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Wikileaks 2.0

http://bankofamericasuck.com/

Adrian Chen at Gawker:

A member of the activist collective Anonymous is claiming to be have emails and documents which prove “fraud” was committed by Bank of America employees, and the group says it’ll release them on Monday. The member, who goes by the Twitter handle OperationLeakS, has already posted an internal email from the formerly Bank of America-owned Balboa Insurance Company

The email is between Balboa Insurance vice president Peggy Johnson and other Balboa employees. (Click right to enlarge.) As far as we can tell, it doesn’t show anything suspicious, but was posted by OperationLeaks as a teaser. He also posted emails he claims are from the disgruntled employee who sent him the material. In one, the employee says he can “send you a copy of the certified letter sent to me by an AVP of BofA’s [HR department] telling me I am banned from stepping foot on BofA property or contacting their employee ever again.”

OperationLeaks, which runs the anti-Bank of America site BankofAmericasuck.com, says the employee contacted the group to blow the whistle on Bank of America’s shady business practices. “I seen some of the emails… I can tell you Grade A Fraud in its purest form…” read one tweet. “He Just told me he have GMAC emails showing BoA order to mix loan numbers to not match it’s Documents.. to foreclose on Americans.. Shame.”

An Anonymous insider told us he believes the leak is real. “From what I know and have been told, it’s legit,” he said. “Should be a round of emails, then some files, possible some more emails to follow that.” The documents should be released Monday on Anonleaks.ch, the same site where Anonymous posted thousands of internal emails from hacked security company HBGary last month. That leak exposed a legally-questionable plot to attack Wikileaks and ultimately led to the resignation of HBGary CEO Aaron Barr.

Katya Wachtel at Clusterstock:

Anonymous said late Sunday evening, however, “this is part 1 of the Emails.” So perhaps more incriminating correspondence is to come. And to be honest, these messages could be incredibly damaging, but we’re not mortgage specialists and don’t know if this is or isn’t common in the field. The beauty is, you can see and decide for yourself at bankofamericasuck.com.

But for those who want a simple explanation, here’s a summary of the content.

The Source

The ex-Balboa employee tells Anonymous that what he/she sends will be enough to,

crack [BofA’s] armor, and put a bad light on a $700 mil cash deal they need to pay back the government while ruining their already strained relationship with GMAC, one of their largest clients. Trust me… it’ll piss them off plenty.

The source then sends over a paystub, an unemployment form, a letter from HR upon dismissal and his/her last paystub and an ID badge.

He/she also describes his/herself:

My name is (Anonymous). For the last 7 years, I worked in the Insurance/Mortgage industry for a company called Balboa Insurance. Many of you do not know who Balboa Insurance Group is, but if you’ve ever had a loan for an automobile, farm equipment, mobile home, or residential or commercial property, we knew you. In fact, we probably charged you money…a lot of money…for insurance you didn’t even need.

Balboa Insurance Group, and it’s largest competitor, the market leader Assurant, is in the business of insurance tracking and Force Placed Insurance…  What this means is that when you sign your name on the dotted line for your loan, the lienholder has certain insurance requirements that must be met for the life of the lien. Your lender (including, amongst others, GMAC… IndyMac… HSBC… Wells Fargo/Wachovia… Bank of America) then outsources the tracking of your loan with them to a company like Balboa Insurance.

The Emails

Next comes the emails that are supposed to be so damaging. The set of emails just released shows conversational exchanges between Balboa employees.

The following codes pertain to the emails, so use as reference:

  1. SOR = System of Record
  2. Rembrandt/Tracksource = Insurance tracking systems
  3. DTN = Document Tracking Number. A number assigned to all incoming/outgoing documents (letters, insurance documents, etc)

The first email asks for a group of GMAC DTN’s to have their “images removed from Tracksource/Rembrandt.” The relevant DTNs are included in the email — there’s between 50-100 of them.

In reply, a Balboa employee says that the DTN’s cannot be removed from the Rembrandt, but that the loan numbers can be removed so “the documents will not show as matched to those loans.” But she adds that she needs upper management approval before she moves forward, since it’s an unusual request.

Then it gets approved. And then, one of the Balboa employees voices their concern. He says,

“I’m just a little concerned about the impact this has on the department and the company. Why are we removing all record of this error? We have told Denise Cahen, and there is always going to be the paper trail when one of these sent documents come back. this to me seems to be a huge red flag for the auditors… when the auditor sees the erroneous letter but no SOR trail or scanned doc on the corrected letter… What am I missing? This just doesn’t seem right to me.

We suspect this is the type of email that Anonymous believes shows BofA fraud:

leak one

Image: Anonymous

Click here to see why these emails prove nothing interesting, and to see what what Bank of America says about the emails >

Chris V. Nicholson at Dealbook at NYT:

A Bank of America spokesman told Reuters on Sunday that the documents had been stolen by a former Balboa employee, and were not tied to foreclosures. “We are confident that his extravagant assertions are untrue,” the spokesman said.

The e-mails dating from November 2010 concern correspondence among Balboa employees in which they discuss taking steps to alter the record about certain documents “that went out in error.” The documents were related to loans by GMAC, a Bank of America client, according to the e-mails.

“The following GMAC DTN’s need to have the images removed from Tracksource/Rembrandt,” an operations team manager at Balboa wrote. DTN refers to document tracking number, and Tracksource/Rembrandt is an insurance tracking system.

The response he receives: “I have spoken to my developer and she stated that we cannot remove the DTNs from Rembrandt, but she can remove the loan numbers, so the documents will not show as matched to those loans.”

According to the e-mails, approval was given to remove the loan numbers from the documents.

A member of Anonymous told DealBook on Monday that the purpose of his Web site was to bring attention to the wrongdoing of banks. “The way the system is, it’s made to cheat the average person,” he said.

He had set up a Web site to post bank data that WikiLeaks has said it would release, and was subsequently contacted this month by the former Balboa employee. It has been speculated that the documents, which have yet to be released, would focus on Bank of America. The spokesman for Anonymous said he had no direct ties to WikiLeaks, which is run by Julian Assange.

Nitasha Tiku at New York Magazine:

WikiLeaks’ founder, Julian Assange, has threatened to leak damning documents on Bank of America since 2009. And Anonymous has backed WikiLeaks’ mission as far as the free flow of information. But these e-mails date from November 2010. Plus, they don’t exactly amount to a smoking gun. Whether or not the e-mails prove real, it’s clear Bank of America should have expanded its negative-domain-name shopping spree beyond BrianMoynihanSucks.com.

Naked Capitalism:

The charge made in this Anonymous release (via BankofAmericaSuck) is that Bank of America, through its wholly-owned subsidiary Balboa Insurance and the help of cooperating servicers, engaged in a mortgage borrower abuse called “force placed insurance”. This is absolutely 100% not kosher. Famed subprime servicer miscreant Fairbanks in 2003 signed a consent decree with the FTC and HUD over abuses that included forced placed insurance. The industry is well aware that this sort of thing is not permissible. (Note Balboa is due to be sold to QBE of Australia; I see that the definitive agreement was entered into on February 3 but do not see a press release saying that the sale has closed)

While the focus of ire may be Bank of America, let me stress that this sort of insurance really amounts to a scheme to fatten servicer margins. If this leak is accurate, the servicers at a minimum cooperated. If they got kickbacks, um, commissions, they are culpable and thus liable.

