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:

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.

Updates On The Cheeseheads

Andrew Sullivan rounds up reacts

Christian Schneider at The Corner:

On Wednesday night, Wisconsin Senate Republicans did what most people thought impossible — they passed Governor Scott Walker’s budget-repair bill virtually intact, without having to split out controversial provisions that limited the ability for government employees to collectively bargain.

A letter Democrat Senate Minority Leader Mark Miller sent the governor today, indicating Miller’s unwillingness to further negotiate any details of the bill, was what prompted the GOP’s decision to take the bill to the floor.

“It was like, ‘I’m in the minority, and I’m going to dictate to you what your options are,’” said one GOP source about Miller’s letter. It was just three days ago that Miller had sent Fitzgerald a letter urging more negotiations, despite the fact that Governor Walker had been negotiating with at least two Democrat senators for nearly a week. “With his recent letter, it became clear that all he wanted to do was stall,” said the GOP source.

Another action that provoked the GOP senators to act was Democrat Senator Lena Taylor’s very public decision to have a spring election absentee ballot sent to her in Illinois. The spring election is scheduled for April 5th, which indicated Taylor’s desire to stay out of the state for another month. “That sure didn’t help,” said one GOP source.

The Wisconsin Constitution requires a quorum of three-fifths of the Senate in order to pass a bill that “imposes, continues or renews a tax, or creates a debt or charge, or makes, continues or renews an appropriation of public or trust money, or releases, discharges or commutes a claim or demand of the state.” For weeks, it had been known that Republican senators could separate the fiscal provisions of the bill from the proposed collective-bargaining changes, which were seen as non-fiscal. However, there was speculation that, if a bill was brought to the Senate floor that contained only the collective bargaining changes, it might not have the votes to pass.

On Wednesday night, the bill passed with a number of provisions that could be considered “fiscal,” such as the requirement that many government employees contribute 5.8 percent of their salaries to their pensions and pay 12.6 percent towards their health-insurance premiums.

Conn Carroll at Heritage:

The courage of the Wisconsin Senate conservatives cannot be understated. Before the vote, lawmakers were threatened with death and physical violence. After the vote, thousands of protestersstormed into the capitol building, ignoring announcements from police that the building was closed. Once inside, and at great risk to the public welfare, activists handcuffed some doors to the capitol shut. When security escorted the Senators to another building, a Democrat tipped off the mob, which then surrounded their cars and tried to break their windows as Senators returned home.

Senate Democrats, who are still hiding in Illinois, are now claiming that the majority’s committee meeting that broke up the budget-repair bill violated Wisconsin’s Open Meetings Law. But the Open Meeting Compliance Guide clearly states that when there is “good cause,” only two hours’ notice is required. The Senate majority did provide the two hours’ notice. If the Senate Democrats’ 19-day refusal to show up for work wasn’t “good cause” enough, certainly minimizing the opportunity for union mob violence is.

The passion coming from liberal activists is understandable only if one believes in their apocalyptic rhetoric. Democratic Senator Timothy Cullen said the bill will “destroy public unions.” And Senator Chris Larson has said, “collective bargaining is a civil right” that if removed will “kill the middle class.” This is all false. First of all, since unions care more about seniority than good government, public-sector unions kill middle-class jobs; they do not protect them. Second, collective bargaining is not a right. And finally, Walker’s bill will in no way “destroy public unions.” Government unions are still perfectly free to practice their First Amendment rights to freedom of association, and in fact still retain more bargaining power than all unionized federal employees. They only difference is that now they will have to actively recruit members instead of forcing government employees to join them, and they will have to collect their own dues instead of getting the state government to take them directly out of workers’ paychecks. And there are many more benefits as well. Governor Walker writes in today’s Wall Street Journal:

When Gov. Mitch Daniels repealed collective bargaining in Indiana six years ago, it helped government become more efficient and responsive. The average pay for Indiana state employees has actually increased, and high-performing employees are rewarded with pay increases or bonuses when they do something exceptional.

