Opinion

Felix Salmon

Trish Regan, Einhorn apologist

Felix Salmon
Mar 24, 2014 17:56 UTC

Ever since the story first broke, more than five weeks ago, that David Einhorn was suing Seeking Alpha, the Israeli financial website has been very, very quiet on the topic. Sometimes they have simply failed to respond at all to requests for comment (including mine); other times, as with Andrew Ross Sorkin, a spokesman will formally decline to comment.

So it was a big deal when Seeking Alpha president David Siegel appeared on Bloomberg TV today, and answered Trish Regan’s questions about the Einhorn lawsuit. Or, at least, it would have been a big deal, if Regan had actually bothered to ask him any of the obvious questions. Like, for instance, whether he’s going to fight it, or what he thinks of the merits of the case.

Instead, however, Regan decided that the best use of her time would be to deliver to Siegel a lecture on (and, presumably, an example of) Proper Journalism:

Trish Regan: David Einhorn has expressed his concern. He would like to know the name of the Seeking Alpha blogger who revealed one of his investments. Who was it?

David Siegel: (laughs, in a WTF kind of way) Well, we’re not going to tell you right now. But, um…

TR (interrupting, just as Siegel might be about to say something newsworthy): Why — Why hide behind anonymity? Why not put your name on something?

DS: We vehemently believe that it’s critical to have an open platform, where everyone can discuss, and debate, without necessarily having any repercussions to that. With that said, we have 24/7 monitoring on everything… it’s incredibly important to us to create the right forum, and we believe that that forum is —

TR: But why, why…

DS: — is a, anonymous…

TR (pushing over anything Siegal might want to say, because she has something more important of her own to declaim): I know but why — why not reveal — I mean, to me, and call me old-fashioned, but part of journalism is when you write an article, you put your name on it. You don’t hide behind anonymity. Why allow your bloggers to do that?

DS: It’s part of our philosophy. We need to have an open environment, and a flexible environment, for people to feel comfortable posting what they need to. We have a very, very rigorous background check process.

TR (giving Siegel four seconds to answer the big question, and burying it under another one): You can understand why David Einhorn would be upset, why he’d want us to actually know who this person is. I mean ultimately will you guys be held responsible?

DS: David Einhorn is a legend, and we have tremendous respect for him, absolutely.

The whole interview is just bizarre. I have no problem with aggressive, adversarial journalism, but the proper place for that is when your interlocutor is refusing to give a straight answer to a straight question. Seeking Alpha has always been very open about offering anonymity (or, more precisely, pseudonymity) to bloggers who request it, for very simple and obvious reasons: many of them are financial professionals whose jobs might be at risk if their identity were made public. Journalists like Regan give anonymity to their own sources on a regular basis, for exactly the same reason.

What’s more, anonymity is hardly unheard-of even among very mainstream publications: the Economist, for instance, has no bylines at all, while even the NYT will occasionally withhold a byline from a reporter in a dangerous country, if revealing that person’s identity would put them at risk.

Let’s say that the blogger in question had phoned up Regan and told her (off the record, but with Regan knowing her source’s identity) that Einhorn was buying up shares of Micron Technology. That might have turned into a nice little scoop for Regan, if she had confirmed it with other sources — all of whom would themselves surely have insisted on anonymity as well.

If Regan had published that story, Einhorn would surely have been annoyed, since he was taking great care to accumulate his stake in Micron as quietly as possible. But here’s the thing: Einhorn would never have dared take Regan and Bloomberg to court, trying to force them to reveal her sources. If a journalistic organization finds out a true fact and publishes it, that might inconvenience a hedge-fund manager, but it’s not going to result in a court case.

In the Micron case, however, Einhorn saw an outlet which was small enough to bully. If he wins, as Sorkin says, “the case could have a chilling effect on the free flow of information to traditional news outlets” — it would damage not only Seeking Alpha and its pseudonymous blogger, but also Trish Regan and all other journalists with confidential sources. Einhorn wants to be able to keep his own information confidential; he just doesn’t want Seeking Alpha to have a similar right.

If anybody deserves a lecture on journalism in this case, then, it’s not Siegel, it’s Einhorn. Meanwhile, Siegel is faced with a very hard decision. Einhorn is not the kind of person to back down from a fight: he has essentially bottomless resources, and will happily spend millions of dollars on lawyers just to make Seeking Alpha’s life miserable and expensive for the foreseeable future. Big media organizations are set up to fight such threats; smaller startups aren’t.

So the big question here is not whether Einhorn is right or wrong: of course Einhorn is wrong, Regan’s misplaced self-righteousness notwithstanding. Rather, the question is whether Seeking Alpha can and will be able to afford to fight him. That’s the big question which every non-enormous media company wants to know the answer to — and that’s exactly the question which Regan didn’t ask.

Ensconced as she is within the massive Bloomberg borg, Regan doesn’t need to worry about the cost of defending her journalistic operation against litigious hedge fund managers. But even Bloomberg benefits from a diverse media ecosystem. And so it’s rather worrying that Bloomberg TV should spend its energies defending Einhorn in this case, rather than finding out whether we’re facing a very real threat to media freedom.