As we have stated repeatedly, servicers lose tons of money on portfolios with a high level of delinquencies and defaults. The example of Fairbanks, a standalone servicer who subprime portfolio got in trouble in 2002, is that servicers who are losing money start abusing customers and investors to restore profits. Fairbanks charged customers for force placed insurance and as part of its consent decree, paid large fines and fired its CEO (who was also fined).

Regardless, this release lends credence a notion too obvious to borrowers yet the banks and its co-conspirators, meaning the regulators, have long denied, that mortgage servicing and foreclosures are rife with abuses and criminality. Here’s some background courtesy Barry Ritholtz:

When a homeowner fails to keep up their insurance premiums on a mortgaged residence, their loan servicer has the option/obligation to step in to buy a comparable insurance policy on the loan holder’s behalf, to ensure the mortgaged property remains fully insured….

Consider one case found by [American Banker’s Jeff] Horwitz. A homeowner’s $4,000 insurance policy, was paid by the loan servicer, Everbank via escrow. But Everbank purposely let that insurance policy lapse, and then replaced it with a different policy – one that cost more than $33,000. To add insult to injury, the insurer, a subsidiary of Assurant, paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road.

That $33,000 policy — including the $7,100 kickback – is an enormous amount of money for any loan servicer to make on a single property. The average loan servicer makes just $51 per loan per year.

Here’s where things get interesting: That $33,000 insurance premium is ultimately paid by the investors who bought the loan.

And the worst of this is….the insurance is often reinsured by the bank/servicer, which basically means the insurance is completely phony. The servicer will never put in a claim to trigger payment. As Felix Salmon noted,

This is doubly evil: it not only means that investors are paying far too much money for the insurance, but it also means that, as both the servicer and the ultimate insurer of the property, JPMorgan Chase has every incentive not to pursue claims on the houses it services. Investors, of course, would love to recoup any losses from the insurer, but they can’t bring such a claim — only the servicer can do that.

Note there are variants of this scheme where insurance is charged to the borrower (I’ve been told of insurance being foisted on borrowers that amounts to unconsented-to default insurance, again with the bank as insurer; this has been anecdotal with insufficient documentation, but I’ve heard enough independent accounts to make me pretty certain it was real)

David Dayen at Firedoglake:

Just because something has a lot of anecdotal evidence behind it doesn’t necessarily mean the specific case is true. But the forced-place insurance scam has been part of other servicer lawsuits, so it definitely exists. Whether this set of emails shows that taking place is another matter. Apparently this is just the first Anonymous email dump, so there should be more on the way

Derek Thompson at The Atlantic

Parmy Olson at Forbes:

Yet however inconclusive the e-mails may be, the leak may have wider implications as Anonymous gradually proves itself a source of comeuppance for disgruntled employees with damning information about a company or institution. Once the domain of WikiLeaks, the arrest of key whistleblower Bradley Manning suggested the site founded by fellow incarcerate Julian Assange could not always protect its sources. “A lot depends on the impact of this week,” says Gabriella Coleman, a professor at NYU who is researching Anonymous, who added that “Anonymous could go in that [WikiLeaks] direction.”

Anonymous is not an institution like WikiLeaks. It is global, has no leader, no clear hierarchy and no identifiable spokespeople save for pseudo-representatives like Gregg Housh (administrator of whyweprotest.net) and Barrett Brown.

It has some ideals: Anonymous tends to defend free speach and fight internet censorship, as with the DDoS-ing of the web sites of MasterCard, Visa and PayPal after they nixed funding services to WikiLeaks, and the DDoS-ing of Tunisian government Web sites. It is also great at spectacle. The group’s hacking of software security firm HBGary Federal not only gained oodles of press attention, it inadvertently revealed the firm had been proposing a dirty tricks campaign with others against WikiLeaks to Bank of America’s lawyers.

That hack led, rather organically, to the establishment of AnonLeaks.ru, a Web site where the Anonymous hackers posted tens of thousands of HBGary e-mails in a handy web viewer. While it took just five supporters to hack HBGary, hundreds more poured through the e-mails to identify incriminating evidence, leading to more press reports on the incident.

Such is the nature of Anonymous–global, fluid, intelligent, impossible to pin down–that it is could become an increasingly popular go-to for people wishing to vent damaging information about an institution with questionable practices.

The collective already receives dozens of requests each month from the public to attack all manner of unsavoury subjects, from personal targets to the government of Libya, from Westboro Baptist Church to Facebook. It rarely responds to them–as one Anonymous member recently told me, “we’re not hit men.”

Yet for all its facets as both hot-tempered cyber vigilantes and enlighteners of truth, Anonymous is becoming increasingly approachable, as the latest emails between OperationLeakS and the former BoA employee show. Assuming this particular employee doesn’t end up languishing in jail like Manning, more people may now be inclined to follow suit.

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Filed under Economics, New Media, Technology, The Crisis

And Then We Plunge…

National Association Of Realtors:

Existing-home sales were sharply lower in July following expiration of the home buyer tax credit but home prices continued to gain, according to the National Association of Realtors®.

Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.

Lawrence Yun, NAR chief economist, said a soft sales pace likely will continue for a few additional months. “Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September,” he said. “However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.

Daniel Indiviglio at The Atlantic:

The housing bears were right: existing home sales fell off a cliff in July. As my colleague Megan McArdle just noted, they sold at an annualized pace of 3.83 million, down by 27% versus June and 26% below July 2009, according to the National Association of Realtors. This is the lowest rate since NAR began keeping track of monthly sales in 1999. It’s also far worse than the rate of 4.7 million sales that the market expected.

Felix Salmon:

This number is the lowest that the NAR has ever reported, and I can see why it spooked the markets, sending 10-year Treasuries breaking through the 2.5% level: we’re seeing less housing market activity now than we were even during the depths of the crisis. According to the NAR, there were 4.94 million existing homes sold in 2007, 4.34 million sold in 2008, and 4.57 million sold in 2009. The latest annualized number in that series, for July 2010, is just 3.37 million. That’s a 26% fall from last year’s rate.

The number is so low that it looks like a statistical aberration: let’s hope it is. Because if it isn’t, the news is gruesome. It means that despite record-low mortgage rates, people aren’t able to buy houses: essentially all the benefit from those low rates is going to people who already own their homes and are taking the opportunity to refinance.

The news also means that there’s a big gap between buyers and sellers: the market isn’t clearing. Sellers are convinced that their homes are worth lots of money, or will rise in price if they just hold out a bit longer; buyers are happily renting, waiting for prices to come down. And entrepreneurial types, whom one would expect to arbitrage the two by buying houses with super-cheap mortgages and renting them out at a profit, don’t seem to have found those opportunities yet.

Houses are rarely a liquid asset; they were, briefly, during the housing boom, but now they’re more illiquid than ever. America is a country where two generations of homeowners have learned to consider their houses an asset; they’re rapidly learning that at times like these, a house can look much more like a liability. (And refinancing your mortgage is just liability management.) The enormous repercussions of that change in mindset are only just beginning to be felt.

Joe Weisenthal at Clusterstock:

Not surprisingly, the end of the homebuyer tax credit caused these sales to fall off a cliff. People just didn’t realize how high that cliff was.

In case there were any doubt that it made a difference, check out this chart from Waverly Advisors which shades in the period of the tax credit.

Home sales started rising immediately, and have fallen off immediately with the tax credit’s expiry.

Kevin Drum:

Megan McArdle, who just bought a house, reports that she and her husband “were astonished by the effect that the tax credit seemed to be having on people. Prices were climbing rapidly, as people got into bidding wars that raised the price by more than 8%. Inventory vanished rapidly; the average days on the market for a new property that wasn’t ridiculously overpriced, half-finished, or occupied by tenants who wouldn’t let the place be shown, was 1-4 days.”