Passing our budget-repair bill will help put similar reforms into place in Wisconsin. This will be good for the Badger State’s hard-working taxpayers. It will also be good for state and local government employees who overwhelmingly want to do their jobs well.

Even in good economic times, the case for government subsidies for radio stations, cowboy poetry, and union dues is very weak. But in a time of fiscal crisis, all of these subsidies are patently absurd. Taxpayers throughout the country should be inspired by Walker’s stand for common sense. We need more leadership like this in every state capitol and here in Washington.

E.D. Kain at Forbes:

And now conservatives have chosen public-sector workers and teachers as their hill to die on. They have followed the most radical voices in the party and the movement, and elected Scott Walker, Rick Scott, and various other Tea Party candidates. Heavily funded by big campaign donors like the Koch brothers and other corporate interests, the Republican party has made a concerted effort across the country to take on unions, public pensions, and social services for the poor.

Enabled by a strong school-reform movement within the Democratic party, emboldened Republicans have waged an all-out assault on teachers, public education, and public unions and masked it all in the language of school choice and accountability. And now, in Wisconsin, they have side-stepped the Democratic process and ended collective bargaining rights for public sector employees, even amidst huge protests and popular condemnation.

Republicans have a long history of union-busting and anti-labor rhetoric, but taking on teachers and cops is a big mistake. This blatant effort to weaken the Democratic party will have precisely the opposite effect.

The healthcare debate gave Republicans a chance to capture the narrative, spin the entire debate into one about fiscal ruin and deficits. Now Scott Walker has given progressives their chance. This is the Democrats chance to recapture that narrative, to turn the discussion back to the dignity of the middle class, to the importance of policies that do not simply push power and capital ever upward. This is the Republican’s Waterloo.

Nate Silver:

The quality of polling on the Wisconsin dispute has not been terrific. But there’s a general consensus — including in some polls sponsored by conservative groups — that the Republican position was unpopular, probably about as unpopular as the Democrats’ position on health care. And the most unpopular part of their position — limiting collective bargaining rights — was the one that Republicans passed last night.

Nor is the bill likely to become any more popular given the circumstances under which it passed. Yes, there’s some hypocrisy in claims by Democrats that the Wisconsin Republicans used trickery to pass the bill — they did, after all, approve it with an elected majority, just as Democrats did on the Affordable Care Act. Nevertheless, polling suggested that Wisconsinites, by a two to one majority, expected a compromise on the bill, which this decidedly was not.

One question is how much this might hurt Republicans at the state level. As David Dayen notes, Democrats will have opportunities to fight back almost immediately, including in an April 5 election that could swing the balance of the Wisconsin Supreme Court, as well as in efforts to recall Republican state senators. Essentially all of Wisconsin outside of the Madison and Milwaukee metropolitan areas is very evenly divided between Democrats and Republicans, so there could be a multiplier on even relatively small shifts in turnout or public opinion.

Andrew Samwick:

I refer to the passage of this bill as the end of the beginning — the opening salvo was to write the bill and find a way to pass it.  The next phase is to see if it can withstand legal challenges and recall efforts to change the legislative balance.  There will be some drama in that phase, but that’s not what really interests me.  The real issue comes in the next phase, assuming the law survives.  There will be two important questions:First, what will the strike that follows the implementation of the law look like?  Narrow or general?  How much support will the public sector unions get from other unions and non-union workers?  Will the disruptions to commerce be enough to get taxpayers and their representatives to fold?  Now that’s drama.

Second, what will happen in specific cases of local public sector employers negotiating with a stronger position?  Governor Walker defends his efforts partly as follows:

Local governments can’t pass budgets on a hope and a prayer. Beyond balancing budgets, our reforms give schools—as well as state and local governments—the tools to reward productive workers and improve their operations. Most crucially, our reforms confront the barriers of collective bargaining that currently block innovation and reform.