Update: David Einhorn has dropped the suit, after finding out through other means who the blogger in question is. Trish Regan covered that development, too:

We’re in an interesting time in journalism, because bloggers are in the blogosphere, and there’s a lot of information out there that’s not always necessarily with someone’s name on it… Is that a danger, nowadays, that we’re in an environment where people can have a very big effect on securities, on the markets, and do so anonymously?

Yes, Trish, bloggers are in the blogosphere. And sometimes market moves happen in reaction to pseudonymous information sources. Or even to fully anonymous sources, in things like Bloomberg articles. I don’t see the problem with this. Unless you’re just upset that Valuable Insights has his own outlet, now, instead of having to bring his story to you.

COMMENT

SeekingAlpha published this statement about Greenlight dropping its suit:
http://seekingalpha.com/article/2106353- seeking-alpha-and-david-einhorn-the-real -story

Posted by Trollmes | Report as abusive

Janet Yellen didn’t gaffe

Felix Salmon
Mar 21, 2014 22:20 UTC

yellen.png

It’s become received opinion that Janet Yellen made a “rookie gaffe” in her first press conference as Fed chair, thereby “rattling markets”. She didn’t.

According to Peter Coy, Yellen made a “substantial blunder”. John Cassidy says she “got into trouble” when she told Reuters’ Ann Saphir that the Fed would wait “something on the order of around six months” after QE ends before starting to raise rates. Clive Crook was so perturbed by the presser that he is beginning to doubt the wisdom of the Fed having any kind of forward guidance at all. Mohamed El-Erian seems inclined to agree: the markets aren’t mature enough, he says, to internalize new information without over-extrapolating (i.e., freaking out).

But here’s the thing: the market didn’t freak out. The chart above shows the benchmark US interest rate — the yield on the 10-year note. The chart gives you a reasonably good idea of what normal volatility is: last Thursday, for instance, the yield fell by a good 10bp when John Kerry made noises about imposing sanctions on Russia. And overall, the yield has stayed comfortably in a range between 2.6% and 2.8%.

What’s more, the big FOMC-related move in the 10-year bond yield happened immediately at 2pm, when the statement was released. Yellen’s “gaffe” caused barely a wobble.

So why does everybody think that Yellen blundered? The answer is simple: they were looking at the stock market (which doesn’t matter), rather than the bond market (which does). Stocks fell, briefly; not a lot, and not for long, but enough that people noticed.

Which is good! In general, Yellen should be more transparent, not less, which means that she shouldn’t be overly cautious about what she does and doesn’t say in her press conferences. Her instinct to give a straight answer to a straight question is a good one. And if Yellen’s straight talk causes a very, very small uptick in stock-market volatility — well, that might not be such a bad thing, given that stock-market volatility is pretty low at the moment and that stocks should be pretty twitchy at these levels. What’s more, we don’t want to go back to the bad old days of Alan Greenspan, where the Fed was always assumed to have failed if it did anything which caused stock prices to fall. Yellen is going to oversee a series of interest-rate rises, and it’s entirely likely that stocks will pull back when that happens. That’s no reason to criticize her.

In fact, Yellen did more than just improve the transparency of the Fed with her remarks; she also helped prepare the markets for a wider range of possible outcomes. If the Fed does end up tightening six months after QE ends, the markets might be disappointed, but the Fed would be justified in taking a “don’t say we didn’t warn you” stance. That doesn’t mean it will happen, but it does mean that Yellen is helping to prepare the markets for the inevitable uptick in uncertainty.

As I explained back in October, transparency and predictability are incompatible goals; Yellen should go for the former, rather than the latter. The Fed’s future actions are unknown, and unknowable, and Yellen needs to be open about that fact. As central banker Adam Posen told Binyamin Appelbaum, there’s going to be increased fractiousness and unpredictability on the FOMC going forwards — and that’s a good thing, a sign that the economy is getting back to normal. If Yellen is keeping the market on its toes, she’s really just giving the markets an early taste of something they’re going to be seeing a lot more of. Traders, and the media, should — must — learn to embrace that, rather than criticizing it.

COMMENT

The recovery has been hollow and shaky. Congress is much more concerned with its own, disparate grasping than with the fiscal health of the nation. QE was elegant monetary engineering and it worked, but it has to be paid for and the easiest way to do that is future rate hikes. Money will move in from overseas, creating a mini-chain reaction. Travelers overseas with dollars can buy two of everything. The bankers get paid and domestic manufacture suffers. It’s all a package, folks.

Posted by xaxacatla | Report as abusive

Annals of captured regulators, NY Fed edition

Felix Salmon
Mar 20, 2014 23:40 UTC

Peter Eavis has a worrying story today: the chairman of the New York Fed, William Dudley, has effectively, behind the scenes, managed to delay the implementation of an important new piece of bank regulation.

The first thing to remember here is that delaying regulations is an extremely profitable game for the financial industry. If a new regulation will cost a bank $100 million per year, and the bank gets that new regulation delayed by a year, then it’s just made $100 million in excess profit. What’s more, the further away you get from the crisis, the harder it becomes for new rules to grow teeth. So when the banking lobby doesn’t like a certain piece of regulation, its tool of choice is to bog it down and delay it to the point at which no one but the banking lobby cares any more. And then allow it to be implemented with so many loopholes and carve-outs that it’s effectively toothless.

