Felix Salmon

Is there really a done deal in Greece? I hope so — but it’s pretty clear that nothing’s in the bag quite yet. In terms of my video above, the Greeks consider themselves in the boat at this point — but the Europeans worry that the Greeks might go back on their promises, so they want not only the Greek executive but also the Greek legislature to sign on. (I didn’t even have a duck for the Greek legislature, I thought the only legislatures we needed to worry about were in Germany and Finland.)

And the IMF duck isn’t in the boat either — Christine Lagarde, too, is demanding further “assurances Greece would stick to the agreed policies whatever the outcome of looming elections”.

It seems that the bondholders are in the boat, however — or as far in the boat as they can credibly get absent a formal bond exchange offer. And that’s why I’m not sold on Floyd Norris’s idea that the money Europe is providing for Greece will instead end up in an escrow account, to be used first to pay bondholders and only second to cover the Greek budget deficit.

If that were the case, the value of the exchange offer would rise markedly: the new bonds would certainly be repaid, and would be worth 100 cents on the dollar, rather than the 60 cents or less that everybody’s expecting right now. It would be a multi-billion-dollar gift to bondholders who expect much less than that, in a context where a few billion dollars could well make the difference between a successful deal and a failed one. If there’s effectively going to be an EU/IMF guarantee of the new Greek bonds, then the nominal haircut would surely be bigger than 50%, and I haven’t heard anything along those lines.

Basically, what’s going on here is that because the bondholders are already in the boat, no one needs to do them any favors. What’s needed is an agreement between Greece and the Troika — something acceptable to both sides, and which the Troika believes that Greece will hold to. Even as sensible people like Mohamed El-Erian can see clearly that that’s not going to happen. “I suspect all three parties to the negotiations know in their heart that their latest agreement, brave as it is, will only last a few months at best,” he writes. “Within a few months, the negotiating parties are likely to be back at the table bickering while Greece continues to stare into the abyss.”

Or, to put it another way, that overloaded pirate ship is very precarious. And even if it manages to get everybody on board now — which is far from certain — it could still easily capsize a few months down the road.

In mid-2009, I went on a search for apologies, from the people who laid the intellectual and regulatory foundations for the financial crisis. I wondered whether and when Larry Summers, in particular, would apologize for what he did at Treasury, and I was heartened when Bill Clinton came out and said that, with hindsight, he was wrong about derivatives regulation.

Then, in 2010, Inside Job came out, and demonstrated the need for the likes of Summers to be asked direct questions about their culpability on the record, on-camera. But Summers refused to be interviewed for that film, despite having known its director, Charles Ferguson, for many years. And when he does sit down for a rare on-the-record video interview, these questions never seem to get asked.

So I was very happy to see that Krishnan Guru-Murthy at least tried to ask Summers these questions earlier this week. Krishnan starts off with standard Summers-interview questions, asking him what he thinks about UK fiscal policy, and Summers gives his standard wise-man answers. But then Krishan gets steadily tougher, asking Summers about the advice he gave the president-elect in 2008, and eventually about his deregulatory tenure at Treasury.

And Summers doesn’t even come close to apologizing, or admitting that he made any kind of mistake at all. Quite the opposite: he starts getting very touchy, telling Krishnan that he’s reducing complex questions to overly simplistic black-and-white narratives. Halfway through the interview, Krishnan asks Summers whether laissez-faire capitalism isn’t working for the middle classes. And Summers pushes back. “I’m a Democrat,” he says, adding that “I’ve long been someone who favored significant interventions to protect the environment.”

“Protect the environment?” responds Krishnan. “Didn’t you advise the president not to sign up to Kyoto?”

“No, no,” replies Summers.

“You didn’t?”

“No. I advised that an agreement be designed in order to protect the American economy, and the United States not take on obligations that would render its businesses uncompetitive.”

Summers never explains how this differs from advice not to sign up to Kyoto, nor does he give an example of any “significant interventions” he pushed for to protect the environment. Because the interview soon moves on to the subject of deregulation, with Summers saying that he “was for moving derivatives to exchanges” — something Krishnan lets stand — and deciding to pick the ground of Glass-Steagal on which to fight, saying that Lehman and Bear Stearns might have survived had they been part of bigger banks.