Suppose his intentions are borne out — teachers regarded as ineffective are not renewed, teachers regarded as effective are rewarded, or some combination of higher quality and lower cost emerges for people to see.  I am a strong believer that in a well functioning market, workers are protected by their ability to take their talents to another employer (Free to Choose, Chapter 8).  The key question will be whether the markets for public services at the local level function well enough for this to happen.  For an economist, that’s even more dramatic.

mistermix:

If the Wisconsin Republicans’ plan was to jam through the defeat of collective bargaining with a sketchy parliamentary move, they should have done it the minute that Democrats vacated the state. If that had happened, the howls would have been loud but fairly short-lived, since it’s easier to energize people when they’re trying to prevent something from happening, rather than complaining after the fact.

Instead, we have today’s trainwreck. Walker got his number one item, but he paid a huge price. He’s almost certainly a one-term governor. There’s a dissenting Republican in the Senate, and presumably we’ll hear more from him. If there’s a general strike, the union’s side of the case is now clearly outlined in the public mind. If the unions don’t strike, they look like paragons of restraint. And what about the recalls? No matter the outcome, they’ll occupy the press and public attention for the next few months.

The Democrats and unions took a sad song and made it better, as far as I can tell. One of the side-effects of our distraction-oriented media and low-information voters is that only one issue can be front-and-center in the public debate. Unions haven’t had much attention recently, so the slippery lies that blame them for all of our many ills have gone unchallenged. In Wisconsin, that’s not going to be the case for the next year or so.

On The Third Wednesday Of Christmas, My Wall Street Elite Gave To Me…

Louise Story in NYT:

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.

This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.

But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives.

“At the end of the day, I don’t know if I got a fair price, or what they’re charging me,” Mr. Singer said.

Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments — an amount that almost certainly would be lower if there were more competition and transparent prices.

Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.

Emily Lambert at Forbes:

Forget baseball, football, or any other sport. For the past two decades, the most interesting rivalry involving these cities has been in derivatives. It’s been the most important rivalry, too. Sports match-ups affect civic pride, but the derivatives battle affects the structure and stability of the financial system.

The rival teams are like the blue bloods versus the scrappy underdogs. The Wall Street club includes the country’s biggest dealers and needs little introduction. The Wall Streeters represent banks, institutions and exclusivity. They play the game of unregulated (or differently regulated, they argue) derivatives, to the tune of $600 trillion.

The Chicago team, based on and around La Salle Street, include the small traders and street fighters. They also have a club, and it too was private and pretty exclusive for years. It’s now the publicly-traded CME Group. But their club included its fair share of taxi drivers, policemen, train conductors, and other everyday folks. This team trades regulated derivatives, better known as futures and options. That market is huge but nowhere near as big as the unregulated (or differently regulated!) side.

These rivals have butted heads since the 1970s, when the Chicago club expanded beyond the world of agriculture and into financial products, New York’s domain. Chicagoans have had a chip on their shoulder for over a century, and traders often portray this head-butting as epic, their struggle to bring much-needed transparency to New York’s murky markets.

The teams fought it out at the Chicago Board of Trade, long the dominant exchange in Chicago, in the boardroom and in the clearinghouse. On one side, you had smaller firms owned by Chicago guys. On the other side, you had representatives from New York firms like Goldman Sachs and Morgan Stanley. A few years ago, the New York firms won the clearinghouse. That became, to a large extent, the reason that the two Chicago futures exchanges merged in 2007. The rallying cry was to save Chicago from New York.

The current derivatives duel is the latest fight, and it could have been Chicago’s moment of triumph. The Chicago crowd made a jab for transparency when CME Group teamed up with Kenneth Griffin at neighboring Citadel Group to create an exchange that would make the derivatives trade less murky. Congress, in its attempt to bring order, took a page from Chicago’s playbook and instructed the bankers to use clearinghouses, a staple in futures.

But as Story recounts, the banks didn’t like the exchange idea. “So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchange’s rivals, which was setting up its own clearinghouse.” CME Group, she later writes, dropped the effort with Griffin to create an exchange and instead has allowed its clearinghouse’s risk committee be “mainly populated by bankers.”

