Opinion

Felix Salmon

Occupy vaporware

Felix Salmon
Oct 1, 2013 18:35 UTC

What happens when a group of anarchists starts a bank? The answer is that nothing happens: the bank never opens.

One of the legacies of the Occupy movement is a bunch of groups, all looking to take on the financial system in various different ways. There’s the Alt Banking working group, for instance, which recently released a book; there’s Occupy the SEC, which is still issuing erudite and hard-hitting comment letters, most recently on money-market fund reform; there’s Strike Debt, which runs Rolling Jubilee, an attempt to buy up debt on the cheap, and then retire it.

Rolling Jubilee recently responded to criticism from Yves Smith; they promise a lot more details about what they’ve been up to coming up in mid-November, and explain that as “an all-volunteer project”, their project “takes time”. Still, they’ve done what they said they were going to do: they’ve raised more than $600,000, and retired tens of millions of dollars in debt.

And then there’s the Occupy Money Cooperative, which describes itself as being “a cooperative company that offers low-cost, transparent, high quality financial services to the 99%”. It’s also the one group which has basically achieved nothing to date. It got some high-profile press in the NYT today, complete with an illustration of what a future, hypothetical Occupy Card might look like. (Interestingly, the illustration, just like the one on the cooperative’s website, does not include the all-important Visa logo that would actually allow the card to be used in practice.) The NYT article, in turn, prompted a slightly weird defense of Occupy Money from Hamilton Nolan at Gawker, saying that even though it’s “still more of an idea right now than a reality”, it’s still a good idea in principle.

His argument, I think, misses the point just as much as Colin Moynihan did at the NYT. The card is vaporware; it will never exist, and the best you can realistically hope for, if you donate money to the cause, is that at some unknown point in the future the organizers will give up and find some way of getting you your money back.

To put this in perspective: one of the organizers behind the project, Carne Ross, told me in July that he expected there would be a physical card, in existence, by September 17. That is, he told me in July 2012 that he expected the card to be a reality by September 2012. And yet here we are, a year later, and all he can reveal in September 2013 is a fundraising campaign, with a $900,000 goal. Once that goal is reached, the NYT helpfully tells us, the cards will become available to anybody who wants one. What the NYT doesn’t mention is that right now — even with all of today’s added publicity — the total amount raised is $3,789.17, or about $270 per day. At that rate, Occupy Money will be fully funded somewhere around November 2, 2022.

When Ross first told me about the debit card, 14 months ago, it was already a little behind the time: I immediately took out of my wallet my no-monthly-fee Simple card, and told him that it could do anything his card could do, and was significantly cheaper to boot. Since then, GoBank has launched as well, along with a host of very cheap prepaid debit cards, like Bluebird and Liquid.

Occupy Money says in its FAQ that its card is “more than just a prepaid card since it features additional services. It’s our aim to make the card and its associated charges less expensive than other cards on the market.” But it doesn’t feature an explicit price comparison. And if you look down the list of fees ($0.99 per month, $4.95 to load cash onto the card, $3.74 to deposit a check onto the card at a store, 4% for instant check deposit via your smartphone, $1.95 to withdraw cash from an ATM, $2 to speak to an agent, $0.99 for a balance inquiry, etc) then it’s hard to come away convinced that the cost of this card is really going to end up being lower than the cost of its competitors. As for the “additional services”, there’s no indication of what those might be. I find it hard to believe that they include anything you can’t get from Simple or GoBank.

Ross has ambitious dreams: he’d love to open a nationwide cooperative bank, owned by its members but insured by the FDIC, rather than the NCUA. As Nolan says, Ross’s dreams are noble ones. But starting a bank is hard work — even Simple gave up, in the end, and decided to just be a glossy front end for Bancorp Bank. And while launching a prepaid debit card is a lot easier than launching a bank — after all, the Kardashians did it, how hard can it be — it turns out that even debit cards are pretty hard to launch if you don’t have any startup money and you’re run on a volunteer basis.

The Occupy Card, then, is too little, too late: it’s an idea which might have been welcome two years ago, when Occupy was at its peak, but which at this point looks rather old-fashioned compared to some of the best new products on the market. And of course on top of that it has the biggest weakness of all, which is that it doesn’t actually exist. Timing is everything, and the Occupy protests were very well timed. But at this point, the movement is losing momentum. And the anarchists are all off using bitcoin.

COMMENT

@ Felix: be very careful who you label anarchists, the government is shut down by a small group of wingnuts. How is this not anarchy?

Posted by lotuslandjoe | Report as abusive

The zombie apocalypse has arrived

Felix Salmon
Oct 1, 2013 13:39 UTC

Have you been involuntarily furloughed today? Are you looking for a good way to spend some of your newly freed-up time? And do you want to understand what’s really going on in Washington? In that case, I can highly recommend that you read John Powers’s brilliant article, The Political Economy of Zombies, over at The Airship.

In Powers’s view, the zombie apocalypse is less horrific than it is utopian: it’s a way to cleanse the world of its otherwise ineradicable neoliberal capitalism, and to pave the way for a much more equal post-capitalist (and post-Zombie) society. “The zombie apocalypse,” he writes, “is as close as we have come in the past 30-odd years to producing a convincing utopian vision for the future that grows out of our present circumstances.”

It was easy to see a lot of people dressed up as zombies during the Occupy protests, and Powers explains what was going on: “Zombies were not being equated with corporate capitalism – they had become the revolution itself. Zombies had become the alternative to the system with no alternative.” Powers quotes anarchist economist David Graeber as saying that neoliberalism has “succeeded magnificently in convincing the world that capitalism – and not just capitalism, but exactly the financialized, semi-feudal capitalism we happen to have right now – is the only viable economic system.”

And he also quotes (of course) Slavoj Zizek:

Look at the movies that we see all the time. It’s easy to imagine the end of the world – an asteroid destroying all of life and so on – but we cannot imagine the end of capitalism.

And then he explains why zombies have become such a common theme in popular culture:

For movie audiences, the mainstream, the 99%, catastrophes aren’t something to dread; they are something to look forward to. They are a catharsis, a conceptual clearing of the deck. They are the implosion of the banking towers at the end of Fight Club, they are the destruction of the White House in Independence Day, they are the wholesale destruction of the entire global map in 2012.