Well, yes, they might — but then again, they might also have just created another Citigroup, requiring massive bailouts from the government. Personally, I don’t think that repealing Glass-Steagal was in and of itself a major cause of the financial crisis, but Summers goes further, saying that huge financial supermarkets are a good thing (he holds up Canada as a model).

Krishnan continues to push. “Even Bill Clinton says that he was wrong to listen to the wrong advice when it came to derivatives. And that was your advice.” (Has Summers ever been asked questions like this, on camera, by an American reporter?)

Summers responds, again, that “it’s complicated”, and then builds up to attacking Krishnan:

Would it have been better if the whole of the 2010 financial reform legislation had passed in 1999 or 1998 or 1992? Yes, of course it would have been better. But at the time Bill Clinton was president, there essentially were no credit default swaps. So the issue that became a serious problem really wasn’t an issue that was on the horizon… If you want to assign responsibility, If you take a market that essentially didn’t exist in the 1990s, that grew for eight years from 2001 to 2008, and then brought on a major collapse, if you were looking to hold people responsible, you would look to… officials of the Bush Administration. I’m not going to tell you that I foresaw this crisis in all its dimensions, but without sounding like Newt Gingrich here, for you to read two articles that a researcher handed you and sling this stuff is not really to give your viewers a very clear chance.

Summers is absolutely wrong about credit derivatives not existing in the late 1990s. He was Treasury secretary from 1999 to 2001; Euromoney Magazine had splashed the words “Credit Derivatives” all over its front cover in March 1996. And Brooksley Born, between 1996 and 1999, was literally losing sleep over those things as head of the Commodity Futures Trading Commission. Summers’s response to Born? To make sure she was marginalized, and, eventually, pushed out of her job entirely.

And of course it’s a bit rich for Summers to criticize Krishnan for asking uninformed questions (they’re not uninformed at all, actually), when he has steadfastly refused to answer informed questions from the likes of Charles Ferguson.

Eventually, Krishnan attempts another tack. “It’s not to put all the blame on you,” he says. “But you started on a trajectory that was then continued by the Bush Administration.” The reply is a classic:

“No, no, no, no. That is just not credibly correct.”

Krishnan then brings up Inside Job and the issue of the revolving door, which of course Summers took full advantage of with his $5-million-a-year job working one day a week for DE Shaw.

“Inside Job had essentially all its facts wrong,” replies Summers, unbelievably, resorting to an argument based on timing: because he didn’t work in financial services before he was Treasury secretary, and because he waited a few years before taking that job at DE Shaw, Summers says it’s “absurd” to blame the revolving door for any of his actions.

It’s weird that Summers, who loves debate, generally refuses to sit down in some public forum and answer serious, informed questions about the legacy of his tenure at Treasury; it might well be that this single interview is the closest we’ll ever get. And on the basis of this interview, it’s clear that, far from apologizing for his actions, Summers is going Full Bluster, denying any culpability, and choosing instead to violently reject and belittle any suggestion that he holds any responsibility for the crisis at all.

It’s time to move the World Economic Forum away from the Swiss enclave with which it has become synonymous, at least for one year. A Greek island — Arianna Huffington suggests Patmos, while Andrew Ross Sorkin is more partial to Santorini — would be perfect: a change of climate, a change of scenery, and an opportunity to bring the forces of global plutocracy to bear exactly where they can do the most good. Davos has billionaires, but it doesn’t have any yachts.

Patmos 2013: you know it makes sense.

Update: More recruits!

Am I feeling a bit sheepish about my extreme pessimism of last night, in the wake of a healthy stock-market reaction in both Europe and the US? Not really. Markets did rise, but the movement was within what you might consider standard noise for stock indices these days: roughly 2% in Europe, a little lower in the US. A resounding vote of confidence in the EU this was not: instead, it looks more like the bad deal done in Europe was already priced in, and the markets just continued, today, on their normal volatile and noisy path. In fact, it’s not at all clear that the EU treaty was responsible for any of today’s market move at all.

