Felix Salmon

Waiting for bitcoin to get boring

Felix Salmon
Nov 30, 2013 23:16 UTC

Something of a milestone was reached very early in the morning of Friday, November 29, a time when most Americans were either sleeping off their Thanksgiving excesses or out seeking Black Friday bargains. At the end of Wednesday, the price of gold, on Comex, had closed at $1,240 per ounce; that market would not reopen until Friday morning. And then at about 1am Friday, EST, there was a trade on Mt Gox, the largest bitcoin exchange, which valued each coin at $1,242. If only briefly and theoretically, at that point in time a bitcoin was worth more than an ounce of gold.

Bitcoin, by its nature, is a highly volatile asset, which is prone to astonishing run-ups in price. Check out these three one-year charts of the bitcoin price:




The first chart is the year to June 2010; the second is the year to April 2013; and the third is the current chart. Without looking at the y-axis, they’re basically identical.

To put it another way, there is nothing surprising about what bitcoin is doing right now; it has done it many times in the past, and it will probably do it in the future as well. After all, there’s no way to calculate the fundamental value of a bitcoin: indeed, it’s probably easier to justify a price of $1,000 per bitcoin than it was to justify a price of $10. At least now it’s increasingly looking like a Thing, complete with Congressional hearings and front-page-of-the-FT publicity stunts.

The latest bright idea from Alderney — that the tiny island (population: 1,900) should print physical bitcoins backed by electronic bitcoins — is certifiably bonkers. For one thing, the whole point of bitcoin is that it isn’t going to suffer the same fate as all those currencies which the government promised were backed by something else. (The dollar was backed by gold, once; the Argentine peso was backed by the dollar. Neither lasted, and if the burghers of Alderney ever change their mind about the bitcoin backing, or it gets hacked or stolen, the owners of the physical bitcoins are going to have no recourse.)

More weirdly, the Alderney bitcoins are going to have about £500 worth of gold in them, which makes no sense at all. Let’s say that the gold in the coin is worth $800, while the bitcoin backing it is worth $1,000. What, then, would the coin be worth? It can’t be much less than $1,000, at least as long as it can be redeemed for an electronic bitcoin, or a bitcoin’s worth of pounds sterling. But by the same token, it can’t be worth much more than $1,000, because numismatists don’t tend to value gimmicks very highly, so it’s not going to have significant value as a collector’s item. And the most you could sell it for, in terms of its fundamental value, is the value of one bitcoin. Which means that there’s no point whatsoever in pouring £500 worth of gold into it — the gold doesn’t increase the value of the coin at all.

All of which is to say that the FT is splashing all over its front page a crazy bitcoin scheme which is never going to happen. “An independent company will provide the Bitcoins,” explains the newspaper, credulously. “If the price plunged, neither Alderney nor the Royal Mint would lose anything.” But what independent company would ever do such a thing? The company would essentially need to hand over its bitcoins to Alderney, would probably have to help fund the cost of manufacturing the coins out of gold, and would get essentially nothing in return for the huge risk it was taking that all its coins would become worthless.

The news here, then, is not so much that there’s some new cockamamie scheme involving bitcoins — a new such scheme is dreamed up every day. Rather, it’s the way in which the bitcoin bug has infected news editors to the point at which they’ll splash any old vaporware silliness all over their front pages. One of the less reported aspects of the bitcoin story is the way in which editors tend to be much more excited about it than reporters, who are generally more skeptical, and who worry that their own reporting will only serve to inflate the bubble even further.

This is something which should worry the bitcoin faithful, if they really want to see bitcoin become a broadly-used global currency. After all, press coverage of bitocins runs in lockstep with the bitcoin price: it’s times like this, when the price is at its fluffiest, that bitcoin gets written about the most. (If it’s not physical bitcoins, it’s hard drives in landfills.) The largely unspoken assumption behind all such stories: bitcoin is an asset class, and people should get excited about it when (and, implicitly, only when) the price is going up. This is what I think of as the CNBC Premise: when an asset rises in price, that is necessarily a Good Thing, and when it falls in price, that is always a Bad Thing.

The CNBC Premise has never made much sense with respect to currencies, however. And with respect to bitcoin in particular, its most exciting aspect is not its value, but rather its status as an all-but-frictionless international payments mechanism. If you want bitcoin to really take off with respect to payments, you actually don’t want to see crazy price spikes — such things are the best possible way of stopping people from using bitcoins for payments. After all, if your bitcoins are doubling in value every few days, why on earth would you want to spend them?

For me, the most interesting period in the short history of bitcoin was the period from roughly the beginning of May to the end of September, when the volatility in the price of bitcoin was relatively low, even as the price was pretty high* — more than $100 per coin. And more generally, it’s the long flat areas of the three charts above, rather than the attention-grabbing spiky bits, that bitcoin bulls should get excited about. If and when those long flat areas last for years rather than months, bitcoin might start becoming a boring, credible currency. We’ll know that bitcoin has made it to the next level not when editors all want to write about it, but rather when editors don’t want to write about it, because it’s just another way of people paying each other for stuff.

*Update: As Joe Weisenthal points out, stability at a high price is more bullish for the bitcoinverse than stability at a low price, because the higher the market capitalization of bitcoin, the greater the amount of commerce that can be transacted in it.


Great article. Bitcoin should be approached prudently with an eye towards risk management. We comment on this and similar issues on our blog.

http://www.bitmorecoin.com – Quick and easy way to buy Bitcoin in the UK.

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Are Heloc defaults about to spike?

Felix Salmon
Nov 26, 2013 17:51 UTC

Peter Rudegeair is worried about Helocs. In particular, he’s worried about all the home equity lines of credit which were written in the run-up to the financial crisis, and which are now beginning to turn 10 years old. When they do that, their default rates have a tendency to spike, since most borrowers have to start paying down their principal after ten years.

Here’s the chart, which I put together from FDIC data; the red line marks the ten-years-ago point.