Powers dates the era of utopian zombiedom to the release of 28 Days Later in 2002, a film which opens after the zombie apocalypse, with a scene of Cillian Murphy exploring the now-empty streets of what was formerly the capital of capitalism:

I remember seeing Boyle’s film when it came out in theaters. I went to see it, not because it was a zombie movie, but despite that. Everyone I knew was buzzing about the opening scene in London. It was that image that got me and a lot of other “not into zombies” guys and gals to go see 28 Days Later. It was that same image that got people excited to see I am Legend: It was Manhattan emptied. It was the end of buying and selling. For the majority of us who live within the capitalist system but aren’t of the neoliberal breed of capitalist, catastrophe means no more mortgage payments, no cell phone surveillance, never again having to bicker over what is or isn’t a preexisting condition. Catastrophe voids all obligation, makes the world anew.

Go read Powers’s essay for the, er, fleshed-out version of this argument: it’s well worth it. Or, just watch what Powers calls “the finest moment of all ecstatic wealth destruction in the zombie movie canon”, from Zombieland. My point is that Ted Cruz, and the Tea Party generally, are basically doing their best to play out this exact fantasy. By shutting down the government, they are destroying not a desert gift shop, but rather billions of dollars of real-world economic activity.

In doing so, the Tea Party is proving that it, truly, is the party of the 99% — of the masses who thrill to zombie movies, who fantasize about living in a post-zombie utopia, who understand that you can’t make an omelette without breaking some eggs. We live in a country where the best way to ensure blockbuster status for your summer movie is to blow up as much stuff as possible — a building, a city, the entire world. Highbrow film critics might find such wanton destruction horrific, but the typical moviegoer just finds it thrilling. And when you look at the grass roots of today’s Republican party, it’s easy to see a bunch of heavily-armed zombie hunters: today’s downtrodden masses, perfectly positioned to become tomorrow’s post-apocalyptic elite.

The Tea Party’s “tear it all down” mentality — the worldview which has shut down the government today and which could conceivably even end in debt default, if the debt ceiling isn’t raised — is not, then, the result of any particular political philosophy. I doubt that Ted Cruz spends overmuch time reading Graeber or Zizek. But it’s real, all the same. And if you think that a government shutdown somehow decreases the probability of a debt-ceiling catastrophe, it might be worth thinking again. I fear that instead it might just whet the Republicans’ appetite for more.

COMMENT

Hi Felix

You and Powers make an interesting point about the sense of catharsis people get from watching some apocalypse movies – particularly the frisson of excitement when a landmark building representing authority is destroyed.

I remember one of my old English teachers (the wonderful Peter Mackintosh – who looked like Count Dracula in his academic robes) back in 1977 getting us school children to explore similar feelings when we read Day of the Triffids (particularly the section describing shops crumbling into the streets of London) and Lord of the Flies – the sense of dread counterbalanced by a sense of wild release.

Stephen King evokes a similar fascination at the start of his epic horror novel The Stand, when he describes the rapid spread of the plague and equally rapid breakdown in civilised society. Part of us hopes it never happens and part of us takes a guilty pleasure in wondering just how (heroically) we would cope.

Cheers

@HuwSayer

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The evolution of Lending Club

Felix Salmon
Sep 30, 2013 13:37 UTC

I have a piece in this week’s NY Mag about Lending Club, part of a series of profiles of what the magazine calls “boom brands“. I’ve been a fan of the Lending Club model since April 2009, and have watched its steady, disciplined growth with admiration since then. As I explain in my article, the company has changed over the years: at this point, it’s much more about the Lending than it is about the Club, and the peer-to-peer nature of the site is much less important than it was at the beginning.

But Renaud Laplanche, Lending Club’s founder, tells me that there are interesting developments ahead on that front, too: he has started talking to companies in Silicon Valley about the idea of providing low-cost loans to employees. As in, very low cost: you could borrow at a rate of as little as 3% from your employer, which in turn would still be making a higher return on its money than anything easily available to its Treasury operation. And because you’re an employee, you’re much more likely to be accepted into the program than a random applicant to Lending Club — and you’re also much less likely to default on your loan.

This kind of program wouldn’t make sense for, say, McDonald’s — but it does make sense for places like Apple or Intel. Again, it’s not an expansion of credit to places where it was formerly unavailable, but it is a way of disintermediating banks and strengthening bonds — in this case, between employer and employee.

And Laplanche thinks that there are areas where he might even be able to expand the size of the borrower pool — specifically, small businesses, which always have a devil of a time borrowing money, and which banks find very difficult to lend to. Lending Club will probably use its own money to start lending in a small way to small businesses in the first instance, rather than putting any peer money at risk. This is a whole new underwriting nut to crack, and there are too many things which could go wrong at the start. But if it works, then Lending Club could really become an engine of economic growth.

Lending Club will go public next year in what will surely be one of the easiest IPOs in memory. The company’s financials and quarterly reports have been publicly available for years, in fully SEC-approved form. In fact, thanks to something called blue sky laws, going public will actually reduce Lending Club’s regulatory burden, by putting the whole company under the aegis of federal regulators. No longer will it need to laboriously work with regulators in 50 different states. But there will be a short burst of publicity, much of which will concentrate on the company’s growth rate.

And the thing to note here is that although Lending Club is by far the world’s biggest peer-to-peer lender, it isn’t following the standard Silicon Valley model of growing as fast as possible. Loan quality changes over time, and it doesn’t want too much of its investors’ money to be tied up in a single cohort of borrowers, as would be the case if it expanded at a too-rapid clip.

Once Lending Club started being able to attract Wall Street money, a lot of things changed, including the fact that all accepted borrowers started getting funded, sometimes within minutes and always within a couple of days. In that sense, the growth constraint at Lending Club is the number of borrowers it accepts, rather than the amount of money available to be lent. But the pool of possible borrowers is still much larger than the one from which Lending Club is currently fishing — it doesn’t even need to expand its product line to be able to grow, at current rates of growth, for many years to come. There are lots of Americans out there who want to borrow money, or refinance. And over time, we’ll surely see a substantial proportion of the best credits among them moving online for their funding needs.