Chicago has represented something special over the years, a counterpoint to Wall Street. Its futures market wasn’t perfect, but it worked. When Wall Street’s derivatives market broke down in 2008, Chicago rightly held its regulated market, its way of doing things, up as a potential model. It may be too simplistic to say that one model is right and the other wrong, but the challenge itself is vital. Especially in a complex business like this one, you need different ideas and sparring to keep the game honest.

Now Chicago’s exchange is a public company. Duffy and Donohue are tasked with maximizing shareholder value. The banks are directly or indirectly responsible for the vast majority of derivatives trading, and CME Group has to involve them in decisions. But it doesn’t have to sell out to them. In Story’s story, CME Group looks less like a counterpoint to Wall Street than like the Midwestern arm of it. I hate to think that the rivalry is dead. There are plenty of people in Chicago who seem to hate New York with a passion I associate more with religion or the Bears (ouch, by the way). I hope that in this fight, which could prove decisive, those people recover their voice.

Kenneth Anderson:

Although I have a few reservations about the tone of the article being just slightly conspiratorial, Louise Story’s front page NYT story today on the evolution of derivatives clearinghouses is highly informative and very well done.  The graphics showing how the bilateral trades would turn into centralized clearing are quite good and would be useful with a class.  On balance,  I think the overall shift to centralized clearing is a good move.  But I also have a bad, bad feeling about this in the context of Dodd-Frank and future expectations.  As I have said in past posts, in a future of financial regulation in which the central question of systemic risk and moral hazard has not been addressed, the result of what is otherwise a sensible move (yes, yes I’m skipping over all the concerns about end-users and Main Street, etc.) could turn out to create not so much a central clearing house but instead … a central address for depositing unwanted risk.

After all, why should any of these leading market participants believe at this point that the government would allow the central clearinghouse to burn down in a crisis?  And if they don’t believe that, then what is their incentive to set terms that will adequately address the risk as a matter of private ordering of fees, margin, whatever form of insurance the central risk-clearer needs? Having a central clearing counterparty is a great idea — if it and the actors that run and control it have the private incentives to make sure it is not a mechanism for accumulating and compounding risks.

Presumably the answer is that government regulators will set those requirements and solve the problem.  But the general theory of financial regulation used to be that systems would be monitored for risk-taking, after private parties (with well-structured incentives forcing them to internalize the risks) had already made the first round of risk-decisions.  Regulators would be kicking the tires for safety and soundness, as a second line of regulatory defense, not the first.  I am an admirer overall of Gensler’s efforts, but he cannot be Batman to Financial Gotham.  The peculiarity is that a structure that ought, in principle, to reduce risk might wind up leveraging it.  The clearing house might turn out to be the one address market participants need to send their unwanted risks.

Kevin Drum:

Banks can talk all they want about capital requirements and governance structures, but if they’re unwilling even to admit publicly who runs their clearinghouses, it’s pretty obvious their primary interest is focused on keeping the derivatives club very, very small and very, very private. In other words: no aggressive competition needed here, thankyouverymuch. Big commissions and big bonuses will remain the order of the day.

Unless, of course, regulators take a tough line and force banks to genuinely open up derivatives trading. What do you think are the odds?

Anthony McCarthy

Barry Ritholtz at The Big Picture:

I keep coming back to this simple fact: If you understand what caused the crisis, the first step in preventing another is working backwards and undoing each of the causes. Front and center is the Commodity Futures Modernization Act that allowed the rampant shadow banking system to develop. It still needs to be overturned . . .

Philip Davis at Seeking Alpha:

The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits and the banks guard that secrecy very closely. In theory, the Dodd-Frank bill will eliminate much of the abuse that is going on in the derivatives market. But already, the newly-elected House and Senate Republicans are looking to turn back to clock. This is apropos because, as Barry Ritholtz points out: It was the dreaded Commodity Futures Modernization Act that allowed the rampant shadow banking system to develop.

John Carney at CNBC:

Half of Story’s piece seems built around the complaints by financial companies—such as Bank of New York Mellon and State Street—that want to become clearing dealers for derivatives. The other half is built around customers who feel the fees they pay to existing dealers are too high—thanks to the anti-competitive cabalization of the derivatives market.