Rudegeair’s point is that we’re only just embarking on the 10th anniversary of the run-up in Heloc issuance. What’s more, a large proportion of the Helocs issued between 2003 and 2008 went to subprime borrowers. Because they’re credit lines, they don’t need to get paid down, at least for the first ten years. And so as these loans hit their tenth birthdays, millions of borrowers around the country are going to start being faced with new mandatory repayments. Which they might not be able to afford:

After 10 years, a consumer with a $30,000 home equity line of credit and an initial interest rate of 3.25 percent would see their required payment jumping to $293.16 from $81.25, analysts from Fitch Ratings calculate.

That’s why the loans are starting to look problematic: For home equity lines of credit made in 2003, missed payments have already started jumping.

Borrowers are delinquent on about 5.6 percent of loans made in 2003 that have hit their 10-year mark, Equifax data show, a figure that the agency estimates could rise to around 6 percent this year. That’s a big jump from 2012, when delinquencies for loans from 2003 were closer to 3 percent.

This is worrying — but I’m more sanguine than Rudegeair. Firstly, delinquency rates on Helocs naturally go up over time. As the best borrowers pay off their loans, and as people sell their homes for whatever reason, the denominator shrinks. The 5.6% delinquency rate for is a percentage of outstanding 2003-vintage Helocs, not a percentage of all the Helocs which were written that year. What I’d really like to see is the chart above, but with each bar split in two, showing what proportion of total outstanding Helocs are more than ten years old. We don’t know that number, and until we know that number, it’s hard to tell how big the problem is.

Secondly, what we can tell from the chart is that total outstanding Helocs are falling at an impressive rate — in fact, they seem to be falling, right now, nearly as fast as they were rising in the final years of the credit bubble. That’s partly because banks are writing off loans when underwater homes are sold, it’s partly because borrowers are paying down their loans, it’s partly because borrowers are refinancing their loans as the property recovery gives them a bit more equity, and it’s partly because borrowers are paying off their loans entirely, as they’re forced to, for instance, when they move. So even if delinquency rates start to rise, they’re going to be rising only as a proportion of a shrinking pool of Helocs.

Finally, we can also see from the chart that the banks have a few years’ experience already, in terms of seeing what happens to ten-year-old Helocs. The big rise in Heloc issuance doesn’t date back to the end of 2003; it’s much older than that, and really goes all the way back to the end of 1999. So the banks have the data they need — and their reaction to that data has been to ramp up their Heloc issuance. According to Moody’s Analytics, Heloc originations are likely to rise 16% this year, and will hit another five-year high in 2014.

Looked at in that light, if the total amount of Helocs outstanding is falling even as the number of new Helocs is rising quickly, it stands to reason that the amount of churn is higher than you might think, and that ten-year-old Helocs make up a pretty low proportion of the whole. This is borne out by Rudegeair’s own numbers: he has $1.3 billion in Helocs turning ten years old at Citibank in 2014, $4.5 billion at Wells Fargo, and $8 billion at Bank of America. That’s less than $14 billion between those three big banks, compared to a $518 billion total pool of Helocs. Even if delinquencies on that $14 billion hit 9%, that’s still a mere 0.2% of total Helocs outstanding.

As Rudegeair says, if interest rates rise and default rates spike along with them, those numbers could yet rise. But for the time being, they’re entirely manageable. Especially considering the fact that interest rates on Helocs are floating-rate, which means that the performing loans will be paying more money even if the defaulting loans cause losses. Besides, we’re still recovering from the last credit crisis. It’s far too early to have a new one.


Another, less charitable, interpretation of your data is that Banks create new HELOCs to pay back for the old ones, thus avoiding the principal to be amortized. More interest income, less current delinquencies… what not to like ?

Extend and pretend of course, but such is the zeitgeist !

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GoldieBlox, fair use, and the cult of disruption

Felix Salmon
Nov 26, 2013 05:29 UTC

If you google “disrupt the pink aisle”, you’ll get 36,800 results, all of which concern a San Francisco-based toy company named GoldieBlox. The company first came to public attention in September of last year, when it launched a highly-successful Kickstarter campaign which ultimately raised $285,881. Like all successful Kickstarter campaigns, there was a viral video; this one featured a highly-photogenic CEO called Debbie, a recent graduate of — you probably don’t need me to tell you this — Stanford University. And yes, before the Kickstarter campaign, there was “a seed round from friends, family and angel investors”. When the viral video kept on generating pre-orders even after the Kickstarter campaign ended, GoldieBlox looked like a classic Silicon Valley startup: young, exciting, fast-growing, and — of course — disruptive.

Not wanting to mess with a proven formula, GoldieBlox kept on producing those viral videos: “GoldieBlox Breaks into Toys R Us” was based on Queen’s “We Are The Champions”, and got over a million views. But that was nothing compared to their latest video, uploaded only a week ago, and already well on its way to getting ten times that figure. This one was based on an early Beastie Boys song, “Girls”, and deliciously subverted it to turn it into an empowering anthem.

Under what Paul Carr has diagnosed as the rules of the Cult of Disruption, GoldieBlox neither sought nor received permission to create these videos: it never licensed the music it used from the artists who wrote it. That wouldn’t be the Silicon Valley way. First you make your own rules — and then, if anybody tries to slap you down, you don’t apologize, you fight. For your right. To parody.

In a complete inversion of what you might expect to happen in this case, it is GoldieBlox which is suing the Beastie Boys. And they’re doing so in the most aggressive way possible. There’s no respect, here, for the merits of the song which has helped their video go massively viral and which is surely helping to sell a huge number of toys. Instead, there’s just sneering antagonism:

In the lyrics of the Beastie Boys’ song entitled Girls, girls are limited (at best) to household chores, and are presented as useful only to the extent they fulfill the wishes of the male subjects. The GoldieBlox Girls Parody Video takes direct aim at the song both visually and with a revised set of lyrics celebrating the many capabilities of girls. Set to the tune of Girls but with a new recording of the music and new lyrics, girls are heard singing an anthem celebrating their broad set of capabilities—exactly the opposite of the message of the original. They are also shown engaging in activities far beyond what the Beastie Boys song would permit.