In the video I shot yesterday with TBI’s Simone Foxman, Simone talks about how Europe’s bailout mechanism is a fragile thing. For one thing, she admits that “the ECB has to get involved in one way or another”, and that we’re not seeing that right now; later on, she wonders whether the markets would even place all that much faith in a German guarantee of PIIGS debts if Germany has been downgraded. “It’s going to be really tricky to not lose a lot of investor confidence” if and when the eurozone breaks up, she says, and when Germany is called upon to provide guarantees, “by then, markets may not trust them enough. If that fear keeps rolling, it snowballs down the mountain and all of sudden becomes an avalanche”.

This is one of those situations where the conventions of reporting market moves on a daily basis are decidedly unhelpful if you want to get a feel for what’s going on in Europe. The fact is that Europe still has a lot of very strong companies, which are worth real money going forwards; in many ways, owning those companies is a much smarter thing to do than simply putting your euros on deposit in a European bank. So looking at the share prices of European companies is really not a great way of working out what the market thinks of the prospects for the future of the eurozone. And looking at the value of the euro doesn’t help much either. Instead, you want to look at more obscure indicators, like the amount that Italian and Spanish banks need to pay if they want to borrow money on the interbank market.

More simply still, just look at the amount of new capital that Banco Santander — one of the strongest banks in Spain, if not Europe as a whole — is now being asked to raise. (More than €15 billion, if you must know.) Here’s Santander’s share price, over the past couple of years. The thing to notice is the inexorable downward slide, not any small uptick today. Does anybody really think we’ve now seen the all-time lows for this indicator? If not, then let’s stop treating intraday market noise as some kind of referendum on the latest Euro treaty.

Michael Cembalest’s idea of explaining the euro crisis with lego was pure genius. So, of course, I had to go out and find some lego myself; the above video is the result. If you look very closely, you might even be able to see the French banks!

Jason Varone was not impressed by this video. “I guess you don’t know anyone trying to retire?” he tweeted in response.

Actually, I do. But retirement isn’t — or shouldn’t be, in any case — a day on which you suddenly liquidate your entire stock portfolio and go from risky stocks to safe cash. As we get older and more risk-averse, we should hold fewer risky stocks and more safer bonds. (Although the idea that bonds are particularly safe is something you might want to reconsider, these days.) Retirement is the point at which you stop putting money into your retirement account — and therefore the point at which you stop buying more stocks. But not-buying isn’t the same as selling.

What’s the optimal asset allocation for someone who’s retiring right now? The answer there depends on a huge number of variables — whether you own your own home, what kind of a mortgage you have, what your monthly expenditures are, what kind of Social Security income you have, etc etc etc. But one thing I can say: the amount of stocks you have the day before you retire shouldn’t be vastly different from the amount of stocks you have the day after you retire.

Yes, there’s always a small number of people who are genuinely hurt by a big stock-market sell-off — people who for some reason have to sell now and who would in hindsight have been much better off selling a few weeks ago. But I don’t see a lot of forced selling in the market right now, and I don’t think there are all that many people in that position: while unemployment is still at very high levels, the amount of new unemployment — people being laid off, and forced to live on their savings — is quite low, and the economy is gaining jobs, not losing them.

As for the rest of us — the employed majority — we should just continue to dutifully put aside a chunk of money every paycheck, and invest it in the broad stock market. Sometimes our retirement account will go up, and other times it will go down. But over the long term, simply putting money in every month is the most important thing of all — that and not panicking when the market gets volatile.

After I wrote my post about restaurant grades on Thursday, my fabulous video producer, Ayana Morali, discovered that the Ritz-Carlton on Central Park South — one of the grandest hotels in New York — received a whopping 77 violation points in its latest inspection. So naturally we went up there to check it out, and got surrounded by hotel security guards who weren’t happy with us filming there.

At one point — you don’t see this in the video — the manager came out and told us we weren’t allowed to film outside the hotel. But when I started asking him about those violation points, he scuttled back into the hotel through a side door, mumbling something about not knowing what I was talking about.

It turns out that the Ritz-Carlton kitchen is operated by one of those celebrity-chef franchises, in this case BLT Market. Laurent Tourondel does seem to be making a habit of racking up enormous numbers of violation points: BLT Steak, on 57th Street, received a mind-boggling 91 violation points back in October, before getting its act together and bringing that score down to 2 in November.