That’s been my sense too, which is remarkable since $8,000 shouldn’t be that big an incentive to buy something as expensive as a house. But then again, maybe that’s the Southern Californian in me talking. $8,000 isn’t a huge incentive if you’re buying a $500,000 house in Los Angeles or Orange County, but it’s probably a much bigger deal if you’re buying a $150,000 house in Little Rock.

In any case, we better hope this is just a short-term effect from housing sales getting artificially pulled in a month or two to take advantage of the tax credit. If it’s not — if the tax credit really was propping up the market — then we’re in for yet more economic pain. Slow housing sales drive lower house prices, and lower house prices have an outsize effect on consumer spending and on economic growth in general. Buckle your seat belts.

Megan McArdle:

The depth of the collapse suggests that in fact, the housing tax credit was not generating new demand as much as moving demand forward a few months.     That means that we’re going to have to work out the aftermath in months of low home sales.

The NAR report strives to accentuate the positive, but this isn’t easy, when the “positive” consists entirely of a modest year-on-year price increase.  Given mortgage rates at 4.5% for a 30-year fixed, and a historic mutli-year collapse in home prices, the fact that we managed to eke out a 4% year-on-year increase isn’t exactly comforting.

Should we rethink buying a house?  Well, we can’t; at this point, we’re couch-surfing our relatives while we wait for our house to close; there’s no way out but forward.  And in our case, we’re planning to stay put for a long time, so as long as DC rents don’t utterly collapse, this is still a good plan for us.  But this only reinforces my belief that housing is no longer a good way to generate wealth.  The government can’t fix this market, which needs to find a new, lower level.  It can only very temporarily distort it.

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Filed under Economics, The Crisis

K-Thug And The Kid

Andrew Ross Sorkin at Dealbook at NYT:

You may recall that during the most perilous months of 2008 and early 2009, there was a vigorous debate about how the government should fix the financial system. Some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.

They argued that Wall Street was occupied by the walking dead, and that no matter how much money we threw at the banks, they would eventually topple the system all over again and cause a domino effect worldwide.

So were they wrong after all?

Paul Krugman:

Andrew Ross Sorkin Owes Several People an Apology

I certainly never said anything like that, and I don’t think Nouriel did either. First of all, I never called for “nationalizing the entire banking system” — I wanted the government to take temporary full ownership of a few weak banks, mainly Citigroup and possibly B of A. I defy Sorkin to find any examples of me calling for a total takeover.

And the argument was never that “no matter how much money we threw at the banks, they would eventually topple the system all over again”. Again, where did I say that? The argument was always that if we were going to rescue the banks — and we were — taxpayers should get the potential upside as well as the potential downside.

If you want to say that the advocates of nationalization were excessively pessimistic about the prospects for a light-touch bank strategy, fine. But caricaturing their position, making it sound far more extreme than it actually was, is definitely not OK.

Jessica Pressler at New York Magazine:

As New York noted this past winter, Andrew Ross Sorkin is somewhat of a polarizing figure at the Times. A number of his fellow reporters are jealous of his success, unconvinced of his reportorial skills, and suspicious of his fawning attitude toward sources. And this morning, Sorkin made a new enemy at the Times, when in an amazingly credulous column (even for him) lauding the effectiveness of the bailout, he declared confidently that “some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.”

This did not please Krugman, who equally disdains imprecision and being referred to, even obliquely, as wrong. So the graybearded Times columnist did what he always does when he gets angry: He padded over to his computer and wrote a somewhat blistering rebuttal on his Times blog. The resulting post, unsubtly headlined “Andrew Ross Sorkin Owes Several People An Apology,” takes issue with Sorkin’s statement and makes clear that the person who is owed an apology is Krugman. “I certainly never said anything like that, and I don’t think Nouriel did either,” he wrote. “I never called for ‘nationalizing the entire banking system’ — I wanted the government to take temporary full ownership of a few weak banks, mainly Citigroup and possibly B of A.”

Joe Weisenthal at Clusterstock:

So did Krugman really want to nationalize all the banks?

No.

Here’s Krugman’s best defense, a post written on March 11, 2009, right at the bottom and in the fog of war.

John Hempton somewhat misunderstands my point, but that’s OK. I should have been clearer — and he and I actually seem to be mainly in agreement.

I was not saying “nationalize all the banks”; I was saying do what the Swedes did — in tandem with a guarantee on bank liabilities, take the banks with zero or negative capital into receivership. It’s really important that you do this: if you offer a blanket guarantee on the assets of a bank that’s already underwater, you (a) are very likely to take a large hit on taxpayers’ money, without any share in the upside (b) create a huge moral hazard/looting incentive.

Is he picking nits?

We don’t think so. Winding down banks that are technically insolvent is not the same thing as nationalizing all the banks.

Here’s another post where he’s saying that nationalization wouldn’t involve all the banks.

That being said, in retrospect, it’s hard to imagine this approach having worked any better than Geithner’s, given how surprisingly smooth things have gone.

So Sorkin’s critique of Krugman (and perhaps Roubini) is narrowly correct, if overstated.

SCORING: on February 1st, 2009, Krugman wrote:

If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.

Later, on February 23, 2009, Krugman noted:

What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree.

And just how were Krugman’s views characterized by other publications back then? Two headlines:

“Paul Krugman: Nationalize the banks” – Pittsburgh Post-Gazette

“Obama Should Nationalize U.S. Banks, Krugman Says” – Bloomberg

As opposed to, say

“Paul Krugman: Temporarily Nationalize the banks” – Pittsburgh Post-Gazette

“Obama Should Temporarily Nationalize U.S. Banks, Krugman Says” – Bloomberg

See how one word changes everything?

The closest he might’ve come in context to noting something resembling Sorkin’s piece is this, from a March 2009 Newsweek profile of him:

Krugman’s suggestion that the government could take over the banking system is deeply impractical, Obama aides say. Krugman points to the example of Sweden, which nationalized its banks in the 1990s. But Sweden is tiny. The United States, with 8,000 banks, has a vastly more complex financial system. What’s more, the federal government does not have anywhere near the manpower or resources to take over the banking system.

But (1) that’s Sweden, not Switzerland, and (2) Newsweek doesn’t specify what kind of takeover he’s referring to in the piece, only writing about it in vague terms as a “takeover.”

Krugman, who apparently was always advocating the temporary takeover solution and he appears to be correct in having pimpslapped Sorkin earlier today.

DECISION: Krugman. To be fair, we didn’t look into what Nouriel Roubini might’ve said, but unless Sorkin comes up with something better on Krugman, in that respect, he was wrong. Not only was he wrong, but his attempt to shell-shock readers by calling someone out in his own building backfired, miserably, and in doing so, likely just threw his “haters” both in and outside of the Times some fuel for their fire.

We contacted both Times executive editor Bill Keller for quote on the matter, we didn’t hear back. New York Times spokesperson Robert “Call Me Bob” Christie declined to comment.

Felix Salmon

Hamilton Nolan at Gawker:

Big time beef at the New York Times! Paul Krugman, chief beard-wearing columnist, took to his blog to attack Andrew Ross Sorkin, chief young reporter who will one day be an investment banker. Krugman says Sorkin mischaracterized Krugman’s position in his column today. He says Sorkin “Owes several people an apology.” First and foremost, Paul Krugman! In any case, this simply must end in a celebrity boxing match, which we will be happy to set up guys, just let us know.