This is faux-naïveté at its worst, deliberately ignoring the fact that Girls, the original song, is itself a parody of machismo rap. The complaint is also look-at-me move, positively daring the Beasties to rise to the bait and enjoin the fight. Which the Beasties, in turn, are trying very hard not to do. In their letter to GoldieBlox, the Beasties make three simple points. They support the creativity of the video, and its message; they’re the defendants in this suit, rather than the people suing anybody; and, most importantly, they have a long-standing policy that no Beastie Boys songs shall ever be used in commercial advertisements. (They don’t mention, although they could, that this last was actually an explicit dying wish of Adam Yauch, a/k/a MCA, and an integral part of his will.)

Given the speed with which the GoldieBlox complaint appeared, indeed, it’s reasonable to assume that they had it in their back pocket all along, ready to whip out the minute anybody from the Beastie Boys, or their record label, so much as inquired about what was going on. The strategy here is to maximize ill-will: don’t ask permission, make no attempt to negotiate in good faith, antagonize the other party as much as possible.

This way, at least, the battle lines get drawn pretty clearly. The jurisprudential analysis comes out, defending GoldieBlox and its right to use the Beasties’ song as parody. After all, fair use is a protection under the law, which means that if it applies, then it doesn’t matter what the Beasties think, or want: GoldieBlox can do anything it likes. On the other hand, in the key precedent for such issues, Campbell vs Acuff-Rose Music, Justice Souter explicitly said that “the use of a copyrighted work to advertise a product, even in a parody, will be entitled to less indulgence” under the law than “the sale of a parody for its own sake”.

This is a distinction the Beasties intuitively understand. After all, this version of Girls has been viewed more than 3 million times on YouTube, without so much as a peep from the Beasties. And if you simply lop off the last few seconds of the GoldieBlox version — the bit where they shoehorn in the GoldieBlox branding — then that, too, would surely have been fine. If all GoldieBlox wanted to do was get out a viral message about empowering girls, they could easily have done that without gratuitously antagonizing the Beastie Boys, or putting the Beasties in their current impossible situation.

Instead, however, GoldieBlox did exactly what you’d expect an entitled and well-lawyered Silicon Valley startup to do, which is pick a fight. It’s the way of the Valley — you can’t be winning unless some household-name dinosaur is losing. (The Beasties are actually the second big name to find themselves in the GoldieBlox crosshairs; the first was Toys R Us.) The real target of the GoldieBlox lawsuit, I’m quite sure, is not the Beastie Boys. Instead, it’s the set of investors who are currently being pitched to put money into a fast-growing, Stanford-incubated, web-native, viral, aggressive, disruptive company with massive room for future growth — a company which isn’t afraid to pick fights with any big name you care to mention.

Because in Silicon Valley, people will always prefer to invest in that kind of company, rather than in a toy company whose toys, in truth, aren’t actually very good.

Update: Turns out that GoldieBlox CEO Debbie Sterling was making deliberately-controversial viral videos long before she conceived of GoldieBlox. I’m not sure what to say about this, except that if you played any part in making it, you should never, ever get the benefit of the doubt.

Update 2: And here is Debbie’s blog from when she was in India, it has to be read to be believed. To think that this woman is trying to claim the moral high ground over Adam Yauch.

Update 3: GoldieBlox has now removed the video, saying that it does want to respect the Beasties’ wishes after all.


Gilson, above, makes a misrepresentation by only quoting the first sentence from one of the products on the GoldieBlox website: “In this much-anticipated sequel, Goldie’s friends Ruby and Katinka compete in a princess pageant with the hopes of riding in the town parade.”

Yeah that does sound hypocritical as Gilson suggests. Except when you read the next sentence and put it in context it makes a lot more sense: “When Katinka loses the crown, Ruby and Goldie build something great together, teaching their friends that creativity and friendship are more important than any pageant.”

So obviously Goldieblox is not promoting princess pageant culture but critiquing it.

As for the song issue, it’s kind of a tough one. As a musician who wouldn’t want works to be used in advertising, I think the creator correctly has certain rights over its use. And the Beastie Boys are cool guys, so why target them? There are loads of way more genuinely sexist male acts who could be parodied.

BUT, it’s also not a great song, by the band’s own admission, with embarrassing misogynistic lyrics. In that sense it deserves to be made fun of and turned upside down.

After careful consideration, I would have to side with the Boys. It may be a crap song, but it’s still their crap song and an advertisement is an advertisement is an advertisement.

What I really don’t get though is how people on this thread go from discussing this issue to vilifying “feminists”.

Get a grip! The issue of whether or not Goldieblox’s appropriation of “Girls” constitutes Fair Use, under the law, doesn’t actually have anything whatsoever to do with feminism!

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Bad bank of the day, RBS edition

Felix Salmon
Nov 25, 2013 19:07 UTC

Here in the US, the bank-related scandals pertaining to the financial crisis invariably focus on the go-go years before everything fell apart, when the originate-to-distribute model created horribly skewed incentives across most of the privately-owned financial sector. In the UK, however, the latest big scandal is in many ways the exact opposite: it governs the behavior of RBS, one of the largest banks in the world, after the financial crisis, and after it was effectively nationalized by the UK government.

One of the problems with this story is that it’s hard to find a single place where the scandal is clearly laid out in its full gruesomeness. The BBC has done probably the best job, but most of the credit here really goes to the Sunday Times, which conducted a two-month investigation, and whose story (which is behind a subscription paywall, sorry) is a fantastic example of how a well-chosen set of individual stories can really bring systemic problems into focus.

And then there’s the Tomlinson Report. Lawrence Tomlinson is an entrepreneur and advisor to the government, and has delivered a 20-page paper entitled “Banks’ Lending Practices: Treatment of Businesses in Distress”. Its conclusions are clear — but its methodology is not, and I’m a bit sad that Tomlinson, after six months’ work, didn’t spend a little bit of effort to make the report more readable and provide detail on how exactly he arrived at his conclusions.

But putting everything together, a coherent narrative does emerge. Basically, after the crisis, RBS was in desperate straits, and had to deleverage fast — especially when it came to property loans. It gave that job to a bunch of bankers — and bankers, quite naturally, have a tendency to try to maximize their own profits. Which is exactly what they did, with no regard whatsoever to the wellbeing of their borrowers. Indeed, the bankers seemed to relish taking a maximally adversarial stance towards RBS’s borrowers, as though they were players in a zero-sum game. The result was a large amount of unnecessary human distress, on the borrower side, along with an unknown quantity of marginal extra profits on the RBS/taxpayer side.