COMMENT

P2P lending has changed drastically over the last 3-4 years mainly due to the deployment of institutional capital. As a result, the bottleneck has become borrowers rather than lenders as Felix aptly notes.

P2P lending has also paved the way for accredited investor crowdfunding. Platforms like RealtyShares (www.realtyshares.com) and Circleup (www.circleup.com) are creating ways for investors to invest as little as $5,000 into real estate and small businesses and earn yields similar to what they earning with platforms like lending club and prosper.

Exciting times for the fintech space and I commend LendingClub and Prosper for being pioneers.

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How Dave Eggers gets Silicon Valley wrong

Felix Salmon
Sep 30, 2013 04:12 UTC

Dave Eggers’ new book, a dystopian fantasia about social media, is excerpted in the NYT Magazine this weekend. The mag’s editor, Hugo Lindgren, gushes about how the book walks “the line between satire and bracing details that feel all too real” — but the fact is that, at least judging by the excerpt, Eggers strays so far away from verisimilitude that his book barely even feels like satire. Instead, Eggers is preaching to a group of people which has already made up its collective mind that social media is dangerous, and who love to one-up each other when talking about where the slippery slope might lead.

I’m sure that this book will sell very well in Germany. But for those of us who have a slightly more nuanced view of the costs and benefits of social media, Eggers’ glaring mistakes, when it comes to Silicon Valley culture, make it all too easy to dismiss his whole book as the work of someone who hasn’t got the faintest clue what he’s talking about.

Eggers, at 43, is now settling into Old Man mode: “I grew up doing all my homework in front of the TV, which baffled my parents and horrified my grandmother,” he tells the NYT. “Now younger people toggle between far more media and devices than I ever could.” Eggers is weirdly proud of his ignorance of social media: he has tweeted exactly twice, back in 2009, and he says in the NYT Q&A that he wanted to write this book from a position of ignorance:

I’ve never visited any tech campus, and I don’t know anything in particular about how any given company is run. I really didn’t want to…

There were a handful of times when I looked something up, or asked the opinion of someone more tech-savvy than I am, but for the most part this was just a process of pure speculative fiction.

The result is a Silicon Valley behemoth, the eponymous Circle, which combines aspects of Google, Facebook, and Twitter — and then adds a heavy-handed overlay of thought police.

“Let’s go back to your dad and this weekend. Did he recover O.K.?”

“He did. It was a false alarm, really.”

“Good. I’m so glad to hear about that. But it’s curious that you didn’t share this with anyone else. Did you post anything anywhere about this episode? A zing, a comment anywhere?”

“No, I didn’t,” Mae said.

“Hmm. O.K.,” Denise said, taking a breath. “Do you think someone else might have benefited from your experience? That is, maybe the next person who might drive two or three hours home might benefit from knowing what you found out about the episode, that it was just a minor pseudo-seizure?”

“Absolutely. I could see that being helpful.”

“Good. So what do you think the action plan should be?”

“I think I’ll join the MS club,” Mae said, “and I should post something about what happened. I know it’ll be beneficial.”

Denise smiled. “Fantastic. Now let’s talk about the rest of the weekend. On Friday, you find out that your dad’s O.K. But the rest of the weekend, you basically go blank. You logged into your profile only three times, and nothing was updated. It’s like you disappeared!” Her eyes grew wide. “This is when someone like you, with a low PartiRank, might be able to improve that, if she wanted to. But yours actually dropped — 2,000 points. Not to get all number-geeky, but you were on 8,625 on Friday and by late Sunday you were at 10,288.”

“I didn’t know it was that bad,” Mae said, hating herself.

This is certainly creepy, but it’s also the exact opposite of the way that Valley technology companies work. The success of Facebook comes from the way in which Mark Zuckerberg managed to observe and understand his Harvard cohort, in an outsider-looking-in kind of way. Or look at Tumblr, which actively hides follower counts so as not to turn the whole thing into a silly game. The product managers at these companies are certainly trying to create something which will become broadly adopted. But they know better than to think that the best way to do that is to encourage their own employees to use the product to the point of exhaustion:

There are problems with Silicon Valley and with technology — don’t get me wrong. But they’re insidious, rather than being overt: executives compete to find products that people want to use, rather than trying to impress upon the public the need to share, or the idea that doing so is so socially beneficial that you’re a bad person if you don’t do it. The Eggers excerpt ends with a scene straight from 1984, featuring a pep rally led by the company’s CEO:

“There needs to be, and will be, access and documentation, and we need to bear witness. And to this end, I insist that all that happens must be known.”

The words appeared on the screen:

ALL THAT HAPPENS MUST BE KNOWN.

“Folks, we’re at the dawn of the Second Enlightenment. I’m talking about an era where we don’t allow the majority of human thought and action and achievement and learning to escape as if from a leaky bucket. We did that once before. It was called the Middle Ages, the Dark Ages. If not for the monks, everything the world had ever learned would have been lost. Well, we live in a similar time, when we’re losing the vast majority of what we do and see and learn. But it doesn’t have to be that way. Not with these cameras, and not with the mission of the Circle.”

He turned again toward the screen and read it, inviting the audience to commit it to memory: “All that happens must be known.”

Mae leaned toward Annie. “Incredible.”

“It is, right?” Annie said.

Mae rested her head on Annie’s shoulder. “All that happens will be known,” she whispered.

The audience was standing now, and applause thundered through the room.

There are certainly criticisms of Google which run along these lines — see, for instance, Daniel Soar’s fantastic 2011 essay for the LRB, entitled It Knows. But the point is that you’ll never find rhetoric like this coming from inside Google. And certainly, if Google tried to change the world one Googler at a time, it would get absolutely nowhere.

Indeed, insofar as Silicon Valley is gamifying the world, the last thing that any company wants is for its own employees to consistently win the game. What’s more, if the game is social interaction, then the winners are never going to be a group of software engineers.

The thing about the Valley that Eggers misses is that it’s populated by people who consider themselves above the rest of the country — intellectually, culturally, financially. They consider themselves the cognitive elite; the rest of us are the puppets dancing on the end of their strings of code.