Sorkin responds to Krugman:

Dear Professor Krugman,

I read your blog post about my column in Tuesday’s newspaper.

As you know, I’m a big fan of yours. I just want to point to some of the source material I had consulted for the column.

You quoted part of my column that said, “Some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.”

On your blog, you wrote, “I certainly never said anything like that, and I don’t think Nouriel did either.”

Just so there is no confusion, I based that passage on what you and Mr. Roubini had said and written during the crisis about a Swedish-style nationalization of the banking system.

Mr. Roubini began an Op-Ed in The Washington Post by writing, “The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it.” Later in the piece, he added, “We believe that, if applied correctly, the Swedish solution will work here.”

On your blog on Sept. 28, 2008, after reading a piece by Brad DeLong, an economist, which you linked to, you wrote, “Brad DeLong says that Swedish-style temporary nationalization is the right answer to a financial crisis; he’s right.”

In your column on Feb. 23, 2009, you asked, “Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.”

I appreciate that you may have articulated the details of your views differently, or more specifically, in other columns and forums.  And I appreciate that you could quibble with my words. But I do think it is clear that both you and Mr. Roubini had pressed for a Swedish-style nationalization. (By the way, at the time, I had thought the Swedish model was a pretty interesting approach, too.)

Again, I love reading your column and the bailouts are certainly an issue that is the subject of much debate.

Best,

Andrew

Andrew Leonard at Salon:

Now, I’m pretty sure Krugman doesn’t need my help in a duel-to-the-death, but I went and read the full text of both columns Sorkin linked to. And in both cases the authors make it explicitly clear that when they say “nationalization” they are talking about temporarily putting only specific insolvent banks into receivership. Sure, you can cherry pick a sentence from the lead paragraph and ignore the lengthy explication that comes afterward, but excuse me for my naive impertinence: I expect better from a New York Times reporter.

Krugman:

How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K.

And once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.”

It is of course true that Krugman advocated a more forceful approach to the banking system than that ultimately chosen by the White House. History has yet to rule on whether the Obama administration will get away with the path of least aggressiveness. It would not have taken much rewriting of Sorkin’s original column to make his same point. But Sorkin was sloppy, and made a factually incorrect claim that Krugman had recommended “nationalizing the entire banking system.”

Hey, no big deal. People make mistakes like that all the time. But when called on it, proper form demands that you admit what you got wrong. The classic formulation for this might be something along the lines of “My statement that Krugman demanded the complete nationalization of every bank in the United States was inartful, but my main point still holds.”

Instead, Sorkin dug in and cited evidence that proved his opponent’s point. And careless sloppiness suddenly becomes willful disingenuousness.

Clark Hoyt, NYT’s Public Editor:

I am not an economist or a business writer, but I have always understood nationalization to be a government takeover, not guarantees to creditors.

Sorkin did not address Krugman’s contention that he misstated Krugman’s reason for supporting the nationalization of some banks. Krugman has had “20 reasons,” Sorkin said.

Andrew Rosenthal, the editorial page editor, who is in charge of the Op-Ed page, where Krugman’s column appears, said, “Paul does not favor a Swedish-style nationalization of the banking system because they would fail no matter how much government threw at them. He never did.”

Bill Keller, the executive editor, who has responsibility for the Business section, where Sorkin works, said he had not reviewed the record, but if Sorkin got it wrong, “he – and we – should correct it, of course.”

Krugman and Sorkin told me that they talked Thursday. Sorkin said the conversation was “very cordial.” Krugman called it “not much fun.” They agreed that they disagree on the definition of nationalization.

I think the right thing to do is to simply acknowledge that, in trying to quickly summarize Krugman’s nuanced position, Sorkin over-simplified and got it wrong. Krugman did not call for the nationalization of the entire banking system, and, unless Sorkin can produce a citation to the contrary, he did not say it was necessary because otherwise the banks would fail again and cause a worldwide domino effect.

Sorkin said he is going back to his editors to discuss whether some sort of clarification is needed.

Maureen O’Connor at Gawker:

The winner is Nobel-winning economist and crotchety columnist Paul Krugman. The loser is Dealbook wunderkind Andrew Ross Sorkin, who got a slap on the wrist in today’s New York Times Corrections page.Lest you forget (or didn’t bother to follow this feud in the first place) Sorkin said Krugman is dumb because he wanted to nationalize the U.S. banking system, so Krugman said am not and did not, but Sorkin said yuh-huh you did because Krugman’s position was the temporary nationalization of banks, but Sorkin thought he meant nationalize forever. Anyway, mom finally stepped in to settle this fight once and for all. And it’s Professor Krugman for the win! In a Times correction dated April 17, 2010:

The DealBook column on Tuesday, about the possibility of the government’s making a profit on its bailout of banks, overstated the position of the economists Paul Krugman and Nouriel Roubini, at the height of the financial crisis, on nationalizing banks. While both supported guaranteeing the liabilities of the banking industry and a temporary government takeover of certain failing institutions, they did not recommend nationalization of the entire banking system. (Go to Article)

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The Sacking Of The Vampire Squid

Daniel Foster at The Corner:

Breaking over at the Wall Street Journal:

SEC charges Goldman Sachs with civil fraud in structuring and marketing of CDOs tied to subprime mortgages.

Stay tuned.

Stephen Spruiell at The Corner:

There seems to be some confusion over what the Goldman Sachs-SEC lawsuit is about. This isn’t just about the fact that Goldman sold its clients some bonds and then later bet against them. In my view, that wouldn’t be so bad. Goldman would be playing two independent roles in that story — broker on one side, trader on the other — and following independent strategies to hedge against market risk. Micromanaging investment banks’ hedging strategies could have all sorts of undesirable unintended consequences.

But the fraud alleged here is more serious than that, and it concerns the way Goldman structured and sold a particular bond, a structured product known as a Collateralized Debt Obligation (CDO). These products are not like ordinary stocks and bonds, which are pretty straightforward investments. They’re made up of the cash flows of a variety of underlying assets — in this case, pools of mortgages. There was a heavy demand for these products during the housing boom, and investment banks such as Goldman were under pressure to keep churning them out. The charge against Goldman is that at least one of these products, a CDO called Abacus 2007-AC1, was built to fail.

The outside consultant Goldman hired to select which mortgages would go into the CDO, a hedge-fund manager named John Paulson, is now known as one of the most famous housing shorts ever — he made an estimated $3.7 billion betting that these kinds of mortgage-backed bonds would go bad. So it is pretty disturbing that Goldman would bring him in as an “independent manager” to help it construct a CDO and not disclose this fact to the CDO’s buyers.

It would be like holding a basketball game, letting a Vegas sharp secretly select the players on one of the teams, and then presenting it to the public as a fair game. The sharp would have an incentive to select the worst players for his team and then bet against it. According to the SEC, that is exactly what Paulson and Goldman did

Henry Blodget at Clusterstock:

Based on the scan, we have not seen any screaming smoking guns.  There is certainly evidence that Goldman and Tourre said one thing internally and another externally.  It also appears that the information that was omitted in the external marketing materials would likely have been of interest to investors.

That’s not proof of fraud, but, as represented by the SEC, it looks bad.  Goldman will want to make it go away (read: out of the headlines) as quickly as it can.

Importantly, this is NOT a criminal indictment.  It is a civil lawsuit.  The SEC and Justice Department usually work together, so the absence of a criminal charge suggests that the Justice Department did not feel criminal charges were warranted.