It helps to look at a real-world example or two, otherwise everything is just too abstract. John Morris spent £65 million converting a country house into luxury apartments; he had another £2.5 million in the bank to cover any last-minute problems, and already had buyers lined up for four apartments worth £7 million. But then, without warning, RBS drained the account with £2.5 million in it, stalling the development, and causing the buyers to walk away. Morris tried to buy the whole thing for £32 million, but RBS said no, instead selling it to its own property division, West Register, for £16 million.

Here’s another: Eddie and Cheryl Warren bought the Bold hotel in Southport for £3.7 million, with a loan from RBS. In the UK, mortgages are floating-rate, and the bank forced them to take out an interest-rate swap to protect them against rising rates. When rates fell, they had to pay penalties on the swap of £120,000 per year — but even so, they always remained current on all their payments. That notwithstanding, RBS declared that thanks to the rate swap, the Warrens were deeply underwater. The bank declared the hotel to be worth just £1.8 million, forced the Warrens into insolvency, and then ended up selling the hotel to — yes — West Register, for the bargain-basement price of £1.4 million. The Warrens lost everything, including their home; they are now divorcing.

And then there’s Leonard Wilcox, who took out a £2.5 million loan to buy a property site valued at £5.35 million, only to see it being sold to West Register for £1.1 million in the end, losing his own home in the process.

The Sunday Times found lots of other stories like this, all of which included something called the Global Restructuring Group (GRG) at RBS. This group had the ability to take over loans and behave with breathtaking aggression and arrogance — and it took full advantage of all its powers.

Once you’ve read the Sunday Times story, the Tomlinson report becomes much easier to understand. The GRG would storm into a portfolio, and decide that its first job was to find something wrong. The trick was always to declare the borrower in violation of some covenant or other, even if she was fully current on her payments. Often, that would be done by writing down the value of property collateral.

On top of that GRG would pile fees onto the businesses it was given oversight of: one such business says that it had to pay an extra £256,000 in RBS fees alone, while others had to pay six-figure sums for external accountants to conduct an “independent business review”. None of this ever helped the businesses in question:

When asked, a whistleblowing ex-RBS banker confirmed that they could not think of any occasion in which a business entered RBS’ Global Restructuring Group and came back into local management.

Tomlinson, as befits a free-market entrepreneur, thinks that more competition would solve these problems. He’s wrong about that. Remember that all of this activity took place within a panicky post-crisis environment: no banks would have stepped in to take over these loans in mid-2009, no matter how many banks there were. And now that credit is flowing more easily again, the problems have gone away of their own accord: they were an artifact of their time. What’s needed is just better bank regulation, to make sure that banks don’t behave atrociously when the economy is going through a nasty recession. As part of that, banks should be encouraged not to mark real-estate collateral to market, in situations where the loans are not delinquent or past-due.

Tomlinson is right, however, that bank customers do need some kind of avenue of redress or complaint — in the UK, for these borrowers, there is essentially none, and they can’t even sue the banks, since any law firm which does business with banks will refuse to take their case.

There are broader lessons here, too, for anybody thinking about splitting troubled banks up into a good-bank / bad-bank structure. The problem with bad banks, which inherit troubled assets and try to wind them down with the minimum of losses, is that they can’t make money from lifetime relationships: their lifetime is by its nature highly limited. And so they have every incentive to treat their borrowers very badly, even when, as in this case, the bank is state-owned.


Felix, GRG didn’t start doing this in 2008, it started in 1991, and it’s been polishing its game ever since.

http://www.ianfraser.org/has-rbs-become- a-rogue-institution/

E.g. relating to a rip-off set up in 2007:
http://www.scotcourts.gov.uk/opinions/20 10CSOH3.html

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The government-dominated bond market

Felix Salmon
Nov 22, 2013 22:27 UTC

JP Morgan’s Nikolaos Panigirtzoglou put a fascinating report out last week, looking at supply and demand in the global bond market in 2014. And although I consider myself something of a bond nerd, I was genuinely astonished by some of the charts he put together, starting with this one:


This chart alone suffices to explain why the markets care so much about the taper: central-bank buying accounts for $1.6 trillion — more than half — of the total demand for bonds in 2013. Meanwhile, private banks are taking the opposite side of the trade: while they were huge buyers of bonds in 2007 and 2008, they’re net sellers in 2013 and 2014, more or less completely negating the buying pressure from pension funds, insurance companies, bond funds, and retail investors. In 2014, it seems, substantially all the net demand for bonds is going to come from the official sector. So it matters a great deal when that demand is diminished.

What’s more, central-bank buying, overwhelmingly from the Fed and the Bank of Japan, accounts for the lion’s share of official-sector buying: sovereign wealth funds and other foreign official institutions will buy just $364 billion of bonds this year, according to JP Morgan’s estimates, down from $678 billion last year. So the heavy lifting is still going to have to be conducted by QE operations, in the face of a taper which JP Morgan estimates at $500 billion over the course of the year. (The assumption is that it starts in January, and is completed by September.) Between the taper and other sources of diminished demand, total bond-buying firepower is likely to be $750 billion smaller in 2014 than it was in 2013. Bad news, for bonds, right?

Not so fast! It turns out that even as demand for bonds is shrinking, the supply of new bonds is shrinking just as fast:

Screen Shot 2013-11-22 at 4.45.23 PM.png

Again, this chart surprised me: I knew that government debt was a very important part of the total bond market, but I wouldn’t have guessed how important it was — or how fast it is shrinking.

Panigirtzoglou puts the two charts together, and you end up with this result:

In total we expect bond supply to decline by $600bn in 2014 to $1.8tr, more than offsetting the $500bn decline in bond demand due to Fed tapering. The balance between supply and demand, i.e. excess supply, looks set to widen from $140bn in 2013 to $280bn in 2014.