In this game, the banks are on one side, and the regulators — primarily the Federal Reserve — are on the other. So it’s particularly worrying when a regulator ends up causing a delay and thereby helping the banks. And yet that’s exactly what seems to have happened:

Mr. Dudley’s concerns played a decisive role in holding up the final version of the rule, two of the people said. Some regulators, including officials at the Federal Deposit Insurance Corporation, were counting on the leverage regulation being completed by the end of last year. Strong supporters of the rule wanted it issued by then to reduce the chances that pressure from bank lobbyists would dilute it. The rule is now expected to come out in April at the earliest.

The optics here are not helped by the fact that Dudley made his millions at Goldman Sachs, a bank which would be directly affected by the rule in question, which forces big banks to increase the amount of capital that they hold against their assets. Neither are they helped by the fact that Dudley runs the New York Fed, which is generally seen as the arm of the Fed which is closest to, and friendliest with, America’s biggest banks. (Indeed, JP Morgan’s Jamie Dimon was a member of the board there for the six eventful years to 2013.)

Mostly, however, the problem is that Dudley’s objection is very silly.

Mr. Dudley raised the possibility that the rule could inhibit the Fed’s ability to conduct monetary policy…

The Fed officials in Washington assessed his concerns but did not think they were serious enough to warrant significant changes to the rule, the three people said.

In theory, Dudley is right. The way that the Fed conducts monetary policy is by instructing the traders at the New York Fed to buy and sell certain financial instruments so that a particular interest rate — the Fed funds rate — is very close to a certain target. Through a complex series of financial interlinkages, setting the Fed funds rate at a certain level then has a knock-on effect, and ultimately helps determine every interest rate in America, from the Treasury yield curve to the amount you pay for your credit card or your mortgage.

Those interlinkages are so complex that they’re impossible to model with any particular accuracy: all the Fed can do, really, is set the Fed funds rate and then see what happens to everything else. And directionally the causality is clear: if the Fed wants rates to rise, then it pushes the Fed funds rate upwards, and if it wants rates to fall, then it brings the Fed funds rate down. That doesn’t always work at the distant end of the yield curve, but it’s still most of what monetary policy can do.

Especially early on in the chain, a lot of the interlinkages take place at the level of big banks. And so it stands to reason that if you change the leverage requirements of big banks, that might change what happens to interest rates when you move the Fed funds rate. Or, on the other hand, it might not. In any case, if and when the Fed starts raising the Fed funds rate, it’ll rapidly become pretty obvious what’s happening to the rest of the interest-rate world, and the FOMC will react accordingly.

In the most extreme case, the FOMC might even change the way it sets interest rates, and start using interest rates other than the Fed funds rate to conduct monetary policy. After all, the Fed can intervene pretty much anywhere in the financial system it likes. Obviously, Dudley, as the head of the New York Fed, would be the person most closely consulted in terms of determining the most effective way for the Fed to intervene and move American interest rates. And in making his recommendations, he would have to take into account everything he knows about the architecture of the financial system, including the leverage ratios being demanded of the biggest banks.

But what doesn’t make sense is the idea that Dudley would try to throw a spanner in the works of an important piece of bank regulation, just because it might make his rate-setting job more difficult. The New York Fed is a highly profitable institution which employs a large number of extremely able traders and economists, all of whom are well versed in navigating the complexities of the interest-rate market. If a change to the leverage rule makes their job a bit more interesting or difficult, well, that’s part and parcel of what it means to work at the New York Fed. It’s no reason at all to delay a rule change and give New York’s banks a gift on a plate.

COMMENT

I think someone’s misunderstood something here. The delay has gone into the drafting of the final rule, after consultation based on the Notice of Proposed Rulemaking. That doesn’t mean that the date of implementation of the rule itself is necessarily going to change – in the NPR this rule was meant to be slowly phased in and to take effect on 1 January 2018. Given that, I think it’s pretty unlikely that a slight delay to get the rule drafted correctly – or even a full Quantitative Impact Study – is going to change the implementation schedule.

Posted by dsquared | Report as abusive

Janet Yellen’s first FOMC statement, annotated

Felix Salmon
Mar 19, 2014 18:36 UTC

COMMENT

The labor market will not improve until honest education and media information distribution are restored. Their is an army of moron followers out there, and they are not productive members of society. You don’t have to worry that they will threaten the balance of power and demand fairness, but they won’t threaten to get any work done either. Add that most successful minions know that we do not have a merit based society and the few people who still can work are totally deincentivised from accomplishment. It doesn’t take being smart or ambitious, it takes being able to stuff your own thoughts down inside and agreeing to whatever corrupt and moronic thing our political and business leaders decide is the best scam for them.

Posted by brotherkenny4 | Report as abusive

The problem of Ukraine’s Russia bond

Felix Salmon
Mar 18, 2014 16:02 UTC

Now that Russia seems to have formally annexed Crimea, no one can possibly expect Ukraine to repay Russia the $3 billion it borrowed back in December. The money was given directly to kleptocratic Ukrainian president Viktor Yanukovych in order to buy his fealty; now that Yanukovych is an international pariah and Russia has seized Crimea instead, in what you might call the geopolitical equivalent of a debt-for-equity swap, Ukraine has no legitimate reason to make its payments on the loan.