Besides, we all share the downside of being part of an always-on, networked society, whether we participate on social media or not. If you’re going to suffer the downside, you might as well enjoy the upside — that’s all the motivation that anybody needs to get involved, there’s no need for crude coercion.

In science, there’s a phenomenon called “herd immunity”: if you vaccinate a high enough proportion of people, the entire population becomes immune. The evolution of the web is similar: enough of us are connected, in many different ways, that no one has real privacy any longer. Eggers can see that, but he then tries to reverse-engineer how we got here, and, by dint of not doing his homework, gets it very wrong.

The Circle is a malign organization; you can almost see its CEO, Eamon Bailey, stroking a white cat in his suburban Palo Alto lair, dreaming of Global Domination. In reality, however, the open protocols of the World Wide Web led naturally and ineluctably to our current loss of privacy. Tim Berners-Lee is no evil genius; he’s a good guy. And the Eggers novel I’d love to read is the one dominated by the best of intentions. Rather than the one which thinks that if technology is causing problems, then the cause must always be technologists with maleficent ulterior motives.

COMMENT

Given the choice between Felix view of the Valley and Dave – no contest- Felix has my vote.

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The JP Morgan apologists of CNBC

Felix Salmon
Sep 29, 2013 04:14 UTC


I don’t know which producer at CNBC had the genius idea of asking Alex Pareene on to discuss Jamie Dimon with Dimon’s biggest cheerleaders, but the result was truly great television. What’s more, as Kevin Roose says, it illustrates “the divide between the finance media bubble and the normals” in an uncommonly stark and compelling manner.

The whole segment is well worth watching, but the tone is perfectly set at the very beginning:

Maria Bartiromo: Alex, to you first. Legal problems aside, JP Morgan remains one of the best, if not the best performing major bank in the world today. You believe the leader of that bank should step down?

Alex Pareene: I think that any time you’re looking at the greatest fine in the history of Wall Street regulation, it’s really worth asking should this guy stay in his job. In any other industry — I can’t think of another industry. If you managed a restaurant, and it got the biggest health department fine in the history of restaurants, no one would say “Yeah, but the restaurant’s making a lot of money. There’s only a little bit of poison in the food.”

This is a very strong point by Pareene — and it’s a point which was well taken by Barclays. When the UK bank was fined $450 million last year for its role in the Libor scandal, its CEO duly resigned. After all, a $450 million fine is prima facie evidence that the CEO really isn’t in control of his bank.

But $450 million is a rounding error with respect to the kind of fines that Dimon is now talking about paying — $4 billion, $11 billion, $20 billion, who knows where this will stop. Tim Fernholz has a good roundup of all the various things that JP Morgan is in trouble for; Libor manipulation is at #5 on his list of seven oustanding investigations — on top of another four settled investigations. If Libor manipulation alone was enough to mean the end of Bob Diamond, it’s hard to see how Jamie Dimon should be able to survive this tsunami of litigation.

Unless, it seems, you work for CNBC. In which case you just ignore Pareene’s question, and get straight onto the important stuff:

Duff McDonald: It’s preposterous. The stock’s touching a ten-year high. It’s a cash-generating machine.

Maria Bartiromo: Should we talk about the financial strength of JP Morgan? The company continues to churn out tens of billions of dollars in earnings and hundreds of billions of dollars in revenue. How do you criticize that?

This view — that profits cleanse all sins, and that so long as you’re making money, nothing else matters — is not normally expressed quite as explicitly as it was here. After all, there are licit and illicit ways of making money, and surely if your profits fall into the latter category, you should not be able to remain comfortably ensconced as a celebrated captain of industry. Besides, banks shouldn’t be obscenely profitable: they’re intermediaries, and in an efficient economy their profits should be quite easily competed away. When bank profits are high, that’s a sign that the bank in question is extracting rents from the economy, rather than helping it to grow.

The rest of the interview is a glorious exercise in watching CNBC anchors simply implode in disbelief when faced with the idea that JP Morgan in general, and Jamie Dimon in particular, might be anything other than a glorious icon of capitalist success. In the world of CNBC, the stock chart tells you everything you need to know, while the New York Times is a highly untrustworthy organ of dissent and disinformation.

Eventually, Bartiromo asks Pareene, with a straight face, who would be the best CEO of JP Morgan “from a shareholder perspective”. Since, clearly, the shareholder perspective is the only one that matters. Except, of course, it isn’t. JP Morgan’s balance sheet shows assets of $2.4 trillion and liabilities of $2.2 trillion, leaving $200 billion in total stockholder equity. Sure, the shareholders matter — but even in terms of the balance sheet they only matter about 8.6%. And in terms of the systemic importance of JP Morgan to the nation as a whole, its shareholders matter even less. The country was seriously damaged by JP Morgan’s lies and misrepresentations about its mortgages — much more than it would be damaged if the share price went down instead of up. And the public has every reason to want the individuals running JP Morgan to be held accountable when it gets into serious regulatory trouble over and over again.

Right now, the banks aren’t lending money to homeowners — the government remains the only game in town, when it comes to mortgages, and that isn’t healthy at all. JP Morgan’s shareholders might be happy with Jamie Dimon, but that doesn’t mean the rest of us should be. Jesse Eisinger wants the banks executives to face personal charges; whether that happens or not, it still behooves them to take responsibility for the long series of egregious errors that JP Morgan has made. Shareholders might not want to see Dimon go. But if JP Morgan does end up paying an 11-digit fine, then resignation would surely be the honorable thing to do.

COMMENT

The way I look at it, we have to reckon with one of two things here:

1. Dimon did not have control of the company and did not know what aspects of his business were going on with what, which makes him incompetent. I don’t personally think he is, honestly.

Or

2. Chase is such a big entity that it is, effectively, ungovernable by its own leadership. This illustrates the inherent problem with letting entities get to the size they do in our corporate hegemony.

Well, there is a third option, pay 20 billion dollars in fines and allow our limp wristed government to simply make it go away, which is going to happen.

We’re doomed.

