be just overdraft fees – could be merchant fees on a debit card, or customer fees for using out of network ATM’s, or a monthly account fee. A no-monthly fee checking account with that low of an average balance, however, is just a loss leader that the bank hopes generates revenue elsewhere. That revenue might be from overdraft fees, or it might be from being able to cross-sell mortgages, auto loans, and credit cards to enough of those customers.

A torrent of new customers is a curse and not a blessing if those new customers aren’t profitable.

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