But there’s a problem here: the loan was not, technically, a bilateral loan from Russia to Ukraine. Instead, it was structured as a private-sector eurobond. As Stephen Gandel says:

There are a lot of other Ukrainian eurobonds out there that look similar to the ones Russia is holding, so not paying the ones Russia is holding will have larger implications for all of Ukraine’s debt, causing prices to fall and interest rates to rise. What’s more, Russia could sell its bonds to the market… That may make a court less likely to invalidate the debt, and Ukraine less willing to do so, if it is held by a private investor, especially a non-Russian one.

This is a notorious vulture-fund move: a hedge fund buys bilateral debt from a sovereign, and then sues not as a sovereign but rather as a private-sector creditor. I can think of a few hedge funds which would be interested in Russia’s debt, if they could buy it at a discount to where the rest of Ukraine’s debt is trading. After all, to use a term you might have seen on this blog in the past, this loan is, legally, pari passu with all the rest of Ukraine’s bonded debt.

(In fact, this bond is arguably senior to the rest of Ukraine’s bonds, thanks to a very unusual provision which allows Russia to accelerate the debt if Ukraine’s GDP falls. But since there now seems to be no chance that Ukraine will pay the coupon on this bond, it’s going to be in default very soon anyhow.)

So, if Ukraine defaults on its $3 billion Russian eurobond, how can Ukraine’s allies prevent that default from having massive negative repercussions on the Ukrainian economy? Anna Gelpern has the answer: The United Kingdom, she says, should make the bonds unenforceable under English law.

Yanukovych’s good-bye bonds would not have to get bogged down in the doctrinal mess of Odious Debt precisely because they took the form of simple English-law contracts, freely tradable in the capital markets and enforceable in English courts… English courts may not have much sympathy for Russia. They may decide that invading a country, bankrupting it, and trying to collect would be too distasteful with or without Odious Debt. Supreme Court Chief Justice (and former President) William Howard Taft offered similar reasons when he refused to enforce claims by private creditors complicit in the escape of another kleptocrat in an international arbitration against Costa Rica in 1923…

To stop the debt from migrating to private hands and showing up in court, now is the time for the UK government to make the Yanukovych bonds unenforceable under English law.

If the UK parliament passes this kind of a law now, before Russia can sell its debt to a vulture fund, that would severely reduce any fund’s appetite for the bond, and therefore minimize the likelihood of the default getting litigated in London.

Gelpern adds — quite rightly — that now is also the perfect time to implement a general ban on countries selling their bilateral debt into the private markets. I’m unclear on what form such a ban would take, or how it would ever be enforced, but as a principle it’s a really good idea.

Even if the UK passes a non-enforcability law, however, the problem of the Russian bond is not going to go away for Ukraine. I’m sure there are cross-default provisions in the rest of Ukraine’s debt, which means that Ukraine’s existing bondholders are likely to be able to accelerate whenever they feel like it. Again, think vulture funds here: a small group of aggressive funds could quite easily buy up 25% of one of Ukraine’s other bond issues, and then declare the whole amount due and payable immediately. As a result, even if Russia never gets its $3 billion back, and never sells any of its bonds, the structure of the December deal could still come back to haunt Ukraine.

All of this was entirely deliberate on Russia’s part. And of course the damage that Russia caused to Ukraine by structuring its loan as a bond is pretty much nothing, compared to the damage it’s causing by seizing Crimea. But it is a reminder that wonky sovereign-debt distinctions can have real geopolitical importance. As Argentina, for one, is well aware.

COMMENT

First, Ukraine was essentially bankrupt in November 2013: actually, the poor state of its finances is the main reason why it asked for the credit and for gas discount. The following three months its government was paralyzed by Occupy Kiev protests; many more Ukrainians were too busy with protests or afraid of the protests to be productive. The country either was going to ask for more help, or default on its debts even without the coup d’etat / revolution / government change.

Second, though a 22 year history of dully elected kleptocracy contributed mighty to Ukrainian woes, the main reason was different. A fragile balance between voters blocks forced all governments to avoid obvious but unpopular decisions, to kick a proverbial can down the road. Wast agricultural regions are overpopulated: modern agricultural technologies cannot use so many hands. They are subsidized by industrial regions. However, the industrial regions are nothing but a huge rust belt. Whatever coal mines and plants did not close yet, it happens mostly due to a government support.

Ironically, the capture of Crimea slightly improves Ukrainian finances, because the net subsidized region used to receive more funds from the state coffers than it contributed as taxes.

As a side note, to my understanding the discussed Ukrainian bonds were issued not in UK, but in Ireland.

Posted by yurakm | Report as abusive

Dorian Nakamoto responds

Felix Salmon
Mar 18, 2014 00:09 UTC

(Earlier: The Satoshi Paradox; Satoshi: Why Newsweek isn’t convincing)

COMMENT

Missed out cashing in?! Are you kidding…why do you think he’s retained legal counsel? I foresee a massive tort suit followed by an out of court private settlement.

Posted by dcayman | Report as abusive

When hedge funds lobby

Felix Salmon
Mar 11, 2014 13:01 UTC

Back in 2000, Warren Buffett published “a fanciful thought experiment” in the NYT, showing just how cheap it was to buy the US government:

Soft money contributions jumped from $86 million in the 1992 election cycle to an expected $360 million in the current one. That’s a growth rate worthy of Silicon Valley: 20 percent annually.