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The good and bad of Dave Ramsey

Felix Salmon
Sep 26, 2013 20:50 UTC

 

Back in June, Dave Ramsey declared war on professional financial advisers via Twitter. One thing led to another, and the upshot, now, is that I’ve published a 3,000-word article on Ramsey’s investment advice in Money magazine.

Who is Dave Ramsey? If you’re a member of the coastal elite, you might remember him from Megan McArdle’s feature about his budgeting advice, which ran in the Atlantic a few years ago. If you’re a more typical flyover-state American, on the other hand, you probably know his radio show at first hand: he’s the third-most-popular radio personality in the country, behind Rush Limbaugh and Sean Hannity but ahead of Glenn Beck. Ramsey’s show is a potent mixture of god and mammon: his Financial Peace University claims to present “a biblically based curriculum that teaches people how to handle money God’s ways”.

The problem is that when it comes to investing, God would seem to be something of a financial illiterate. For instance, in his Total Money Makeover book, Ramsey writes that “Aggressive Growth funds get the last 25 percent of my investment. (They are sometimes called Small Cap or Emerging Markets funds.)” Given that another 25% of Ramsey’s asset allocation goes to International funds, followers of Ramsey’s advice could end up putting 50% of their money in international stocks.

Ramsey also claimsfalsely but repeatedly — that it’s reasonable to expect a 12% return on your investments, and that therefore it is reasonable to take out 8% of your savings every year, after you’ve retired. This is a recipe for disaster: over the course of a 30-year retirement, the 8% withdrawal rate, adjusted for inflation as Ramsey recommends, would run out of money 56% of the time. Here, for instance, is a sample worksheet from his book, calculating that if you want to live on $30,000 per year, you’ll need a nest egg of just $375,000:

 

ramsey.png

All of which would make it very easy to hate on Ramsey, and to side with the financial advisers he aligns himself against. But the fact is that it’s more complicated than that. The fact is that, realistically, the overwhelming majority of people who follow Ramsey’s advice are never going to reach the point at which they invest a penny. (Before they get there, they have to pay down all their debts, and then build up an emergency fund containing six months’ worth of expenses.) Ramsey isn’t harming people who don’t take his investment advice: if anything he’s helping them, by giving them something to aspire to.

Meanwhile, financial advisors cater to the rich, not to the mass market. If you sign up with Dave Ramsey, you will get financial advice, and it won’t cost you much if you’re not investing much. Yes, you’ll be steered into wildly inappropriate funds which carry up-front fees of somewhere north of 5%. And yes, Ramsey will get highly disingenuous when it comes to defending those indefensible fees. But, once again, Ramsey isn’t talking to people with seven-figure sums to invest: he’s talking to people who could never get past the front door at most financial advisers. A highly-recommended and beyond-reproach adviser like Galia Gichon charges $250 per hour: if you have just three sessions with her, that’s $750. And $750 is 5.75% of $13,000: if you’re investing less than that, in a weird way you’re saving money by paying up-front commissions.

To put it another way: there’s a tiny subset of Ramsey clients who do invest, and nearly all of them invest less than $10,000 per year. Those people neither can nor should be shelling out $250 an hour for financial advice — especially seeing as how they’ve already got themselves in a pretty good place by following Dave Ramsey. What they really need is someone to talk to, someone to hold their hand and encourage them to keep on saving, even after they’ve paid off their debts and built up their emergency fund.

Investing, no less than paying down debt, is all about discipline and goal-setting and having a clear idea of why you’re doing what you’re doing. But in some ways, investing is harder than paying down debt. Debt hangs over you; it’s a nasty, omnipresent cloud which never makes you feel better and often makes you feel worse. Under Ramsey’s plan, you budget carefully, cut up all your credit cards, and use only cash, pre-distributed into different envelopes dedicated to different types of expenses. Everything is worked out from your budget, and since your budget involves living within your means, there’s money left over to steadily pay down your debts. It’s an efficient and effective system, and once you’ve paid off a couple of your smaller debts, you can see that it works and that you’re on your way to becoming debt-free.

Once your debts are paid off, however, the temptations of the hedonic treadmill return. Without the dark cloud of debt, you’re free to spend every last penny you earn: free to buy that shiny bicycle, take that much-deserved vacation, replace that sagging mattress. Putting that sixth month’s salary into your emergency fund doesn’t feel as though it’s nearly as much of an achievement as does paying off your credit-card debt in full. And it’s hard to get support from your peers: personal finance is the last taboo subject, the one thing we never talk about in polite company.

So once you’ve paid off your debts, once you’ve put tens of thousands of dollars in the bank, who’s going to keep you on the straight and narrow? Who’s going to persuade you that continuing to pay for everything in cash, out of envelopes, is a good idea, rather than being an infantilizing embarrassment?

Some financial advisors might pretend that they’re charging money because they’re smart at picking investments, but really that’s the least valuable thing that they do. Ramsey’s advisors will accept anybody, and they will do the valuable thing — just being there, mainly, in a world where it’s incredibly difficult to find someone to talk honestly to about money — for what in dollar terms can be a very low sum.

I don’t like Ramsey’s investment-advice model any more than I like his investment advice. It’s based on hidden kickbacks from advisors to Ramsey himself, and the income Ramsey gets from the investment-advice arm of his empire is clearly a large part of the reason why his investment advice is so bad. If you’re disciplined enough to follow Ramsey’s advice on getting out of debt, then you’re disciplined enough not to need to pay an advisor 5.75% of your savings just to hold your hand. And you should be treated with respect, which means that you shouldn’t be lied to about the returns you can expect or the amount of money you’ll really need in retirement.

But I can’t hate Ramsey in general just because of the small part of his empire which gives investment advice. The rest of what he says is very solid — and he’s clearly done a great job of reaching a very wide audience. On top of that, there are lots of people who sincerely feel that they need individual investment advice — and most of those individuals are simply not catered to by the existing financial-services industry. Dave Ramsey’s advisers surely have their problems. But there’s a colorable argument that they’re better than nothing.

With a financial advisor, it’s that much harder to fall off the Dave Ramsey wagon: you’ve got a friend, now, whom you’re accountable to, every time you go over budget on your spending or fail to make a planned deposit into your investment portfolio.