So here’s what’s likely to happen to both parties:

Goldman Sachs will have to write a big check, and then it will be fine: Goldman will likely say the charges have no merit and then, in a month or two, settle with the SEC for a few hundred million dollars (chicken feed).  Goldman will then defend itself against the civil lawsuits that arise from this and probably settle those as well.  There may also be follow-on lawsuits for other CDOs and products Goldman created.  Those, too, will likely be settled or dismissed.  Bottom line: This will cost Goldman some money, but not enough to matter to investors.

Fabrice Tourre will be placed on administrative leave or fired (a.k.a., thrown under the bus).  He will then spend the next couple of years testifying in this and other follow-on civil lawsuits.  The SEC will probably demand a cash settlement from him, too, and boot him out of the industry. Based on our scan of the allegations, Tourre was involved in every aspect of the structuring and marketing of the CDO in question.  The complaint includes snippets of communications in which Tourre describes the CDO one way internally and another way externally.  Again, this is not proof of fraud, but, at least as represented by the SEC, it looks bad.  Tourre will likely want to fight the charges, especially if he thinks they’re b.s., but it will be too risky and expensive for him to do so, so he’ll likely settle.  Having made such public allegations, the SEC will make sure that any settlement produces an appropriately tough-looking headline (thus the fine and industry dismissal).

Felix Salmon:

With this suit, the SEC has finally uncovered the real scandal behind the Abacus deals. The NYT tried, back in December, but it didn’t quite get to the nub of the story — although Paulson was mentioned in the NYT story as someone who was generally short the subprime market, there was no indication that he played any role in structuring the deals. Neither was there any mention of ACA.

The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told ACA that Paulson had a long position in the deal when in fact he was entirely short.

Goldman Sachs has lost more than $10 billion in market capitalization today, in the wake of these revelations. Good. It can go long markets and it can go short markets. But it can’t lie to its clients. That’s well beyond the pale.

Update: The Abacus pitch book can be seen here.

Naked Capitalism

Jesse Eisinger and Jake Bernstein at ProPublica

Matt Taibbi:

Goldman, Sachs is getting busted, finally, for what to me is one of the most devious and brilliant crimes of the last decade.

I can’t get into this too much because I have other material coming out about it. But the upshot of it is that GS teamed up with a hedgie named John Paulson (no relation) to make the biggest ball of subprime shit they could, got short of it by credit-default-swapping it, then roped third parties into buying it. It’s kind of awesome in a way, and I’m sure it was fun while it lasted.

But now… I’m reminded of the scene in Goodfellas when the cops bust Henry…:

Bye bye, dickhead!

Megan McArdle:

One wants to be cautious about saying that Goldman Sachs is definitely guilty.  Financial crises produce immense political pressure for securities regulators and attorneys general to go head-hunting, and the cases often turn out to be weaker than they seem once the defense gets a chance to speak.  The case against two Bear Stearns hedge fund managers, for example, turned out to hinge on horrific-sounding quotes that had very clearly been ripped out of a context that totally changed the implications. Which just goes to show how heavy the pressure is on prosecutors to make these cases.

But it certainly sounds as if the SEC has the goods here.  Felix Salmon has gone through the pitchbook, and pronounces it free of any indication that a third party with a strong economic interest in the transaction was picking the securities to be included.  I will be interested to hear the defense rebuttal.  It should, at the very least, be entertaining.

Was anyone hurt by it?  That’s less clear–at that point, the market still had a bit of froth left, and people might well have bought the securities if Paulson’s interest had been disclosed.  But that doesn’t matter.  It’s hard to imagine anyone making an argument that Goldman didn’t have an obligation to disclose this information–and the fact that they failed to disclose seems to indicate that Goldman, at least, thought that the information would adversely impact the sale price.

I suspect this case will get a lot of public traction.  At this point, what galls people is not so much the stupid behavior that led to the bailouts, but the blatant self-dealing that seems to have gone on.  Unfortnately, much of that self-dealing is not actually illegal . . . so when we find an example that is legally actionable, the public and the court system are bound to jump on it with both feet.

Atrios

Stephen Gandel at The Curious Capitalist at Time:

So there you have it. Finally, the financial crisis gets its first major fraud case. Investment banks created complex securities that increased the risks of in the financial system. Most then held on to the securities because they didn’t know what they had. Goldman instead came up with an elaborate scheme to lay off the risk on unsuspecting investors. Either way, Uncle Sam had to come in a clean up the mess. As the SEC says, in selling something they knew was worthless, Goldman was no different from the medicine man of old. It’s a fraud as old as time.

The first question was who was damaged here. The answer is all of us. First of all, the investors who bought the securities lost about $50 billion on them $1 billion. (That’s the figure for the deal in question by the SEC. But I believe if you figure in all the deals synthetic deals that Goldman set up the investor loss is much larger.) Those investors were mostly pension funds. Second, Goldman insured these purposefully useless mortgage bonds with AIG. So all of us, taxpayers that is, had to pay up for those losses when AIG had to be bailed out. So this suit is really just a case of the government trying to get its money back from Goldman. That’s something we should see more of.

Two more questions: Does this end Blankfein’s reign as head of Goldman? I think so. It’s a big deal for an investment bank to be charged with securities fraud. And it is not just a coincidence that Goldman would get hit with a fraud case when Blankfein was CEO. Even though he is not named in the complaint, Blankfein is to blame. He pushed the firm to become less of an investment bank and more of a trading behemoth.  And this is the result: A brilliant trade that was so brilliant the Goldman people forgot that it also might be fraud.

Last: So are hedge funds more to blame in the financial crisis than we thought? It certainly looks that way. When the hedge funds went before Congress a year or so ago, they were praised–Paulson included. Now it looks like Paulson masterminded a trade that cost the government tens of billions of dollars. I would hope his next Congressional meeting will be less pleasant.

Lucas van Praag at Goldman Sachs:

The Goldman Sachs Group, Inc. (NYSE: GS) responds to a complaint filed by the SEC today.

The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.

The Goldman Sachs Group, Inc. is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

UPDATE: David Goldman (Spenger) at First Things

Eli Lehrer at FrumForum

Paul Krugman at NYT

Tom Maguire

Marian Wang at ProPublica

UPDATE #2: Goldman settles. Felix Salmon

Naked Capitalism

Daniel Indiviglio at The Atlantic

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Nobody Gets Shot, Hit In The Knees Or Loses Their Late Night Talk Show Over This, Do They?

Foster Kamer at Village Voice:

Gawker Media owner Nick Denton Tweeted earlier this evening, asking if the rumors he’d heard about Business Insider editor John Carney’s firing were true. Well, Nick, here’s your answer: John Carney, managing editor of financial news and gossip vertical Clusterstock at Business Insider, was let go this afternoon by B.I. owner Henry Blodget, we’ve confirmed with sources familiar with the matter.

This…is going to take quite a few people by surprise. Nobody from the company we spoke with certainly saw it coming, either.

We’re told Carney was fired by Blodget this afternoon, and it was speculated that this was the result of the last few weeks of disagreements between Blodget, publisher Julie Hansen, and Carney over how to best run Business Insider: Blodget wanted more sensational, pageview-grabbing posts and click-friendly features like galleries, while Carney wanted to put forth breaking news scoops that told a longer narrative. It was also speculated that Carney, one of the highest paid members on the Business Insider staff, wasn’t bringing the traffic numbers to sufficiently satisfy Henry Blodget, given his high profile within the financial reporting world, but that Clusterstock’s homepage had the highest traffic of all the verticals at Business Insider during Carney’s tenure, and that his own stories generated “tons of [unique visitors].”