And the game has barely started. For most supplicants, cost still lags ridiculously far behind value. American business spends $200 billion a year on advertising to influence consumers. In many industries — communications, tobacco, banking, pharmaceuticals and insurance among them — political influence can sometimes be of similar commercial importance. It also matters critically to such professionals as lawyers, doctors, and teachers…

Suppose that a reform bill is introduced, raising the limit on individual contributions to federal candidates from $1,000 to, say, $5,000 but prohibiting contributions from all other sources, among them corporations and unions. These entities could still encourage their employees, stockholders, or members to contribute personally, but could do no more — a ban, incidentally, that applied to them until the ”soft money” dodge was introduced in 1978. Such a bill would be far from a panacea for all campaign finance ills, of course, but it would at least be a start. Why should this bill stand a chance in a Congress enraptured with the status quo? Well, just suppose some eccentric billionaire (not me, not me!) made the following offer: If the bill was defeated, this person — the E.B. — would donate $1 billion in an allowable manner (soft money makes all possible) to the political party that had delivered the most votes to getting it passed. Given this diabolical application of game theory, the bill would sail through Congress and thus cost our E.B. nothing (establishing him as not so eccentric after all).

America, it seems, doesn’t have eccentric billionaires — instead, it seems to specialize in the old-fashioned type, billionaires who just want to make even more money. People, that is, like Bill Ackman. And, of course, people like Todd Westhus, as well, who if they’re not billionaires already, aspire to reach that milestone soon. The worrying thing is that the Ackmans and Westhuses of this world have discovered what you might call the Buffett Arbitrage. Rather than investing in advertising or capital stock, they invest instead in lobbying, with the aim of getting very specific legislation passed which will make them very rich.

There’s nothing new, of course, about spending lots of money lobbying the government to get what you want, financially. Steve Coll wrote a 700-page book about just one company’s use of such methods. But what is new, or at least seems to be getting more popular, is the tactical short-term use of political lobbying to create a single windfall gain in the financial markets.

Yesterday’s NYT article about Ackman makes for a great read, partly because of what Jonathan Weil calls the “hilariously inept” nature of the campaign, and partly because Ackman is so open about his tactics:

“The risk we took in making this investment was could we get the world to focus on a company, could it get enough of a spotlight so that the S.E.C., the F.T.C., the 50 attorney generals around the country, the equivalent regulators in 87 countries, if any one of them, or at least any powerful member of that group, could we get them interested?” Mr. Ackman explained at the investors conference in February, 14 months after he made his bet on Herbalife public. “And I think that was the biggest risk we took in going short” on Herbalife.”

In other words, Ackman has a billion-dollar bet that he can bend public servants to his will, and, by announcing an investigation, send Herbalife shares plunging. He’s Buffett’s eccentric billionaire incarnate, except that instead of trying to reduce the influence of money on politics, he’s trying to turn it into a trading mechanism.

The big risk here is not particularly that Ackman’s campaign is going to work. Rather, it’s that hedge fund managers will take the wrong lesson from what he’s doing, and conclude that his big mistake was just being too open and public about what he is trying to achieve. Much more effective to work in the shadows: one of my favorite examples of that is the way that Elliott Associates invisibly lobbied lawmakers in Albany to tweak the rules surrounding compound interest on court judgments, thereby increasing the amount they were owed by Peru from $42 million to $58 million. That piece of lobbying was done so quietly that Peru’s lawyers didn’t even know it was happening until it had already happened.

Which brings me to Frannie, and the massive amounts of money — tens of billions of dollars, maybe more — at stake with respect to seemingly worthless old pieces of paper representing the housing agencies’ preferred and common stock. I wrote about this campaign last year, saying that the main reason to buy shares of Fannie Mae and Freddie Mac is as a bet that well-connected Washington types have inside information about what the government is going to do, and/or are likely to influence the outcome. The campaign has only intensified since then: recently Gretchen Morgenson even devoted an entire column to the plight of the poor hedge-fund managers who bought securities at very near zero and who are now lobbying the government to grant them billions of dollars’ worth of Frannie profits.

There is no good reason why the government should do that, of course — no good reason, that is, beyond what Bloomberg calls “one of the biggest potential paydays in history”. Right now, the agencies are effectively part of the US government, which means that the US government is explicitly standing behind all of their trillions of dollars in liabilities. Yes, the two companies are profitable, for the time being, and are dividending their profits back to the taxpayer. But if at any point in the future they start losing money again, it’s going to be the taxpayer — again — who foots the bill. Since the government is on the hook for all future Frannie losses, it makes perfect sense that the government should keep for itself any possibly-temporary Frannie gains, at least until the agencies are wound down.

But the amounts of money at stake here are so enormous that the Buffett Arbitrage, scarily, might end up working. Buffett was talking about $1 billion; that’s the size of Ackman’s bet, too. But at Frannie we’re talking about at least $33 billion in preferred stock, and possibly even more in common stock. If the government ends up giving the hedge funds any money at all from Frannie’s profits, you can reasonably consider all of that cash to be a direct return on lobbying expenditures. Which will surely prompt any number of similar attempts in future. Buy securities cheap, change the law, see them soar. There are surely dozens of ways that can be done; I suspect we’re still in the very early days of seeing that tactic adopted by the hedge-fund world.

COMMENT

Felix has it wrong. He thinks hedge funds are the big winners if F/F survive. Actually it is the US tax payers that stand to see a big win if F/F are allowed to live.