And ultimately, when it comes to investing, that’s what really matters. It’s easy to get caught up in the narcissism of small differences, to argue whether it’s more realistic to tell people to expect 4% returns rather than 8% returns or even 12% returns. It’s even easier to extrapolate those returns over many decades, to make the difference in the end result look as large as possible.

But the fact is that the amount you end up with, at retirement, is not really a function of your investment decisions — not to a first approximation, and not even to a second approximation, either. The first and biggest driver of your total wealth at retirement is simply the amount of money that you managed to save, in total, over the course of your working life. The more money you put away, and the less money you spent, the more you’ll end up with at the end of the day.

After that, the secondary driver — and it’s much smaller than the primary driver — is general market returns, the market beta. If you’re lucky enough to be investing over the course of a thirty-year bull market, then you’ll end up with substantially more money at the end than if you were stuck in a nasty bear market for most of your working life.

Last, and very much least, comes the question of which specific investments you make: whether you’re in mutual funds, or in stocks, or in ETFs; whether and how you pay commissions; how tax-efficient your investments are; how much you pay in fees; how much your investments outperform or underperform the market; and so on. These questions tend to be the ones which investment professionals concentrate on, since they’re the questions where they have a professional advantage and can, in theory, make a difference.

But let’s keep things in perspective, here. Ramsey is good at the main thing, which is encouraging his followers to save as much as possible. He’s bad at telling them how to save, and of course he has no control at all over how well the market as a whole performs. But if you asked me to predict which person was likely to end up with the greater sum of money at retirement, I might well pick the person on the Ramsey program paying a 5.75% up-front fee on all of her investments, over a self-directed individual following first-rate advice from Jack Bogle. And the reason is that Ramsey’s followers are disciplined spenders. Which can make much more of a difference than any kind of investing strategy ever will.

COMMENT

I am 25 and my wife and I have followed DR’s advise for years. We have a paid for house (cheap forclosure, we are saving up for an upgrade), and have almost 60k in retirement accounts. It’s is also worth noting that neither of us has made over 50k individually in a year. His advise is solid for most people. So to say that people following his advise won’t have enough to justify an hourly adviser is just wrong.

I agree that his investment strategy is not efficient (mostly due to loads and fees). However, I do agree with exclusively investing in equities while building your nest egg.

+1 Missinginaction (above comment): Having low spend rate is the only way to build wealth.

Posted by bdBrooks | Report as abusive

The bitcoin bug bites SecondMarket

Felix Salmon
Sep 26, 2013 05:58 UTC

I have to admit I’m disappointed in this one. It’s no secret that I’m very skeptical about what’s likely to happen when small, risky investments start getting lots of publicity thanks to the ban on general solicitation being lifted. And I’m even more skeptical about funds which do nothing but invest in bitcoins. But at the same time I like quite a lot of the SecondMarket business model. They provide a valuable service to private companies, and they have every ability to carve out a nice little niche for themselves as an accreditation and investment platform — a one-stop shop which allows companies and funders both to avoid much of the onerous paperwork normally associated with private investments.

The problem is that SecondMarket isn’t just a service for issuers and investors. It has also, of late, become a lead-generation engine — or, to put it another way, a mechanism for selling schmucks to wolves. SecondMarket has contact details for a very large number of accredited investors, many of whom trust the company and the reputational capital it has built up over the years. If you send enough of those investors investment pitches for diamond funds, or art funds, or space-based vaporware, the sillier among them will bite. And, eventually, regret doing so. SecondMarket’s investor list is a valuable thing, but the company isn’t behaving in the manner that you’d expect of an owner of something precious and valuable. Instead, it seems to be happy renting its list out to just about anybody.

SecondMarket began life as a way to monetize illiquid fixed-income investments during the financial crisis; it then morphed into a quasi-exchange for Facebook shares. Both businesses were lucrative, but both also came to a natural end, and now it seems that the company is not particularly confident in its ability to make similar sums as a high-end services company. So observers who discerned a whiff of desperation when they first started receiving pitch emails are not going to be surprised by SecondMarket’s latest development: a bitcoin fund.

Bitcoin Investment Trust is basically exactly the same thing as the Winklevii’s bitcoin ETF, only it doesn’t need SEC approval — it’s limited to accredited investors. (But it can still be marketed in public, now that the general solicitation ban has been lifted.) That means it’s even more problematic than the Winkleproduct — it has all the same downsides, plus added illiquidity! If you buy into this trust, you still can’t do the single most useful thing that anybody can do with bitcoins, which is sell them or trade them. (Bitcoins are a combination of currency and commodity; this trust strips out the interesting bit, which is the currency part, leaving just the stupidly speculative commodity aspect.) You still have to pay a fee of 2% per year to SecondMarket for all the work they’re doing sitting on your bitcoins. And then, if you ever do decide to sell, you have to pay another 1.5% fee to get out. On top of that, if you buy into the trust after January 1, you’re also going to have to pay a 1.5% fee to get in.

SecondMarket CEO Barry Silbert is a big booster of bitcoins — he thinks that in 30 years’ time, they’ll be worth lots of money. He’s even put together a 14-page investor presentation, saying that bitcoins could be worth $7,692 apiece if they wind up being worth 1% of the value of the world’s gold today. So let’s say you invest $1,367 in ten bitcoins today: in 30 years’ time, they might be worth $76,920.

On the other hand, if you invest $1,367 in the bitcoin trust, and pay a 1.5% fee, then you only end up with 9.85 bitcoins. And then if you lose 2% of your bitcoins every year for the next 30 years, and then you lose another 1.5% when you sell, your total bitcoin holding in 30 years’ time will be just 5.29 bitcoins. Even if they’re worth $7,692 each, that’s a total of just $40,709 — you’ve ended up paying SecondMarket a full 47% the money you would have made if you’d just sat on the bitcoins yourself.

More profoundly, this announcement marks the end of SecondMarket as an agnostic platform, and the beginning of SecondMarket as a booster of specific investments. The company has already seeded its bitcoin trust with $2 million of its own money — it’s making a big bitcoin bet, and is actively encouraging all of its users to do likewise. Silbert knows that the bitcoin trust is risky: that the most likely scenario is that it goes to zero. It’s a lottery ticket, basically — but one which pays a constant stream of management fees to Silbert’s company, and which risks putting investors off SecondMarket for good if it fails.