When restaurants start getting scores in the upper reaches of the C ranking, it’s definitely worth getting worried. Here’s the chart, again, to remind you how restaurants with 77 or 91 points rank relative to their peers:

I’d definitely think twice before eating at a restaurant with 77 violation points. But my question in the video is a serious one: even knowing about the 77 points, would I really rather eat at a McDonald’s with no violation points at all? Ultimately, I’d still plump for BLT Market, I think. If I can eat street food in Quito, I should be able to cope with the Ritz-Carlton on Central Park South. Even though it’s living proof that there’s no correlation at all between price and cleanliness.

I still haven’t been able to get an updated version of the triple-A bond chart, but I did manage to blow it up to six feet tall and do my best weatherman impression in front of it at the Nasdaq Marketsite in Times Square.

After my post on financial advisors last week, Josh Brown, a/k/a the Reformed Broker, got in touch saying that at some point he and I should discuss action bias — the way in which advisors feel the need to do something just to make their clients think they’re earning their keep. I was happy to oblige.

Josh is convinced that the new Pimco Total Return ETF is going to be the big game changer in the battle between mutual funds and ETFs: I think he’s right about that, since there’s no conceivable reason why you’d want to pay a 1% fee on a Total Return mutual fund when you can pay 0.55% on a Total Return ETF instead.

In the short term, this means a loss of income for Pimco, as investors rotate out of their mutual funds and into cheaper ETF flavors of substantially the same investment pool. But as Ari Weinberg will tell you, the main job for Pimco is to gather up as many assets under management as it can; the income flows from there. And the ETFs mean many fewer headaches for Pimco, too:

Mutual funds no longer have to divide the rents from buying/selling mutual fund shares on their behalf. In fact, with in-kind creation, they don’t even have to pay commissions internally to collect assets. Assets just walk in the door through creation.

Funds operating this way can now keep even more of the expense ratio and, theoretically, spend more of it on doing what they are supposed to be doing: providing returns for investors.

One of the ugliest parts of the mutual-fund world is the way in which many fund managers essentially bribe brokers to push their funds by loading them up with enormous fees and then kicking back commissions to the broker in question. ETFs don’t have that problem. But they do pose another risk: they’re so easy to buy and sell that many brokers and advisors are tempted to trade in and out of them far too much. That’s the action bias.

Frankly, you don’t want a broker or advisor keeping an eye on a fluctuating market and actively investing on your behalf. You want someone who will tell you that you’re overreacting, and that the best thing to do is nothing. That’s a truly valuable service.

My favorite bit in this video comes towards the end, when I ask Charles about the wonderful tweet he sent out last Friday, after the gay marriage bill passed the New York senate.

I wanted to know, was this just a lovely sentiment, or does Charles really think this is going to happen? The answer is the latter, and Charles gives two strong reasons why that might be the case.

One is the way that the world is getting smaller and more interconnected. Countries make hundreds of agreements with each other, they set up organizations like the UN and the EU, and in general behave much more pleasantly towards each other than they ever have in the past. And at some level that has to be because doing so is what their people want.

Charles’s second point was about mobility and immigration, and it’s a great one. Greater levels of immigration aren’t just a fantastic idea from a national-security standpoint and a fiscal standpoint, they’re also demographically necessary for an aging America which has a lot of labor-intensive needs in a service sector which can’t be outsourced. “The self-interest of people will weaken the effects of borders,” says Kenny, which is surely true. Americans don’t like immigration, but they love the low prices that immigration brings for their golf courses and swimming pools and McMansions.

There’s a long distance between appreciating the upside of immigration, on the one hand, and extolling the idea of completely open global borders, on the other, where everybody has the same right to work in the US, no matter where they were born. There’s many people who would push for the former, and almost nobody who would push for the latter. But as the economic distance between countries shrinks, the problems associated with such a policy will get smaller. And Charles points out too that there will be increasing numbers of Americans who want to live abroad; those Americans would in principle be quite happy to sign bilateral open-border agreements with the countries they’d like to live in.