If the Senate plan becomes law:

1) The taxpayers take an immediate loss of $189 Billion. (the senior preferred stock)

2) Taxpayers will lose the ‘upside’ of the 80% stake that they own in F/F. (I estimate this to be at least $100B – Dick Bove thinks it is $300B)

3) The US mortgage market will suffer under the Senate plan:

A – Say ‘good bye’ to the 30 year mortgage.

B – Be prepared for much higher % rates and a stiff pre-payment penalty on all new mortgages.

So under the ‘Felix’ plan taxpayers will drop about $400B – about the cost of the military for a year. This comes to $2600 for every worker in the country.

Great plan Felix…….

Posted by Krasting | Report as abusive

The rational Candy Crush IPO

Felix Salmon
Mar 10, 2014 17:40 UTC

Jim Surowiecki is absolutely right about the IPO of King Digital Entertainment, the makers of Candy Crush Saga. The point of an IPO is to raise permanent capital for a company which intends to exist in perpetuity, while King will realistically last only as long as the Candy Crush fad. King will probably never again make the kind of money ($568 million) it made last year, and yet it issued options in January at a crazy $9.4 billion valuation.

Surowiecki writes:

It’s easy to see why King’s founders want to go public: money. But the money isn’t worth the hassle. As a public company, King will have to show shareholders consistent results and ever-growing profits. Such expectations are, frankly, silly in crazily competitive, hit-driven industries, and trying to meet them is a recipe for frustration. If King stayed private, it could milk its cash cow and build games without having to worry overmuch about hatching a new cultural juggernaut. We expect companies to constantly be in search of the next big thing. But, for one-hit wonders, the smartest strategy might be to just enjoy it while it lasts.

There are two different pieces of advice here. The first is entirely sensible: if you have a business throwing off massive amounts of cash, and you have no real assurance that you can build a similar business or replicate your past success, then probably the best thing to do is to just pocket the cash, rather than trying to reinvest it. After all, Candy Crush Saga itself was not the product of hundreds of millions of dollars of investment: it was the product of good luck, basically.

The second piece of advice is that if you’re just going to cash checks from Candy Crush, you’re better off doing that as a private company, rather than having to deal with public shareholders. This is probably also true. Public companies are bad at managing decline: they always want to show growth. The result is all manner of attempts at “pivots”, or at investing cashflow into longshot attempts to build a new business from scratch (for a prime example, see the way that AOL took the hundreds of millions of dollars flowing from its dialup service and poured them into Patch). Which, needless to say, rarely works.

But here’s the problem: all companies have a valuation, and right now the market is placing a valuation on King which is somewhere in the $10 billion range. If the present value of Candy Crush Saga’s cashflows is less than $10 billion (which it almost certainly is), then it is entirely rational for anybody who might be inclined to live on those cashflows to instead sell the company to people who think it’s worth more than that.

And there’s another great reason to go public: it gives King’s current shareholders — employees and VCs — the ability to cash out easily, rather than just waiting for a ever-diminishing series of dividend checks. Like it or not, this is the way of the current technology world: you start up a company, you sell it, you get rich. Even if going public sucks.

The main reason to go public, however, could just be that the IPO market is so frothy right now that companies have to have the credible threat of an IPO in order to get the best possible price from a strategic acquirer. Right until the day before the IPO, King is going to retain the option to simply sell itself to some company which wants proven expertise at making enormous profits in the world of mobile-native apps. By moving towards an IPO, King is forcing those companies to get serious about making an offer — both in terms of timing (they’d better do it quick) and in terms of valuation (they’d better meet the likely IPO share price). Because buying King after it’s gone public is going to be a lot more difficult.

Sometimes, capital markets are inefficient at allocating capital. When debt markets are frothy you see a lot of debt issuance; when equity markets are frothy, you see a lot of IPOs. We’re seeing a lot of IPOs right now, including some pretty crazy ones. And if you sell into a frothy market, you’re being rational, not stupid. Let the buyers of King shares worry about where their return is going to come from: no one is twisting their arm. So long as there are people out there willing to buy at a $10 billion valuation, markets demand that the current owners should be able to sell.

COMMENT

This is just another in a series of examples of why I stopped investing in equities some time ago Felix. Plug Power is another very recent example.

I know, I know, let the buyer beware…..When I contemplate making money that way it just doesn’t feel very good. It feels like cheating. Like ripping off people who aren’t that smart.

Posted by Missinginaction | Report as abusive

Satoshi: Why Newsweek isn’t convincing

Felix Salmon
Mar 10, 2014 04:18 UTC

I had a 2-hour phone conversation with Leah McGrath Goodman yesterday. Goodman wrote the now-notorious Newsweek cover story about Dorian Nakamoto, which purported to out him as the inventor of bitcoin. At this point, it’s pretty obvious that the world is not convinced: in that sense, the story did not do its job.

As Anil Dash says, the geek world is the most skeptical. Almost all of the critiques and notations attempting to show that Dorian is not Satoshi are coming from geeks, which makes sense. If the world is what you perceive the world to be, then there is almost no overlap between the world of geeks in general, and bitcoin geeks in particular, on the one hand, and the world of a magazine editor like Jim Impoco, on the other hand. As a result, there’s a lot of mutual incomprehension going on here, which has resulted in an unnecessarily adversarial level of aggression.