Silbert has a Wall Street background, and SecondMarket is a registered and fully regulated broker-dealer. As such, it really should be bending over backwards to be as conservative and sober as it can — no one wants their broker-dealer to be some risky fly-by-night operation offering investments with massive downside. If you’re a broker-dealer, job one is always to be as trustworthy as possible. And getting involved in bitcoins is not a great way of demonstrating trustworthiness.

I have spoken to Silbert about this, at some length, but I still don’t really understand (a) why he’s doing this; and (b) why he’s doing this under the auspices of SecondMarket. Bitcoin does breed True Believers, and Silbert might well be one of them — but that’s no reason to put at risk the reputation of the company he’s spent so many years building up. I don’t necessarily think that SecondMarket has definitively jumped the shark today — I think that it can probably recover from this misstep if it tries. But a bitcoin trust is not a good idea. It didn’t make sense when the Winklevii first came up with it, and it makes no more sense now that SecondMarket has followed their lead. No sensible investor should go anywhere near it, and anybody using SecondMarket as a platform should be more than a little concerned that their trusted broker-dealer has taken this highly unorthodox road.

COMMENT

Mr. Salmon, you’re missing an important angle. To those who really understand Bitcoin, it is not just some payment system or fun/speculative investment. Bitcoin (if it grows to some certain level) will change the financial system of the planet.

Now, you can argue it will never get there. Or, you can argue that the changes wouldn’t be good (such as if you prefer governments control peoples’ private property). Whether one is right or wrong on those arguments, please understand that if Bitcoin does not fail, it will become something very powerful and very special. And it will be the set of individuals and businesses that seized the technology in its early years – when everyone else thought it was a joke or scam – who will be proudly looking back on what they helped accomplish for humanity.

Hyperbole? Let’s check back in ten years.

Posted by evoorhees | Report as abusive

Inter-dealer brokers’ inside information

Felix Salmon
Sep 25, 2013 15:55 UTC

It’s hard to keep track of all the charges coming out today, in a coordinated fashion, against inter-dealer broker ICAP. For those of you who like primary documents but who don’t fancy wading through 26 pages of the the English FCA complaint or 58 pages of the US CFTC order, let me recommend the juiciest one of the lot: the Justice Department’s criminal complaint against three ICAP defendants, Darrell Read, Daniel Wilkinson, and Colin Goodman.

Goodman is the cash broker, based in London, who called himself Lord Libor. Every day, he would send an email to the various banks which contributed to the daily Libor fixing, giving them “suggested Libors” for where they should report yen Libor at 1-month, 3-month, and 6-month tenors. Not all of the banks would follow Goodman’s suggestion all of the time. But most of them would take Goodman’s email as an important datapoint, and some of them would simply turn around and submit whatever Goodman told them the rate was. After all, yen Libor was, especially during the financial crisis, something of a fiction: it’s meant to represent the rate at which banks lend to each other in yen, but by the time of the crisis, there was exactly zero interbank yen lending going on. So yen Libor became simply whatever the banks said that it was — a recipe for manipulation.

The biggest manipulator of all was Tom Hayes of UBS, who was criminally charged back in June. Hayes made millions for UBS by entering into derivatives bets about where Libor was going to be. And he tended to win those bets not because of some unusual degree of prescience, but rather because he would tell ICAP where he wanted Libor to be, and then Goodman would put those numbers into his email to the various fixing banks. Essentially, ICAP made money by knowing what Hayes wanted, and then delivering it to him.

Hayes’s trades were very profitable not only for UBS, you see, but also for ICAP. Libor derivatives don’t trade on any exchange: they’re entered into bilaterally, between various institutions. And in the middle, taking no risk but bringing the different institutions together so that they can trade, sit the inter-dealer brokers like ICAP. Hayes didn’t use ICAP exclusively — he had a similar arrangement with Tullett Prebon — but he used ICAP a lot, and every time he traded through them, they would take a commission. On top of that, ICAP had an implicit deal with Hayes that in return for getting him the Libor fixings he wanted, he would be willing to face their other clients on unrelated trades. Essentially, if somebody phoned up ICAP looking to do a derivatives deal, they knew that Hayes would be there for them, at something approaching the market price, and would provide the liquidity the market needed.

There’s a lot of pretty funny internal ICAP politics in the complaint. Because Hayes was a derivatives dealer, his commissions went to ICAP’s derivatives desk — rather than to Goodman, who was on the cash desk. As a result, both ICAP and Hayes had to contort themselves to find some way to pay Goodman for his services. It turns out that Goodman was selling himself pretty cheap: he seemed to be satisfied with an extra £5,000 per quarter. Plus whatever “kickbacks” Hayes paid him directly. (Those, sensibly, weren’t discussed directly over email, although they were referred to: “As for kick backs etc we can discuss that at lunch and I will speak to Tom about it next time he comes up for a chat,” wrote Wilkinson to Goodman.

The world of inter-dealer brokers is one of the most lavish on Wall Street: deals are commonly lubricated with expensive meals, Champagne, tickets to sporting events or Las Vegas — even nights out at Lady Marmalade Adult Parties. The brokers don’t take on any risk, but they still get paid enormous sums — and the way they get the money is by persuading the big traders on Wall Street to use them rather than some competitor when putting together trades. If that involves staying up all night blowing rails, then that’s what the inter-dealer brokers are going to end up doing.

So while ICAP’s behavior here was particularly egregious, and probably criminal, there’s something endemic to inter-dealer brokers which is deeper and more troubling. The New York attorney general is worried about what he calls “insider trading 2.0″, where small groups of traders have information a few milliseconds before the rest of the market. But in the world of inter-dealer brokers, there’s really no such thing as public information at all: all trades are private, all information is private, and the way to make money is entirely a function of what connections you have and whom you’re able to befriend over the course of long evenings of lavish entertainment.