None of this is going to happen in our lifetimes, but if you look at how far the world came over the course of the last century, there’s reason for optimism about how much more progress it can make in this one. Countries already go to war with each other much less frequently than they did in the past; the insane cost of war alone is one good reason why that might be. And without wars to make us hate each other, we’ll surely continue to get friendlier towards each other.

Sometimes, too, change can happen astonishingly fast. David Schlesinger touched on this in his chat with me yesterday — look at the way in which the Chinese government is successfully serving the interests of the Chinese people today, compared with 20 or 30 years ago.

The main official obstacle to Chinese people traveling around the US today is not China’s government, it’s America’s. And while we fear China in many ways, the spectre of mass Chinese immigration to the US is not one of them — to a large degree, America could and should welcome an influx of Chinese entrepreneurialism, which could quite possibly be funded with some of China’s trillions in foreign exchange reserves. From a US perspective, much better all that investment and job creation happen here than in China.

They put something in the water, here in Aspen, which makes people very optimistic. (Although maybe it’s inactive early in the morning: both Steve Adler and I were unimpressed by the latest demographic analysis purporting to find a centrist, consensus-driven majority in America.) But the world really is getting better, and has been for a couple of centuries now, and it’s very likely to continue doing so, in its lumpy and unpredictable way. Which means that, sooner or later, there’s a good chance that Charles’s dream will come true.

On Tuesday I moderated a panel at the New York Forum which featured, inter alia, Duncan Niederauer, the CEO of the New York Stock Exchange, and Richard Robb, the CEO of Christofferson Robb, a money management firm which does its fair share of speculation.

My question at the beginning of this clip, for Niederauer, didn’t come entirely out of the blue. Amar Bhidé had previously talked about the casino aspect of markets, and Andrew Ross Sorkin had talked about the distinction between speculation and investment. But Niederauer was not happy when I pushed him on these concepts. Wall Street is increasingly a game of speculation rather than investment, I said, and asked how a casino operator pushing people to make bets over the course of a millisecond was not part of the problem. Rather than engaging with the question, he simply shut me down: “I thought my job description was quite different than what you just described,” he said. “So you must be talking to someone else.”

Niederauer then used all his media training to pivot and give a mini-speech instead about how self-regulation was better than Dodd-Frank. But Richard Robb, to his credit, engaged, even if what he said doesn’t stand up to scrutiny. “I don’t know what the difference between investing and speculation looks like,” he said, throwing up a straw man of everybody working at peoples’ tractor collectives. Robb’s prescription was essentially to do nothing but ban a few of his competitors: stop big banks from doing what he does, leave him alone to do anything he wants, and “let innovation find its own way, and if it’s parasitic and unproductive, it will not be rewarded by the capitalist system.”

That’s clearly false, of course: we can all think of parasitic and unproductive Wall Street innovations which have made millions of dollars for bankers and traders and money managers. Richard Robb himself gave a good example earlier on in the panel: structured investment vehicles.

And so Sorkin jumped in, making the good and obvious point that “it’s actually very easy to see what speculation is and what investing is.” Here’s one simple distinction: speculation is where you buy something in the expectation that it will rise in price, where investment is where you put money into something so that over the long term you can make a profit from the resulting cashflows, be they coupon payments or dividends. And as Sorkin said, if you make an investment for two seconds, that’s clearly speculation.

Robb’s response to Sorkin I think was one of the most telling points of the panel. “How about two days?” he asked. “Two weeks? Two months? Where would you draw the line?”

I could barely believe what I was hearing — was Robb really suggesting that holding a position for two days might be considered investment rather than speculation? Or even two months? All of them are speculation — and the fact that the likes of Niederauer and Robb can’t see that is I think a big part of the problem.

The subject of the panel was financial innovation, and Robb genuinely believes that he’s something of a centrist on the issue: he makes great play of agreeing with his friend Bhidé, for instance. But the fact is that if you’re talking to alumni of Goldman Sachs (Niederauer) or the University of Chicago (Robb), or someone who used to run the derivatives desk at a too-big-to-fail bank (Robb, again), then their idea of what’s good for the world is always going to be pretty skewed. They’ve made millions of dollars in the Wall Street casino, and they’re precisely the people being put on panels to ask whether the casino is a good thing. It’s reasonably easy to predict what they’re going to say — and to discount it heavily.