That number has pretty large error bars: you could pretty much cover the entire thing just by delaying the taper for three months. So let’s not worry too much about the difference between the two estimates, here. Instead, step back and look at the big picture, which is pretty simple: as a stylized fact, the bond market is dominated on both sides by the official sector. Private participants might sit in the middle as market-makers, or try to borrow money here or there, but overall what you’re looking at, when you look at the bond market, is government issuing debt and governments buying it.

The good news is that this large transfer of money from the official sector’s left hand to its right hand is slowing down, but that’s going to take a while. In any case, there doesn’t seem to be any conceivable way that the private sector could possibly be able to fund the still-substantial government deficits which have been bequeathed to us by the financial crisis. As a result, I suspect that QE is likely going to be around for a while, just as a matter of mathematical necessity. The world’s national deficits can’t get funded any other way.


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Man In The World…..”Damn He Really Is” For Sure!
…..That “Kutchie”, He Looks Marvelous Dahling!…

….”Hemingway”, Had Nothing On The “KutchMan”…

….Someone Overheard The “Kutchman” Say One Day That He Thought That He Was A Lesbian!… We Don’t Want To see Him Coming Out Of The Toilet With Just His Dick In His Hands!

….If He Ever Needs Any Guidance, Who’s A Better Consiglieri Than His Father?….They Both Season They’re Garlic With Food!

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Why privately-financed public parks are a bad idea

Felix Salmon
Nov 22, 2013 01:21 UTC

If you want to find the most valuable land in the world, you have to look for two things. Firstly, find a rich, densely-populated city. Secondly, take a map of the middle of that city, and look for open space: parks, rivers, lakes. Look at the land bordering that open space, where offices and apartments can avail themselves of spectacular views — that’s where land is going to be the most expensive. Indeed, ultra-luxury condo developer Arthur Zeckendorf recently told the NYT that once he finishes the building he’s working on right now, he doesn’t have anything else in particular that he’d like to build: “We have looked at every single site in Manhattan, but we haven’t found one that meets our criteria to be on a park.”

Naturally, the most expensive land in the world tends to attract the richest people in the world — the kind of people who are very good at marshaling money, and politicians, so that they can get what they want. Last year I wrote about John Paulson’s $100 million gift to Central Park — which is, of course, the park he lives next door to — and the way in which Central Park’s charitable status means that the US taxpayer is effectively chipping in a very large chunk of Paulson’s gift, possibly as much as half of it. Which is not an effective use of public funds.

Indeed, more generally, the big problem with the charitable-donation tax deduction is that it’s effectively a multi-billion-dollar tax expenditure on the rich, even as charitable donations by the majority of the US population don’t get subsidized at all. If it were abolished, or scaled back, the amount saved by the government would dwarf any reduction in charitable donations: in theory, the government could simply make up the entire shortfall and then some, and still come out ahead. As a rule, it’s always easier and cheaper for a government to subsidize something directly than it is to try to fiddle around with laws which have the same effect but don’t show up on the official accounts.

But those laws refuse to go away — and in the case of prime real estate next to urban open space, the situation is getting steadily worse, rather than better. The open space itself invariably is a public asset, which belongs to everybody — at least in theory. But you know how it goes: you move in somewhere, paying $10,000 per square foot for your spectacular view, and it doesn’t take long before you feel that it’s yours. You’ll donate money to it, you’ll improve it — and, since most philanthropy these days has a transactional element to it — you’ll expect a little something in return. Pretty soon, the public’s parks become rather less egalitarian than you might imagine. Here’s Benjamin Soskis:

For much of the twentieth century, the city’s public parks represented a robust vision of egalitarian, governmental support for the public welfare. But that vision, and that support, withered with the fiscal crisis of the nineteen-seventies, when city funding for parks was slashed dramatically. It has never recovered; no city agency has suffered as dramatic a drop in its workforce over the past four decades than the Parks Department. The fiscal crisis also inaugurated a shift toward private governance and administration, marked by the establishment of the Central Park Conservancy in 1980. The Conservancy, and others modelled after it, promised to provide an antidote to the messy and unpredictable city budgeting process. For the most part, they have proved an overwhelming success: Central Park and its well-endowed kin, neglected before the rise of the conservancies, look better than ever, and city residents of all classes continue to enjoy their offerings.

But such philanthropic arrangements are not without their critics. Some have worried about the general hazards of privatization—the risk of corruption, or conservancies abetting the exploitation of public parks by private interests. Others grew concerned that the private funding of certain flagship parks would sanction the erosion of public stewardship, leading to a two-tiered system in which certain green spaces flourish while the majority of the city’s nearly two thousand parks languish.

The exploitation of public parks by private interests is absolutely happening, and Alex Ulam has example after example, and doesn’t even mention the fiasco that was GoogaMooga, where a huge swathe of Prospect Park was effectively destroyed by a 2-day for-profit event, which paid the park a mere $75,000. He does mention this, though:

Damrosch Park, for example, a New York City park run by Lincoln Center for the Performing Arts, is closed off for seven to ten months every year for private events, such as Big Apple Circus and New York City’s Fashion Week. In addition to being regularly closed to the public, Damrosch Park has had 57 trees cut down and its distinctive granite benches removed to accommodate such events.

Behind all this, however, is something which is even more insidious. We now live in a world where rich people and big corporations actually get richer by donating tax-deductible money to supposedly public parks. The big news of the moment is that Hudson River Park, which has run out of money, is now going to be able to fund itself by selling its air rights to developers on the other side of the street. This is far from unprecedented: the High Line, a few blocks west, was funded in large part by a scheme where for every $50 you donated to the High Line Improvement Fund, you could add an extra square foot of floor area in any development you were building nearby. (Check out Appendix D on page 61 of this PDF.) Given that developers pay up to $600 per square foot for such rights, that was quite the bargain.

Meanwhile, on the other side of Manhattan, the Howard Hughes Corporation is proposing to build a 50-story tower right on the waterfront. And the principle that private money should pay to improve such sites seems to have become broadly accepted:

Catherine M. Hughes, chairwoman of Community Board 1, said she was glad to finally see the developer’s master plan, which appears to have met many of the community’s concerns. “We understand that in order for it to succeed and provide community amenities it needs to be economically viable,” she said.