Felix Salmon:

The mention of Carney’s salary is also indicative of a newfound focus on cashflow at TBI. There’s a finite number of name-brand financial bloggers out there, and when you hire one of those brands, you do so in large part for the respect that gives your franchise as a whole, rather than doing silly math about whether the ad revenue from his pageviews justifies his monthly paycheck. Blodget wants to be taken seriously as a financial news outlet: he wants to compete directly with the FT. And to be able to do that, he’s going to have to be able to hire talent. After today’s events, however, he’s going to find it extremely difficult to hire any respected financial journalist with a reasonably secure job.

Carney certainly has his idiosyncrasies, and he wouldn’t last a week at Bloomberg, but he’s perfectly open about them, and one of the great things about media companies in general and blog companies in particular is that they’re pretty good about letting the talent do what it needs to do, just so long as the stories keep coming. And Carney always kept the stories coming. What’s more, the beating heart of Clusterstock is the dynamic duo of Carney and Joe Weisenthal; now that he’s fired Carney, Blodget must know that he risks losing Weisenthal as well. If he loses them both, he’ll rapidly become something like 24/7 Wall Street or Minyanville: a site with lots of low-quality traffic and generally uninspiring editorial content. After all, left to his own devices, Blodget is prone to publishing silly and irrelevant stuff like this which is barely worth tweeting.

Kamer’s sources within TBI certainly don’t seem happy about this news, and on its face there’s a lot more downside than upside for Blodget in firing Carney. I don’t worry about John: he’s a huge talent who will certainly land on his feet. But if I was an investor in TBI, I’d be very worried about Blodget, and I’d be phoning him up right around now asking him what exactly he thinks he’s doing. Because this kind of thing is likely to lose him a lot of respect in the finance and media communities.

Update: It’s worth noting that Henry Blodget put a post up last week with the headline “The Internet Is Making Us Shallow and Vapid! (Or Maybe We Were Just Shallow And Vapid To Begin With)”. Clearly he’s come to peace with appealing to the shallow and vapid. And once he did that, I’m sure the decision to fire Carney was made easier.

The Blodget/Salmon TwitSpat at Clusterstock

Henry Blodget at Clusterstock:

A Reuters blogger attacked us on Twitter this afternoon.

Having gotten used to having his own journalistic efforts funded by a multi-billion-dollar finance-terminal business (which we, sadly, lack), he was apparently appalled that we care about producing content that people want to read.

Many of the folks kind enough to follow us on Twitter were bored to death by the exchange that followed.  Some, however, were kind enough to say they enjoyed it.

In the hope that there might be others who would have enjoyed it had they been wasting time following Twitter this afternoon, here it is.

More Blodget:

Yesterday, a Reuters blogger named Felix Salmon attacked Business Insider for, in effect, producing content that readers want to read.

Felix didn’t put it that way, of course, but he does seem to feel that a publication’s writers and columnists should not be concerned with whether readers actually want to consume the content they produce.

We, needless to say, disagree.  We exist for you and because of you.  And if you don’t want to consume the content we produce, we can only conclude that it’s because we’re doing a lousy job.

Felix’s views are shared by some journalists who work in mainstream media organizations, where there is still a lot of money coming in from old business models and where long, text-heavy content is the primary storytelling form (And no wonder: Newspapers sell more ads when they fill more pages, so stories run long).  This is especially true at Reuters, of course, where the bloggers’ salaries are paid by a massively profitable global trader-information terminal that Wall Street folks pay thousands of dollars a month for — a terminal business that, by the way, the bloggers’ efforts don’t help in any way.

Let me be the first to tell you that we would LOVE to have a multi-billion-dollar global trader-terminal business to fund our online news operation.  It would make life a lot easier and more luxurious.  We hope to someday have a business like that.  As yet, we don’t.

More importantly, we also think Felix’s criticism of our content is grossly unfair.  We’re publishing a huge amount of content that is exactly what he thinks we should be producing — long, text-heavy analysis, original reporting, and commentary.

Salmon responds:

At this point, even I’m bored of the Salmon vs Blodget wars. But Henry has decided to grossly misrepresent my views, so it’s worth explaining in a bit more detail what I actually think about blog content and how it can and should be turned into money.

One of the first rules of blogging is to link a lot, especially if you’re writing about someone who has made their views freely available on the internet. For instance, my post on Wednesday about Blodget firing John Carney has seven external links, three of which are to Business Insider; my post on Friday about Business Insider’s economics had eight external links and one internal link, with six of the external links going either to Blodget’s site or his Twitter feed.

If you look at Henry’s post about me, however, it includes the word “Felix” five times, but he doesn’t link to me — or to anybody else — at all. Instead, he larded his post up with lots and lots of internal links. It’s easy to get from Henry’s post to somewhere else on his site; it’s impossible to get from his post to anywhere else on the internet, unless it’s someone who’s paying him for the privilege of advertising on TBI.

This is important, because Henry talks about how I “seem to feel” and about how “Felix’s criticism of our content is grossly unfair”. It’s simply wrong to blog such things without linking to the criticism in question and allowing your readers to make their own minds up about whether you’re characterizing it accurately — especially when Henry doesn’t even bother to quote me directly in his piece.

Now because Henry doesn’t quote me or link to me directly, it’s not clear exactly what he’s talking about. But the one thing that’s pretty clear is that he thinks that I think that TBI is failing to produce “long, text-heavy analysis, original reporting, and commentary”. Well, for the record, I don’t think that. But his tweetifesto does make it pretty clear that he judges such content in exactly the same way as he judges a dashed-off blog entry illustrated with a picture of two hot babes kissing: by how many pageviews it generates.

If you’re going to judge all stories using that particular yardstick, then it’s pretty obvious that you’re going to end up with lots of cheap posts with provocative headlines and/or photographs, and lots of slideshows which can generate dozens of pageviews per reader per post. And you’re going to end up firing people who are better at more thoughtful, longer-form content.

TBI’s lead developer, Ian White, left a comment on Henry’s post saying that TBI has published 2,547 stories in March to date — all with an editorial staff of 15, plus three interns. Ignoring weekends for the sake of simplicity, that works out at 8.5 posts per person per day. It’s the more-is-more sweatshop model: never mind the quality, feel the quantity. If you throw enough stuff up there, something’s bound to be a hit. And if you spend too much time and effort on any one post, the opportunity cost of doing so is large: you could be generating more pageviews by writing more, shorter pieces, or — better — putting together a slideshow instead.

This is a model which works until it doesn’t. It’s undoubtedly true that the more posts you put up, the more pageviews you get, and when you’re selling ads on a CPM basis, every extra pageview means extra revenue. It’s also true that if an airline charges a passenger $25 for checking a bag, that’s $25 of revenue it wouldn’t have had otherwise. But charging money for checking bags can result in lower revenues overall, and chasing pageviews can do likewise.

Choire Sicha at The Awl:

What do you do after you’ve fired blogger John Carney as managing editor of Clusterstock on grounds of lack of cheap sensationalism? Why not have a snippy little girl-spat with Reuters finance blogger Felix Salmon! Go Henry Blodget, go! Show the tweens how it’s done.

Also, you know what? The Internet: Let’s Get Rid Of It.

Elizabeth Spiers:

I don’t agree with everything Henry Blodget has been saying, but between Blodget and Felix Salmon, Blodget sounds like someone who runs/has run a new media business before and Felix sounds like someone who’s never been anywhere near the business side. (And I say that with the caveat that Felix is a smart and agile writer. But I think he’s very naive about the granular economics of an online biz.)