Joe Weisenthal says I’m wrong about the Ira Sohn conference. But that doesn’t mean he thinks that David Gaffen is right. Gaffen reckons that people go to these events so that they can trade in and out of stocks in the space of 10 minutes. Weisenthal, by contrast, sees value somewhere else entirely:

It’s not often that you get to hear the thought process and reasoning employed these financial professionals. Within the broader scope of financial media, you hear a lot of managers and pundits making their arguments in broad strokes, with lines like “We’re bullish on US banks because of low rates, yada yada yada…“And that kind of stuff really is useless. But these are professionals who usually have portfolios of just a handful of stocks, who have done a tremendous amount of research on each one before pulling the trigger, and frequently they do have original insights.

So you shouldn’t go out and by MBIA just because a manager likes it. But if you’re looking for original thinking on stock selection, the speeches, presentations, and letters of big hedge fund managers is frequently some of the best stuff around.

This is a good point. The best way to extract value from Ira Sohn presentations is to concentrate not on the stocks that the hedge fund managers are talking about, but rather on their methodology. At the very least, you’re likely to learn a few ways of looking at a company that you hadn’t thought of before. These fund managers, then, can improve the way that investors do their own research on companies, even if they’re not going to be delivering up great investment ideas on a plate. Use their methodology on a stock which none of them are looking at, and you might just be able to find a hidden gem.

There’s another way to look at the fund managers’ investment techniques, and that’s as a way to evaluate the managers. The idea here is that the managers who have the smartest techniques are likely to be the best managers to invest in. On this front, I’m far from convinced: as I told Gaffen, the analyses presented to the Ira Sohn conference are really sales pitches more than they are transparent views into how hedge fund managers think and invest in the real world. For all their joined-up thinking at Ira Sohn, most successful fund managers in reality use techniques which they would hesitate to admit to in public.

But in any case, you’ll never get the important nuance about how these fund managers think from reading news reports about the conference. So I still don’t see the point in sending a bunch of reporters to cover it.

It’s the Ira Sohn conference tomorrow, with well over a thousand people paying four-digit sums, and sometimes more, for the privilege of listening to boldface fund managers talk about their investment ideas. The conference gets a lot of press, not least from Reuters, but these presentations are not the kind of thing that individual investors — or even financial journalists — are really qualified to judge.

Hedge funds — and venture capitalist funds, and private-equity funds — have a certain mystique which rubs onto their managers, especially when those managers have posted impressive investment returns over the past few years. The Ira Sohn conference has even more mystique, since with many of these fund managers it’s the only time they speak in public, and as a result the audience is primed to expect something very special.

But as with any investment, it’s important not to get caught up in hype. Precisely because the Ira Sohn conference has so much hype and mystique, everything coming out of it should be treated with extreme prejudice. If you find a great investment idea in an improbable and unexpected place, that’s likely to be a much better bet than if you think you’ve found a great investment idea coming from a professional fund salesman in a highly-artificial context.

Investing in hedge funds is hard enough; investing in individual hedgies’ ideas is pretty much impossible. The only people who should even try are other hedgies, or possibly endowment managers who see a lot of idea flow and have significant experience of getting caught up in a story and then seeing how it plays out. Sometimes the highest-conviction ideas are also the worst ideas. Unless and until you’ve lived through those kind of experiences, you’re probably best off simply ignoring everything coming out of the Ira Sohn conference.

Most of this video is reasonably serious: I genuinely do think that Christine Lagarde is going to be the next managing director of the IMF. And it probably won’t take long before she gets the job, either.

At the end, I throw out a very left-field name which almost nobody outside the world of sovereign-debt geeks has ever heard of. But there’s a serious point there: the single biggest job of the IMF managing director is going to be navigating and architecting a round of pretty much unprecedented sovereign-debt restructuring deals. Can Lagarde do that? I don’t know that she can. But there’s one man who undoubtedly can.

Via Paul comes this montage of highlights from the people who brought you the Everything is OK series. What makes it especially fabulous for me is the fact that a  large chunk of it takes place right outside Reuters HQ in Canary Wharf. Obviously, you shouldn’t watch it. Do your job instead. Or go shopping. One or the other.