In all of these cases, it would be cleaner, more transparent, and more efficient for the public sector to pay for the parks, while raising money through a simple auction of development rights if and when it thought that development in such areas was warranted. If lovely parks like the ones on the west side are public goods, then the public should pay for them — and if they increase property values, then the public should be able to reap the benefit by selling the newly-appreciated development rights. Instead, private developers acquire their development rights at unknown and unknowable cost, because it’s all hidden behind ostensibly charitable activity. (The development which includes that 50-story tower, for instance, will, we’re assured, “include a still-to-be-determined rescue plan for the financially ailing Seaport Museum”.) And development takes place not because it necessarily fits into any greater public plan, but just because it’s the only way that work gets done which has historically been the job of the city, rather than the private sector.

One bill, put forward by Daniel Squadron, a state senator from Brooklyn, would mandate that 20% of any charitable donation to Central Park or Prospect Park be used to support less glamorous parks in less glamorous neighborhoods. Whether such a bill would pass constitutional muster is unclear, but in any case it wouldn’t make much difference: there will always be ways around such things, especially when new parks are in large part being built by private-sector interests.

If the private sector is building parks like the High Line or the new Seaport, then those parks are going to be designed, from the very beginning, to privilege monied interests and rich-people preferences in general. (A visit to the High Line, any summer weekend, will confirm that the people who go there are decidedly well-heeled, the presence of large public housing projects very nearby notwithstanding.) He who pays the piper, calls the tune. Which is why, if we’re building public parks, the public should be paying for them. If we want to raise public income by selling development rights, that’s fine too. But let’s not conflate the two.


For those scholars among you, see Ill Fares the Land by Tony Jundt. Good reading on why private public partnerships are bad for the public. But on the specific topic of parks, it is important to note that when housing became the near-sole means to pay for Brooklyn Bridge Park, all year round recreation came out of the original master park plan. All recreational amenities were replaced by very costly to maintain landscaping.Why? Lawns sell condos but pools, ice rinks and indoor rec-centers do not. It took the community 8 years to get back 3 soccer fields and a seasonal recreational pier from the community’s original master plan. 8 years of constant and continuous advocacy (ne, fighting) with the Bloomberg “entity” that runs this non-designated “park”. If we were to dedicate just 1% of our tax revenue to public parks, all parks would be maintained to the level of these “private” parks. Remember when the Republican convention was held in NYC? Remember that a big section of Central Park was cordoned off for a Chase party? Remember that the democratic caucus wanted to use parts of the park for their event and were denied? These are historic facts – these Conservancies are a menace to open and transparent use of public lands. They should be abolished. And hopefully, under Mayor DeBlasio, they will and all parks folded back into the NYC Parks Dept. Think of all the money tax payers will save if there is just one entity running our parks? Certainly for Brooklyn Bridge Park we would save about $1Million in redundant public servant salaries and related expenses for their own building and benefits. That is on top of the Conservancy’s costs – publicly funded by City Council and State representative donations to run this redundant BBP Conservancy. The whole thing is a scam and the public loses – again, and again, and again.

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Why guru ETFs beat human gurus

Felix Salmon
Nov 21, 2013 01:09 UTC

Wall Street is no place for shrinking violets, but even by New York standards, Jason Ader has some serious chutzpah: he said today that “the proliferation of index funds and exchange traded funds” helps activist investors like himself make money.

These big investors are rarely holding “management accountable for underperformance and are not pressuring boards to hold management accountable for underperformance,” Ader said at the Reuters Global Investment Summit.

Funds run by well known activists, including Jeff Ubben of ValueAct, Barry Rosenstein of Jana Partners, and Carl Icahn, have returned roughly 14 percent on average so far this year, twice the amount that the average hedge fund has delivered, partly because they cajole businesses into running their operations better, the activists say.

In principle, this makes sense. One common criticism of passive investing is that if everybody did it, then there would be no price discovery — and that the more passive investors there are, in a market, the easier it becomes to take advantage of them with a little bit of sophisticated analysis and/or activist investing.

But the point at which passive investing becomes self-defeating is a bit like the point at which the gradient of the Laffer curve turns negative, and tax hikes cause revenue losses rather than revenue gains: both points are far beyond any state of the world that obtains in real-life America. Passive investors are still a minority of all stock-market investors — and, what’s more, they could easily become a majority without doing any harm to the markets’ price-discovery abilities. The only thing that matters is that there’s a reasonably large number of active marginal price-setters. Since there always will be a reasonably large number of active marginal price-setters, no one ever need fear that the rise of passive investing is going to become self-defeating.

In any event, it’s a simple mathematical truth that activist investing has not outperformed passive investing this year. That 14% return looks downright miserable, if you compare it to the 25% year-to-date return on the S&P 500, or any index fund which tracks it.

Of course, if your dream is to beat the market, then you’re going to have to invest in something other than a passive index fund. But don’t kid yourself that the rise of the passive-investment gospel is going to make your life any easier: it isn’t. And don’t kid yourself, either, that paying 2-and-20 to anybody is a sensible way to try to achieve your goal. Indeed, there’s an increasing number of relatively low-fee ETFs which aim to replicate the results you’d get from investing with some of the biggest-name investors in the market. (Or, of course, you could just buy stock in Berkshire Hathaway.)

These “guru” ETFs, as they’re known — one of them even trades under the GURU ticker symbol — are an outgrowth of the hedge-fund replication industry, and have varying degrees of sophistication. Charles Sizemore does a good job of comparing them: ALFA is incredibly complex; GURU is simpler; the forthcoming iBillionaire ETF (plugged by Tim Fernholz under the headline “How to copy a hedge fund billionaire’s investment plan”) is downright naive, based as it is on a strategy of simply looking for S&P 500 components in the 13F filings of certain billionaire investors.

It’s easy to laugh at these things — 13F filings, for instance, are lagging indicators which don’t give any indication of how hedged an investor is, or whether they’re putting on some kind of relative-value trade, or what their exit strategy might be. But never mind all that: iBillionaire has lots of pretty charts showing consistent outperformance over various time periods from one month to 8 years. This is “hypothetical” outperformance, of course — and surely the index has been structured, and the billionaires in it carefully chosen, so as to make the index look as attractive as possible from today’s perspective. Here more than ever, buyer beware: it’s all but certain that the index’s outperformance will start to disappear now that its immune to selection bias.