Heather Horn at The Atlantic, with the tweets:

Here, we’ve edited it for readability, included some nasty one-liners from the bystanders, and tossed in the satisfying denouement.

  • Salmon: “[Blodgett’s] business model: Take a story about M&A fees associated with AIG. Illustrate with 2 hot babes kissing. http://bit.ly/dexECw”
  • Blodget: “[Salmon] blasts appalling collapse of journalistic standards: Illustrate boring stories with 2 hot babes kissing.”
  • Salmon: “there are 2 journalistic issues here: the pic; and the fact that you’re running boring stories … there was no reporting involved in this story, yet it involved a significant amount of time to write it & find a pic.@nicknotned rightly says that the old days of link-plus-snark are over. Replacing with link-plus-babes-kissing is self-defeating … it’s like crack cocaine for blogs. You get a short-term high, but at the cost of long-term health and sustainability.”
  • Blodget: “Wow, check out what Reuters is paying [Salmon] to do all day: http://bit.ly/92eVl2 Can I get a job at Reuters?”
  • Salmon: “no.”
  • Blodget: “Can’t figure out who [Salmon] works for now — Columbia Journalism Review, McKinsey & Co., or CEO of Business Insider? … I mean, it is really astounding that Reuters pays [him] huge money to complain about things on Twitter all day …”
  • Salmon: “your business model became news when you fired [John Carney]. That’s why I blogged it http://link.reuters.com/qam25j and am tweeting it.”
  • Samurai Trader (unrelated Tweeter who starts attacking Salmon halfway through): “[Salmon] is a bitter Brit stuck in the States with a shit blogging job. If his research had value, he’d work for a fund. $$”
  • Blodget (to Samurai Trader): “Well, [his] writing is excellent. That part I get. I don’t get why Reuters paying him to bitch/tweet at others” (turning back to Salmon)  “if business model really the issue, can we have a $10 billion finance terminal cash-gusher to fund our newsroom with? … If you give us $10 billion a year to fund our newsroom, I promise we’ll publish some stuff that you like to read … And, by the way, one of the first things I’m going to do with that $10 billion is hire you. Because you’re excellent.”
  • Salmon: “and then the second thing you’ll do is fire me. Because I don’t create enough slide shows.”
  • Blodget: “But we can’t afford you if you just noodle around bashing people on Twitter all day”
  • Salmon: “damn, you’re micromanaging me already, and you haven’t even hired me yet!”
  • Blodget: “Okay, back to this glorious waste of time (thank goodness I’m the boss or my boss would be an idiot not to fire me … First, a confession: That tweet about firing you for not making slideshows was brilliant. I almost choked in sandwich line … But of course it’s not really about slide shows. It’s about producing content people want to read … Specifically, unless you’re subsidized by a trader-terminal, it’s about being read by enough people to pay your $ … And that’s where, honestly, I would be a bit worried about hiring you. Because you don’t seem to think that should matter … And now, unfortunately, although this is great fun, I have to get back to work. Because otherwise we’re going to go bankrupt … And then you would have one less site whose journalistic standards and business strategy you can insult!”
  • Salmon: “Of course he turns it into a 25-page slideshow :-)”
  • Blodget: “:-)”
  • Salmon: “of course you cut out the ‘can I get a job at Reuters’ / no’ exchange…”
  • Blodget: “Ahhh… apologies. I didn’t realize what that “no” referred to. I’ll add it.”
  • Salmon: “RT @ChadwickMatlin: @hblodget turning his twitspat with @felixsalmon into a slideshow either tonedeaf irony or brilliant postmodernism”

Mike Taylor at Fishbowl NY

Andrew Sullivan

More Kamer at Village Voice:

So: this thing over? Smoke cleared? We got answers from both Blodget and Salmon on the entire affair. Granted, they’ve done a pretty good job of speaking on it themselves, but we figured it’d be worth it to throw them a few questions regarding less the argument’s subject matter, but more on the argument itself. And, of course, we got far, far more than we asked for:

Have you seen an increase in traffic because of John’s firing/the “discussion” between the two of you?

Henry Blodget: No. We’re large enough now that dust-ups only generate meaningful traffic when they’re with really high-profile folks. Felix is well-known and well thought-of in New York media circles (including at our shop), but most people in the real world have never heard of him.

With respect to John, he’s a good writer and a great guy, and we’ll miss him.

Felix Salmon: I don’t actually look at my traffic figures, so I don’t know the answer to that. But if I did get an increase in traffic, it probably wasn’t the core business-and-finance readers I was hired to write for. I should imagine that most of them sensibly ignored the whole thing. I did get a couple of hundred new Twitter followers, though.

Do you have any personal animosity towards Henry/Felix? Do you think he has any towards you?

Felix Salmon: No, and no. I don’t know if it’s germane, but I have *not* spoken to Carney about all this. Yet.

Henry Blodget: I was annoyed a few days ago when Felix insulted our entire staff, but I’m over it.

Henry, you’re clearly not of the mindset that writing for an audience and writing “good” content are mutually exclusive terms. But do you think there’s any difference between writing what people want to read and writing high-quality content?

Blodget: I absolutely think people want to read high-quality content, and our goal is for everything we produce to be top-notch. Where I think I differ with some traditional media folks is that, online, high-quality content takes many forms.

Online, high-quality can be everything from a 3,000-word essay to a 300-word analysis to a 9-word quote. It can be a single image with a telling headline. It can be a video, or a series of well-chosen links. It can be a well-organized multi-page presentation composed of graphics, images, and text.

All of those types of content can be produced well (high-quality) or badly (awful.) And whether they are high-quality or not will make all the difference in whether readers flock to your site or ignore it.

Felix, Henry seemed to imply that you think writing for an audience and writing “good” content are mutually exclusive terms. If you were given B.I. and were told to make it profitable now, how would you go about doing it? What’s the better way for Henry to do it? Is there one?

Salmon: Right, as I said about Politico today, if you write good stuff that a small insidery elite needs to know, mass traffic is likely to follow — no need for hot babes kissing or endless listicles. Meanwhile, your brand value when it comes to other monetization strategies will be vastly improved — it’s a lot easier to imagine people paying to go to a Politico conference than it is to imagine them paying to go to a conference organized by someone who’s proud to be “the Hooters of the Internet”.

More generally, if Henry has a need to be profitable now, that only confirms what I speculated in my original “Blodget fires Carney” post about a cash crunch at TBI. He has a VC-funded business model, and as such ought to be willing to lose money now if he’s building brand value for the eventual exit. If he isn’t being given the freedom to do that, that’s a sign that his investors have run out of faith and/or patience and/or money. And no, I don’t really have advice for a VC-backed CEO in that situation.

For fans of old-school New York media wars, this was fun. But is it “too insidery” for anyone outside of New York media to care?

Probably. That said, sure, it’s obviously making-of, behind-the-scenes action taking place in public, but it’s not irrelevant. Backroom accounts of the fights that yield the manner in which Washington, D.C., and Hollywood function become bestsellers often because they’re stories of how things we let affect our lives and consume come to be, and the insanity behind them from which they’re produced. The entertainment value of a widely read writer and the owner of a network of sites having a public war of words aside? It was a fairly educating experience, about a perpetually topical struggle — what makes “good” content and what makes “cheap” content — seen through two wildly different media perspectives. There’re worse, more pointless spats we could’ve watched. This one yielded decent results, and maybe a few people’s minds were changed on the way they view these issues after hearing opposing perspectives on them. Maybe everyone learned something. Maybe we all moved forward.

Not likely. But still. Maybe.