The irony of all this, of course, is that the cabalization of the derivatives market was one of the goals of regulators, who demanded that market participants set up centralized derivatives clearing houses in an effort to contain counter-party risk. Central to the successful operation of any such clearing house, however, is the exclusion of would-be dealers who seem too risky.

One of the ways a centralized clearing house reduces counter-party risk—that is, the risk of someone on the other side of your trade not doing your deal—is by being the strongest and biggest counter-party that is on the other side of every trade. The idea is that even if a single seller fails—and doesn’t deliver on the sale—the derivatives clearing house has access to enough capital and liquidity that the trade itself can still be completed. You don’t have to worry, in other words, who is on the other side of your trade—it’s always the clearing house.

Importantly, however, a clearing house has to guard against the possibility of its members failing. Without proper capitalization and collateralization requirements, the clearing house could find itself unable to complete trades in a time of financial distress. It would go from being a risk-reducer to a risk-multiplyer, with all the risk concentrated in one place.

The odds of getting a clearing house that is properly capitalized are rather low on the face of it. Competition between clearing houses will result in a downward pressure on fees, collateral requirements, and dealer capitalization requirements. In short, the clearing house will be captured by its customers in a manner that undermines its financial soundness.

To make matters even worse, the natural market counter-balance to this pressure toward riskiness on the part of the clearing house is undermined by the perception—indeed, the reality—that any important clearing house is too big to fail. In a free market, the customers of a clearing house would balance out the demand for lower collateralization/capitalization/fees with a wariness about the increased risk associated with this lowering. But in reality, customers don’t worry about a major clearing house failing because the US government will intervene to bail it out.

This is, ordinarily, an argument made by proponents of government regulation. The tendency toward riskiness plus moral hazard means the clearing house cannot be self-policing. To balance out this situation, the government steps in an imposes collateralization and capitalization requirements on the clearing house. There’s even a sort of fairness argument here—the higher costs associated with the regulations are paying for the implicit guarantee.

If we could be confident in the competence of regulators, the story might end there. Unfortunately, regulators have a poor track record of regulating risk. On the one hand, they often simply lack the tools to effectively predict risk—which means they are simply guessing about the types and levels of capital and collateral that should be required. On the other hand, they are subject to political pressures that influence their view of risk. So what starts out as an educated guess winds up as a politicized guess.

If that’s too theoretical, here’s an example drawn from history. In the 1980s, global regulators were meeting to discuss bank capital requirements. One of the issues at hand was what risk weighting different assets should get. All of the countries agreed that their own highly rated sovereign debt should get zero percent risk weighting—which essentially meant that banks didn’t have to set any capital against losses. Ask the banks with Irish and Greek debt how that is working out.

The same global regulators argued about what risk weighting to give mortgages. The Federal Reserve thought mortgages should get a 100 percent risk weighting—the same assigned for highly-rated corporate debt, and requiring an 8 percent reserve against losses. The West Germans, however, wanted to gin-up interest in their residential real estate market and pushed for a 50% risk weighting. This risk weighting more or less held through the later capitalization reforms, resulting in banks over-investing in mortgage-backed securities. How’d that work out?

So we’re left with a problem from hell. Market participants cannot be trusted to govern a clearing house. The clearing house itself cannot be trusted to be self-governing. And the regulators cannot be trusted to govern properly either.

Look, We’ve Got A Heartbeat!

Heather Horn at The Atlantic with the round-up. Horn:

GM has had a fantastic second quarter, reporting a $1.3 billion profit. That “set[s] the stage,” reports Bill Vlasic for The New York Times, “for the automaker to file for an initial public offering, possibly as soon as Friday.” How well GM stock does, he explains, “will determine how much money American taxpayers will recoup from the $50 billion government bailout of G.M.”

Steve Schaefer at Forbes:

A year ago, General Motors was fresh off a spin in bankruptcy court and an IPO was the light at the end of a very long tunnel. By January the automaker’s executives were laying out the key checkpoints on a journey back to the public markets and now, just over 14 months since filing for Chapter 11 GM is on its way to a public offering that is widely anticipated for the fourth quarter.