But the fact is that not all ETFs need to be passive cap-weighted index-trackers, and buying one of these guru ETFs is no sillier than buying a typical actively-managed mutual fund. In fact, it’s probably more sensible, since the discipline of the ETF strategy is baked in to its structure, and it’s harder for an all-too-human manager to make silly mistakes. On top of that, no matter how high the fees on these ETFs might go, they’ll never come anything close to the kind of fees being charged by Jason Ader and his ilk. The ETFs just sit back and follow a predetermined strategy, rather than feeling the need to do the rounds of media organizations, spouting random “conviction trades for the coming year”. Cheaper and quieter? It’s a winning combination.


“One common criticism of passive investing is that if everybody did it, then there would be no price discovery — and that the more passive investors there are, in a market, the easier it becomes to take advantage of them with a little bit of sophisticated analysis and/or activist investing.”

This is somewhat true, but more important is the quality of others that you are competing against. Even if the market is 90% passive, that share in a sense is immutable – they simply do not partake in price discovery. It is the other 10% whom you are competing against. You only “outperform” when you guess better than they do.


Posted by ArCaMa | Report as abusive

The evolution of Bloomberg News

Felix Salmon
Nov 19, 2013 15:58 UTC

Yesterday was a big day for layoffs over at Bloomberg, and Kara Bloomgarden-Smoke has the official memo from editor-in-chief Matt Winkler. In typical Bloomberg style, the defenestrations seem to be taking place in much the same way as they would on Wall Street, with reporters being escorted from the building, never to return. (Bloomberg has a formal policy that once you’ve left, even if your departure was not of your own choosing, you can’t come back.)

I got a phone call this afternoon from one Bloomberg employee of very long standing, who used terms like “Lord of the Flies” and “culture of fear”; he said that he had never seen anything like this during his long career at the company. Employees were even reportedly flocking to the local Starbucks to view the latest NMA video about Bloomberg News on their phones, because they didn’t dare watch it on their work computers.

If you take a step back from the chaos, however, it’s possible to see the beginnings of a deep change in how the Bloomberg newsroom is run. The message I’m getting from the layoffs is that Bloomberg is finally growing out of Winkler’s insecurities, and is beginning to shape the newsroom into more of a means to an end, and less of an end in itself.

To understand what’s going on, it’s important to have a vague feel for where the power really lies within Bloomberg LP. Winkler is undoubtedly a powerful man — he oversaw the rise and rise of Bloomberg News, and he is a close confidante of Bloomberg, co-writing Bloomberg’s autobiography along the way. But while Winkler is powerful, he’s no Tom Secunda. Secunda, a co-founder of the company, is the other Bloomberg billionaire, the man in charge of basically everything which makes money at Bloomberg. And Secunda is the opposite of a romantic press baron: all he’s interested in is profitability.

Winkler’s enormous achievement, of building one of the world’s foremost news organizations from scratch, required an aggressive, underdog spirit. Bloomberg News is a highly competitive organization, and Winkler wanted to beat everybody, on everything, all the time. His goal for Bloomberg News was always that it be faster, broader, deeper, more accurate, more trustworthy — on every story, compared to every competitor.

That goal, however, put Winkler at odds, to some degree, with Secunda, whose only priority is client service, and giving Bloomberg subscribers whatever they want. And it turns out that Bloomberg subscribers, although they definitely want market-moving news ahead of anybody else, are much less fussed about the broad mass of news stories which don’t move markets.

So while Winkler was building up a substantial investigative-journalism group, or creating the Bloomberg Muse franchise to cover the arts, Secunda was grumbling, asking why Bloomberg News needed to provide any of that kind of stuff. Couldn’t Bloomberg subscribers find just as good content in such areas from the New York Times wire, if they needed it? The answer, of course, was yes, but that was not an answer that Winkler ever wanted to hear: his competitive drive didn’t end at actionable news. He wanted to win everything, all the way down to sporting results and book reviews.

In recent years, Winkler has been losing a bit of his former power. New areas of editorial — most obviously Bloomberg View and Bloomberg Businessweek — have been set up largely outside his purview: while he’s nominally in charge of both, he has little actual control of either — as some of Businessweek’s most notorious covers will attest. And then, this summer, the Atlantic’s Justin Smith was hired to the newly-created job of Bloomberg Media CEO.

Smith’s main qualification for the job was that he took a company which was bleeding millions, and turned it into a profitable, digitally-savvy news organization. And while Bloomberg News doesn’t have a profit mandate — its main job is to provide news to terminal clients, not to be profitable in its own right — it was clear that Smith was being charged with making the organization rather less wasteful, and with ensuring that if Bloomberg was doing something, it was doing it for a good reason.

Thus was created a procedure which had never happened at Bloomberg News before. “We evaluated everything we’re doing,” said Winkler, in his memo, “to determine what’s working and what isn’t, with the single aim to ensure all we do has maximum impact”. No more would Bloomberg News try to beat everyone on everything: from here on in, it would concentrate only on those areas where it could really move the needle.

Put like that, it was pretty clear where layoffs would be coming. Bloomberg TV is watched by, to a first approximation, nobody — and loses more than $100 million a year. With costs so high and benefits so low, it was never going to maintain its former size. Bloomberg Muse created some wonderful content, but, again, almost nobody read it — and it was hard to make a case that it was producing extraordinary material that no one else could equal. And as for the investigative unit — well, investigations are part and parcel of any serious news organization, and Bloomberg News is nothing if not a serious news organization. But again, the unit was looking bloated, it wasn’t reaching a wide readership, and the terminal clients didn’t much care about what it produced. If they weren’t interested, then at the very least the investigations should have some kind of popular impact, and help to bolster the reputation of Bloomberg News within the global elite.

Thus did Smith give Josh Tyrangiel, the editor of Bloomberg Businessweek and one of the very few people inside Bloomberg News to have proven himself largely independent of Winkler, a broader remit, including pretty much all the problem areas: investigations, Bloomberg Muse, and — at least temporarily — Bloomberg TV as well. The pruning was severe, just as it was when Tyrangiel took over Businessweek. But Winkler is clear that even after these cuts, Bloomberg News is going to have a greater headcount next year than it did before this week’s firings. It’s still growing: it just no longer feels the need to try to beat every other media organization on things as peripheral to its terminal business as arts coverage and match reports.