As befits a debate which is centered on bitcoin, a lot of the incomprehension comes down to trust and faith. Bitcoin is a protocol which requires faith in no individual, institution, or state — all you need to believe in is cryptography. Dorian Nakamoto could have told Goodman explicitly that yes, he invented bitcoin — and still a lot of the bitcoin faithful would not be fully convinced unless and until Dorian proved that assertion cryptographically.

Goodman, on the other hand, is a proud journalist, who gets personally offended whenever anybody raises questions about her journalism, her techniques, or her reporting. In a reporter’s career, she says, “you check facts, you are building trust and building a reputation”. Goodman feels that her own personal reputation, combined with the institutional reputation of Newsweek, should count for something — that if Newsweek and Goodman stand behind a story, then the rest of us should assume that they have good reason to do so. There’s no doubt that a huge amount of work went into reporting this story, very little of which is actually visible in the magazine article itself.

In aggregate, says Goodman, an enormous amount of evidence, including evidence which is not public, persuaded her that Dorian Nakamoto was her man. Goodman has not decided whether or how she might publish that evidence. When she appeared on Bloomberg TV, she said that she would love for people to look at the “forensic research” and the public evidence in the case — but, talking to me, she made it clear that she didn’t consider it her job to help out other journalists by pointing them to that evidence. What’s more, she also made it clear that she was in possession of evidence which other journalists could not obtain.

In other words, Goodman spent two months following leads and gathering evidence, both public and private. Eventually — after confronting Dorian Nakamoto in person, and getting what she considered to be a confirmation from him, both she and her editors felt that she was able to say, on the front cover of Newsweek, that he was the guy. The article itself was the culmination of that process, but it did not — could not — contain every last piece of evidence, both positive and negative, public and private, about both Dorian Nakamoto and every other candidate she looked at. The result is not the process, and Goodman feels that she should be given the respect due a serious and reputable investigative journalist, working for a serious and reputable publication.

Newsweek, it’s fair to say, has not been getting that respect, although it has been getting a lot more attention than most purely-digital publications would have received had they published the same story. Jim Impoco, cornered at a SXSW party, said that he finds criticism of his story to be “phenomenally offensive”, and then went on to make the highly ill-advised remark that “we eliminated every other possible person”. But that’s really a messaging failure: he was on the back foot (SXSW is, after all, geek HQ this week, and the geeks are gunning for Impoco right now). Clearly, this was not the time or the place for a considered discussion of evidentiary standards.

That said, both Impoco and Goodman should have been smarter about how they talked about the story, post-publication. Both have been largely absent from Twitter and Reddit and RapGenius and other online places where the debate is playing out; instead, they have been giving interviews to mainstream media organizations, which are often unhelpful. TV interviews devolve into stupid fights; interviews with print or online journalists result in just a couple of quotes.

Goodman spent a lot of time, with me, walking me through her journalistic technique: she started, for instance, by trying to track down the person who initially registered the bitcoin.org domain name, and then followed various threads from there. And yes, she did consider and reject the individuals who are considered more likely candidates by the geek squad. Nick Szabo, for instance, might well look like a good candidate if you’re looking only at the original bitcoin paper, and asking who is most likely to have written such a thing. But when she looked at Szabo’s personal life, nothing lined up with what she knew about Satoshi Nakamoto and his communications. Instead, she found the Dorian Nakamoto lead — and didn’t think much of it, at first. But the more she kept trying to dismiss it, and failing to do so, the more she wondered whether Dorian’s very invisibility — “contextual silence”, she called it — might not be sending her a message.

Towards the end of Goodman’s investigation, when she was preparing to try to meet with Dorian Nakamoto in person, Goodman told Impoco that if it didn’t turn out to be Dorian, then “we’ve got nobody”. That’s what Impoco was most likely talking about, when he talked about eliminating people. Goodman — and Impoco, more recently — was just saying that this was her last open thread, and that if Dorian didn’t pan out as the guy, then they didn’t have a story.

From my perspective, then, there’s a big disconnect between what I now know about Goodman’s methodology, on the one hand, and how that methodology is generally perceived by the people talking about her story on the internet, on the other. With hindsight, I think that Goodman’s story would have elicited much less derision if she had framed it as a first-person narrative, telling the story of how she and her team found Dorian and were persuaded that he was their man. The story would surely have been more persuasive if she had gone into much more detail about the many dead ends she encountered along the way. The fateful quote would then have come at the end of the story, acting as a final datapoint confirming everything that the team had laboriously put together, rather than coming at the beginning, out of the blue.

That storytelling technique would not persuade everybody, of course: nothing would, or could. And, more importantly, it isn’t really what Impoco was looking for. Even the piece as it currently stands was cut back a few times: the final version was pared to its absolute essentials, and, like all longform magazine journalists, Goodman wishes that she might have had more space to tell a fuller story.