Or, to put it another way, ICAP’s (alleged) criminality is basically just an extension of its core business — which is dealing in information asymmetry. ICAP’s brokers know who wants to trade what, in which direction — and they use that information to make risk-free profits. In the case of Hayes, it looks very much as though they crossed a criminal line in doing so. But the bigger scandal, in many ways, is the amount of money they can make entirely legally, by monetizing information which they have and which no one else possesses. Shouldn’t Eric Schneiderman be worried about that?

COMMENT

I guess there is a broader question here, Felix. Is it legitimate to have a purely private investment market? And variables that are privately determined? Where all business is “Enter/Use at your own risk?”

We have a concept like that regarding accredited investors, for both sophisticated individuals and corporations. What’s happened here and in other places where you have “fixes” in the market price, is that the market has gotten so big that the position of the fix affects a wide number of players, and the variables affect some non-sophisticated players (e.g. an adjustable rate loan that floats off LIBOR).

I wrote an article on this a while ago:

http://alephblog.com/2012/07/05/on-inter nal-indexes-like-libor/

Now obviously, my opinion has been wrong with respect to how the tide of public policy has moved. My point is this: you can dig into a large number of complicated situations, and probably find someone taking advantage of information asymmetries. Is he a trader, an arb, or a felon? If a felon, there are going to be a lot of surprised people who though they were just making an internal market.

As always, I appreciate your work.

David

Posted by DavidMerkel | Report as abusive

The idiocy of crowds

Felix Salmon
Sep 23, 2013 21:47 UTC

Today’s a big, exciting day for anybody who has found it simply too difficult, to date, to throw their money away on idiotic gambles. Are you bored with Las Vegas? Have you become disillusioned with lottery tickets? Do micro caps leave you lukewarm? Does the very idea of a 3X ETF fill you with nothing but ennui? Well in that case today you must rejoice, because the ban on general solicitation has been abolished, and the web is now being overrun with companies like Crowdfunder and RockThePost and CircleUp which offer a whole new world of opportunity when it comes to separating fools from their money. You can even lose your money ethically, now, if that’s your particular bag. The highest-profile such platform is probably AngelList: as of today, founders like Paul Carr (alongside, according to Dan Primack, over 1,000 others) are out there tweeting at the world in an attempt to drum up new investors.

It is conceivable that over time, these equity crowdfunding platforms will learn from their inevitable mistakes, and the few which survive will learn how to be something other than a hole in which to pour millions of dollars. But right now we’re in the very early days, and there’s no conceivable reason why anybody should want to volunteer to be a sacrificial guinea-pig. All of the platforms, right now, feature what RockThePost rather touchingly calls “crowdsourced due diligence” — something which, if you read their FAQ, is detailed thusly:

Though RockThePost requires companies to include a certain amount of information before being eligible to list on the site, RockThePost does not conduct any due diligence on them or endorse any as attractive investment opportunities.

This is basically the Prosper business model, circa 2005: blind faith in the wisdom of crowds, leading inevitably to a toxic mixture of good-faith and bad-faith failed fundings. To be honest, the distinction is not one worth worrying about too much: in both cases, a business gets funded, the money disappears never to be seen again, and the funders are upset.

It’s worth noting, here, the highest-profile company to not get in on this game: Kickstarter. They decided in early 2012 that they were not going to open up their platform to people who were looking for equity investments — and that decision looks pretty smart today. After all, Kickstarter knows full well how big the reach/grasp disconnect can be for people taking to the internet to try to fund their new project with ambition and zeal. It’s easy, in the early days of a project, to massively underestimate the cost of meeting future obligations — even when those obligations are little more than sending out t-shirts in the mail. With crowdfunding, the obligations are much more onerous: business owners have serious responsibilities to their shareholders, and I suspect that very few of the businesses listed on the new platforms are actually equipped to meet those responsibilities.

What’s more, as Fred Wilson notes, there are a myriad of little ways in which startups can get tripped up by restrictions in the crowdfunding rules. Unless the company has very good lawyers and has already signed up some very experienced investors, the chances are it will end up inadvertently breaking the law somehow. And if it has signed up some very experienced investors, you have to expect that the fish swimming around the waters of sites like CircleUp are just going to get eaten alive by the bigger sharks doing custom deals.

One angel investor explained it very well in an email to me this morning:

These guys are building their business on the notion/dream that somehow the internet can disintermediate social and relationship capital. I’d argue that this is precisely what the internet can not do: if you’re going to invest in a startup, you’d better know the founders, and you’d better know something that most people do not know. Information asymmetry is the only way to lower the risk profile on such crazy risky investments.

In theory, these companies are providing a useful service for startups. Raising money is hard, logistically speaking — and once you’ve got your commitments all lined up, there are some good reasons why it makes sense to outsource a lot of the accreditation and paperwork to an outside company. The problem is that AngelList and its ilk don’t stop there: their main purpose, in fact, is not to take care of paperwork, so much as it is to act as a lead-generation service for startups which have failed to raise all the money they want through more legitimate avenues.

There’s something of an alternative-investment bubble right now: just look, for instance, at Saatchi Online’s truly insane “invest in art” project, which takes unknown artists and tries to sell their work as something which could be worth millions in a few years’ time. Five years of ZIRP will do that: first the bond markets get inflated, then the stock markets, and then, eventually, the really crazy stuff.

In that sense, right now — the tail end of the ZIRP experiment — is the absolute worst possible time to embark upon this general solicitation road. Far too much liquidity is chasing yield, with the result that even the smart money has started funding companies at utterly bonkers valuations. When you then open up the dumb money to projects which the smart money has passed on, the outcome is certain, and not pleasant.

The best case scenario, here, is that a bunch of people who can afford to lose some money end up doing just that. There’s no shortage of ways to invest badly, and the world isn’t going to come to an end just because there’s now one more. But I do fear that when the inevitable happens, the ensuing litigation will drag on for many years. If you want to avoid it, I would avoid all equity crowdfunding platforms as a matter of principle.

Update: Howard Lindzon (an investor in AngelList) responds.

COMMENT

Simple solution – only allow the huge number of new Chinese billionaires and mega-millionaires to invest – who cares if they are fleeced?

Posted by cirrus7 | Report as abusive
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