All of this should make Secunda happy — while at the same time emphasizing the fact that Smith and Tyrangiel now have a significant degree of control over a newsroom which used to belong solely and unambiguously to Winkler. And while the Winkler regime had its idiosyncrasies, it didn’t pull its punches. Now, however, Bloomberg News is increasingly a direct threat to the success of Bloomberg LP, in a world where China represents the company’s biggest growth opportunity and just one of the two things that Mike Bloomberg has declared to be in his “long-range plans” after his successor’s inauguration as New York City mayor. (The other? Playing golf in Hawaii and New Zealand with Julian Robertson.)

This is the downside of having Bloomberg News act as some kind of service provider to the terminal-sales business: the terminal-sales business clearly wants to minimize the impact of any critical news articles about China. As Edward Wong reports:

Editors at Bloomberg have long been aware of the need to tread carefully in China. A system has been in place that allows editors to add an internal prepublication code to some articles to ensure that they do not appear on terminals in China, two employees said. This has been used regularly with articles on Chinese politics.

This is a textbook example of pulling punches: refusing to publish stories in exactly the country where they would serve the greatest purpose. I can’t imagine that Winkler would have initiated such a protocol: it serves no journalistic function. But it’s clear — for good and for ill — that Winkler no longer has the absolute control over Bloomberg News that he used to have.


How does it feel to have helped the tyrants lie about the jobs numbers and destroy Jack Welsh? You are an ass-hat.

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When airlines don’t compete

Felix Salmon
Nov 18, 2013 16:00 UTC

James Stewart is not happy about the settlement which allows American Airlines and US Airways to merge.

A bit of context: Historically, the US government has smiled on the national airlines, allowing them to merge when they want to, and bailing them out in times of trouble. (They got $15 billion, for instance, after the 9/11 attacks.) But in August, all that changed, quite suddenly and unexpectedly. The Department of Justice, along with a smattering of state attorneys general, sued American Airlines’ parent company AMR and US Airways, saying that their proposed merger would cause “substantial harm to consumers”. At the heart of the suit was the idea that American and US Air currently compete head-to-head on “thousands of heavily traveled nonstop and connecting routes”, which benefits consumers; and that consolidation in the airline industry more broadly “would make it easier for the remaining airlines to cooperate, rather than compete, on price and service”.

The final settlement, however, as Stewart notes, fails to address any of those concerns. Instead, the merger will basically be allowed to go ahead as planned, in return for the merged airlines giving up 104 landing slots at National airport in Washington DC, as well as a smattering of other airport assets. This is not a huge concession: US Air is currently the largest airline at National, and after the merger and divestitures it’s going to be even bigger there than it is right now.

Stewart’s narrative is a perfectly reasonable one: the normally-supine regulatory apparatus briefly raised an eyelid and snarled, but just as quickly rolled over and went back to sleep. This constitutes, says Stewart, a “baffling about-face”, although in reality it’s more like two about-faces, with the Justice Department pretty much ending up exactly where it started.

The question is, which position is preferable? There are basically two ways of looking at airline competition, and it’s pretty clear that Stewart prefers the one in August’s Justice complaint, which is admittedly the more intuitive one. Under this view, the amount of competition can be measured pretty easily, by looking at two numbers: how many big airlines there are, and how many routes they compete on. Looked at that way, there’s less competition in the US airline industry now than in living memory: Delta merged with Northwest, United with Continental, and now American with US Air. Even Southwest bought AirTran. Once the latest merger is complete, the four merged companies between them will control some 80% of domestic air service — and there’s very little indication that the three largest carriers have any particular inclination to compete on price.

But in a way, that’s exactly the point lying behind the other way of looking at airline competition. The big legacy carriers don’t compete on price at the moment, when there are four of them, and they won’t compete on price in future, when there are only three. In fact, big legacy carriers rarely compete on price. The only airlines which are built to compete on price are so-called “low cost” carriers — and the only way to encourage the formation of such creatures is to open up landing slots for them, in deals like the one that Justice just did. Those 104 slots at National, for instance, can’t go to Delta: they have to go to smaller upstarts — the kind of airlines who can and will compete on price. Under this view, the only way to create real competition in the airline industry is for there to be a lot of new airlines. Think Europe. Some of those new airlines will fail, but as a group, they will provide downward pressure on prices in a way that legacy airlines never could — especially given their legacy obligations.

I’m inclined to pessimism on both fronts: I think that merging US Airways and American will surely mean less competition and higher prices, at the margin — and I also think that the national dominance of the big legacy carriers makes it very difficult for any new airline to succeed. If you look at the history of airlines like JetBlue and Virgin America, they tend to start off with high hopes, but it doesn’t take long for their prices to start rising up to big-carrier levels. At that point, they compete mainly on service rather than price, which doesn’t make it any easier to attract the millions of travelers who feel locked in to a big carrier’s loyalty program. (Indeed, the economics of the airline industry are a bit like the economics of gas stations: where gas stations lose money on gasoline and make all their profits on convenience-store sales, legacy airlines lose money on the actual flights, while making all their profits from their loyalty programs, selling miles to credit-card companies and the like.)

The American-US Air merger, then, is surely going to be bad for prices, overall, especially out of airports other than National and LaGuardia. And the concessions aren’t going to be remotely enough to kick-start a new wave of low-cost airline startups.

The real problem here is that the root-cause bad decision was made in 2001, when the US government decided to bail out the legacy airlines rather than letting them fail. If they had failed, there would have been a period during which flying around the country would have been a lot more difficult. But it wouldn’t have taken long for a lot of smaller airlines to be created in order to fill that need. And we’d all be in a much better place right now. At this point, however, the chances for real competition in the airline industry have never been lower — regardless of what the Justice Department does.


Your last paragraph warms my heart.Do you hold the same position towards the auto company bailouts and federal assistance.

Posted by TomLindmark | Report as abusive