But here’s where one of the main areas of mutual incomprehension comes into play. Impoco and Goodman are mainstream-media journalists producing mainstream content for a mass audience; Goodman’s article was probably already pushing the limits of what Impoco felt comfortable with, given that he couldn’t reasonably assume that most of his readers had even heard of bitcoin. Impoco was interested in creating a splashy magazine article, for the print reincarnation of a storied mass-market newsweekly. Of course, seeing as how this is 2014, the article would appear online, and would reach the people who care a lot about bitcoin, who were sure to make a lot of noise about it. But they weren’t the main audience that Impoco was aiming for. Indeed, in early 2012, when Impoco was editing a much smaller-circulation magazine for Reuters, I sent him a draft of what ultimately became this article for Medium. He passed: it was too long, too geeky. Even if it would end up reaching a large audience online (it has had over 200,000 page views on Medium), it didn’t have broad enough appeal to make it into a magazine.

Similarly, while Goodman has done a lot of press around her article, most of it looks like a tactical attempt to reach the greatest number of people, and build the most buzz for her article. So she’s been talking to a lot of journalists, especially on TV, while engaging relatively little on a direct basis with her online critics. There’s no shortage of substantive criticism of Goodman’s article online, and of course there is no shortage of venues — including, but not limited to, Newsweek.com — where Goodman could respond to that criticism directly, were she so inclined. But instead she has decided in large part not to join the online debate, and instead is pondering whether or not to write a self-contained follow-up article which might address some of the criticism.

There’s a good chance that follow-up article will never come, and that Goodman will simply cede this story to others. And you can’t necessarily blame her, given how vicious and personal much of the criticism has been, and given how many of her critics seem to have made their minds up already, and will never be persuadable. Goodman has said her piece, and there are surely greatly diminishing returns to saying a great deal more.

Still, it’s just as easy to sympathize with the frustration being felt by the geeks. Appeals to authority don’t work well on this crowd — and neither should they. If the US government can lie about the evidence showing that there were weapons of mass destruction in Iraq, it’s hard to have much faith in an institution which, 18 months ago, slapped “HEAVEN IS REAL” all over its cover. (That story, interestingly enough, was demolished by another mass-market magazine, Esquire.)

Indeed, both sides here have good reason to feel superior to the other. From Newsweek’s point of view, a small amount of smart criticism online has been dwarfed by a wave of name-calling, inchoate anger, and terrifying threats of physical violence. And from what you might call the internet’s point of view, Newsweek is demonstrating a breathtaking arrogance in simply dropping this theory on the world and presenting it, tied up in a bow, as some kind of fait accompli.

The bitcoin community is just that — a community — and while there have been many theories as to the identity of Satoshi Nakamoto, those theories have always been tested in the first instance within the community. Bitcoin, as a population, includes a lot of highly-intelligent folks with extremely impressive resources, who can be extremely helpful in terms of testing out theories and either bolstering them or knocking them down. If Newsweek wanted the greatest chance of arriving at the truth, it would have conducted its investigation openly, with the help of many others. That would be the bloggy way of doing it, and I’m pretty sure that Goodman would have generated a lot of goodwill and credit for being transparent about her process and for being receptive to the help of others.

What’s more, a bloggy, iterative investigation would have automatically solved the biggest weakness with Goodman’s article. Goodman likes to talk about “forensic journalism”, which is not a well-defined phrase. Burrow far enough into its meaning, however, and you basically end up with an investigation which follows lots of leads in order to eventually arrive at the truth. Somehow, the final result should be able to withstand aggressive cross-examination.

At heart, then, forensic analysis is systematic, scientific: imagine an expert witness, armed with her detailed report, giving evidence in a court of law. Goodman’s Newsweek article is essentially the conclusion of such a report: it’s not the report itself, and it’s not replicable, in the way that anything scientific should be. If Goodman thinks of herself as doing the work of a forensic scientist, then she should be happy to share her research — or at least as much of it as isn’t confidential — with the rest of the world, and allowing the rest of the world to draw its own conclusions from the evidence which she has managed to put together.

A digital, conversational, real-time investigation into the identity of Satoshi Nakamoto, with dozens of people finding any number of primary sources and sharing them with everybody else — that would have been a truly pathbreaking story for Newsweek, and could still have ended up with an awesome cover story. But of course it would lack the element of surprise; Goodman would have to have worked with other journalists, employed by rival publications, and that alone would presumably suffice to scupper any such idea. (Impoco was not the only magazine editor to turn down my big bitcoin story: Vanity Fair also did so, when the New Yorker story came out, on some weird intra-Condé logic I never really bothered to understand. Competitiveness is in most magazine editors’ blood; they all want to be first to any story, even if their readers don’t care in the slightest.)

Instead, then, Newsweek published an article which even Goodman admits is not completely compelling on its own terms. “If I read my own story, it would not convince me,” she says. “I would have a lot of questions.” In other words, Goodman is convinced, but Goodman’s article is not going to convince all that many people — not within the congenitally skeptical journalistic and bitcoin communities, anyway.

Goodman is well aware of the epistemic territory here. She says things like “you have to be careful of confirmation bias”, and happily drops references to Russell’s teapot and Fooled by Randomness. As such, she has sympathy with people like me who read her story and aren’t convinced by it. But if there’s one lesson above all others that I’ve learned from Danny Kahneman, it’s that simply being aware of our biases doesn’t really help us overcome them. Unless and until Goodman can demonstrate in a systematic and analytically-convincing manner that her forensic techniques point to a high probability that Dorian is Satoshi, I’m going to remain skeptical.

COMMENT

▲ PIMPS ARE NOW ACCEPTING BITCOIN ▲

Posted by ThePowerElite | Report as abusive
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