This is what Biggie and Tupac sound like on the same track. Pretty dope. Guys, don’t shoot each other.

Juli Weiner at Vanity Fair:

Their disagreement was perhaps the apotheosis of the perennial page views vs. ethics debate: Salmon accused Blodget of resorting to slide shows and photos of attractive women to lure in readers; Blodget responded that Salmon was being naïve. When S.E.O. deity/Gawker overlord Nick Denton stepped in and endorsed Team Blodget, the Tumblr-ing and Twittering masses were torn asunder. Now, after the fog of war has cleared, both Blodget and Salmon have weighed in on the controversy.

“[The Village Voice]: Do you have any personal animosity towards Henry/Felix? Do you think he has any towards you?

Felix Salmon: No, and no. I don’t know if it’s germane, but I have *not* spoken to [recently fired Business Insider reporter John] Carney about all this. Yet.

Henry Blodget: I was annoyed a few days ago when Felix insulted our entire staff, but I’m over it.”

Despite the lack of (public) personal animosity toward one another, both men still affirmed their original positions. Blodget defended his attention-grabbing editorial style: “Online, high-quality can be everything from a 3,000-word essay to a 300-word analysis to a 9-word quote. It can be a single image with a telling headline. It can be a video, or a series of well-chosen links. It can be a well-organized multi-page presentation composed of graphics, images, and text.” Salmon still condemned overly click-friendly content: “[I]f you write good stuff that a small insidery elite needs to know, mass traffic is likely to follow—no need for hot babes kissing or endless listicles.”

The truth, as it is wont to do, probably lies somewhere in between the two extremes—which is why this post about two journalists arguing about ethics is accompanied by a photo of a naked Gisele on a horse.

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It Looks Like A Translucent Borg Cube Surrounded By A Moat

Catherine Philp at Times of London:

The United States has unveiled plans for its new $1 billion high-security embassy in London — the most expensive it has ever built.

The proposals were met with relief from both the present embassy’s Mayfair neighbours and the residents and developers of the Battersea wasteland where the vast crystalline cube, surrounded by a moat, will be built.

The decision to abandon the former site in Grosvenor Square by 2016 came after a prolonged battle with residents angered by the security measures demanded after the September 11 attacks. More than a hundred residents took out a full-page advertisement in The Times to oppose tighter measures that they said would leave the area more vulnerable to attack.

The new embassy, on a former industrial site behind Battersea power station known for its gay clubs, will be designed by Kieran Timberlake, the Philadelphia architect.

Ed Morrissey:

Because the US is apparently flush with cash, we will shortly close our London embassy where our security measures have annoyed our neighbors to build a new one in a former industrial area — for over one billion dollars.  The much-derided Green Zone embassy in Baghdad cost just over half that amount, and our new Islamabad embassy will cost close to $850 million.  The obvious conclusion: our diplomats require more expensive security in London than they do in Baghdad or Pakistan, a weird and unexplained decision.

However, our embassy in the “Battersea wasteland” will have one ultra-high-tech feature that the others lack … a moat

Warren Ellis:

In fact, let’s admit it. IT’S A FORTRESS WITH A FUCKING MOAT. It doesn’t say “welcome to a little piece of America, one of the best ideas the world ever had and a country that welcomes the tired and poor and afraid.” It says “if you even look at us funny we’ll pour boiling oil on you from the roof. Raise the drawbridge! Release the Mongolian Terror Trout!”

It’s pretty funny, really.

Alex Knapp:

Both funny and sad, really. I remember when I was a teenager reading Robert Heinlein’s The Moon is a Harsh Mistress, which is about a small prison colony on the Moon fighting for its independence against an oppressive Earth government. Suffice to say, there were many parallels to the American Revolution deliberately dropped in there. But one thing that stood out in my mind, then and now, was the fact that it was the Americans who were the most gung-ho about crushing the Lunar Rebellion, decrying them all as criminals and terrorists. When I was a teenager, I thought it was ridiculous to think that the Americans would be the most bloodthirsty group. Now as an adult living through a period of absolutely, clinically paranoid levels of safety-consciousness in all aspects of American culture, from putting leashes on toddlers to being terrified of second-hand smoke, pushing for concealed carry when violent crime is at an all-time low, suspending students for carrying plastic knives for their lunch, and shredding civil liberties in the name of a dubiously defined “war on Terror”, I see Heinlein’s point.

I really think that Americans should pay more attention to the following Spanish proverb: “Vivir con miedo es como vivir en medias.” — “A life lived in fear is a life half-lived.”

Vince Veneziani at Clusterstock:

At the very least this sounds like an excuse to visit. American taxpayers mind as well enjoy their London largess.

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Beware Goldman Sachs Bearing Gifts

Beat Balzli at Speigel:

The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. “Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,” one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.

Fictional Exchange Rates

Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer.

In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank. In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today’s records, it stands at 5.2 percent.

At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

The bank declined to comment on the controversial deal. The Greek Finance Ministry did not respond to a written request for comment.

Felix Salmon:

How might a deal like this work? Let’s say that Greece issues a bond for $10 billion, which it would then normally swap into euros at the prevailing interest rate, getting $10 billion worth of euros up front. In this case, it seems, the swap was tweaked so that Greece got $11 billion worth of euros up front — and, of course, has to pay just as many euros back when the bond matures. Essentially, it has borrowed $11 billion rather than $10 billion. But for the purposes of Greece’s official debt statistics, it has borrowed only $10 billion: the extra $1 billion is hidden in the swap.

This wouldn’t be the first time that Goldman came up with a clever capital-markets deal to help a European country get around the Maastricht rules: as far back as 2004, Goldman put together something called Aries Vermoegensverwaltungs for Germany, in which Germany essentially borrowed money at much higher than market rates just so that the borrowing wouldn’t show up in the official statistics. And according to Balzli, Italy has been doing something almost identical to the Greek swap operation, using a different, unnamed, bank.

It’s a bit depressing that EU member states are behaving in this silly way, refusing to come clean on their real finances. But so long as they’re providing the demand for clever capital-markets operations like these, you can be sure that the investment bankers at Goldman and many other investment banks will be lining up to show them ways of hiding reality from Eurostat in Luxembourg.

Tyler Cowen:

From what I understand of the Maastricht standards, they are far less stringent than banking regulation, even in places where banking regulation is relatively lax.  Is the premise that governments are more trustworthy and more transparent?  Or is the premise that governments should be allowed to do what banks cannot?

Here is gloss on the Sophoclean chorus on debt; you may need to scroll down to the paragraph on lines 151-58.

Marc Chandler at Seeking Alpha:

It is not unusual for sovereigns, including Greece, to borrow in foreign currencies, like dollars, yen and Swiss francs and swap back into euros. The article claims that the US investment house arranged a cross currency swap for Greece back in 2002 but gave exchange rates that, in effect, created for Greece an extra billion dollars. Of course, the swap will have to be unwound, but it was in effect off-balance sheet and was not picked up by the stats office.

Many observers have already noted problems with the Greek accounting methods which have sometimes not included defense spending in the budget calculations and have also sometimes not included the debt owed to hospitals under its social programs.
Greek bonds as well as the other weaker credits in the euro zone are rallying today. But this could very well prove to be a one day wonder if we are right and no EU bail out will be forthcoming tomorrow.

Instapundit:

This is interesting in itself, but it makes me wonder how much similar chicanery is out there undiscovered . . . .

John Cole:

At this point, Goldman Sachs should replace SPECTRE as the global villain in any future Bond movies.

UPDATE: Calculated Risk

Henry Blodget at Clusterstock

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