Everybody’s got a view on the GM story and on Thursday the IPO specialists at Renaissance Capital offered their own take on how the automaker should go about returning to the public market, offering up a four-point plan for how GM can get out from under the government’s thumb and ensure it is offering a valuable opportunity for IPO investors.

Here are a few highlights from the four-point plan outlined in the Renaissance Capital commentary, which I encourage you to read in its entirety:

Transparency means full and fair disclosure. The Treasury has the duty to ensure that all material fundamental and governance issues are fully disclosed to potential public investors. Thus far, GM has largely avoided specifics on its strategy, but the company now must clearly lay out a chronology for regaining market share, realigning costs and transitioning from government control.   Assuming that GM does a $20 billion raise in this upcoming IPO, what’s the plan for the other $30 billion held by the government?

Assure IPO allocation transparency.  Prior IPO bad practices included spinning shares to favored executives or giving hot IPOs as “free money” to institutional investors as a quid pro quo for other business.

Decision-making roles must be clarified. GM and the government have been silent on how the competing interests of shareholders, the administration and the United Autoworkers will be resolved.

Value the stock for success. In thinking about valuation, the government and management need to understand that the GM IPO is in a similar position as a debt-laden private equity company with backers eager to monetize an investment. Recent sales of shares by such highly motivated selling shareholders have been accomplished only with deep discounts.  Over the last two years, between 50% and 70% of private equity IPOs have been forced to price below the originally proposed ranges.  GM needs to adjust its expectations accordingly.

Among the other issues that need addressing according to Renaissance Capital’s roadmap: the post-IPO succession plan for CEO Ed Whitacre; how GM’s product mix will be driven by the administration’s environmental policy and will the Treasury take a backseat to management as it offloads its stake in the automaker over time.

John Ogg at 24/7 Wall Street:

We are expecting somewhere around $15 billion per discussions we have had with others.  Here is the big question… Will the GM IPO become a busted IPO right out of the chute like so many others have?

The company recently secured a new $5 billion credit line and when the IPO will actually come, that may be as long as 45 to 60 days after the filing and will be somewhat dependent upon market conditions.

Richard Read at The Car Connection:

The line of credit has been pieced together from ten banks, including big-hitters like Bank of America and Morgan Stanley — two corporations that have shared GM’s pain of bankruptcy and bailout. More may join the ranks, since the line of credit is a potential cash cow for lenders.

But today’s news isn’t just important for GM, it’s also a major development for politicians. GM and the Obama administration both took a lot of heat for last year’s controversial bailout, and the nickname “Government Motors” still hangs around GM’s neck. Filing for an IPO now means that GM’s return to the stock exchange could happen before November’s mid-term elections. That would be a boon for Democrats, who could point to the IPO as evidence that the bailout was successful and that taxpayers will eventually recoup their loan from GM.

But even if the IPO runs on schedule, Republicans will probably still be able to point to government ownership of GM, which currently hovers at 61%. GM wants the Treasury Department to sell off about $10 billion of its $43 billion stake in the company as soon as the IPO launches, which would bring the government’s position below the 50% mark. However, the Treasury isn’t completely onboard with that plan; they’re afraid — as they should be — that selling off that much equity at once would dilute the value of the company and the government’s remaining shares. And right now, “diluting” is the last thing that probably needs to happen for GM.

That said, demand could be high for GM stock when it does relaunch — not least because of the company’s earnings, which are rumored to ring in above the $1 billion mark for the second quarter. We’ll have more about that later, but in the meantime, check John Voelcker’s post about Ed Whitacre’s sudden retirement.

John Neff at Autoblog:

The announcement today that General Motors will soon be welcoming its fourth CEO in just 14 months was startling news, but the real unanswered question is just who is Dan Akerson? We’ve already told you what his business chops are and it’s clear the man can run a lemonade stand, but there’s virtually no other information available out there besides his resume. And as for pics, the entirety of the internet has but one to offer, which is Akerson’s glamor shot as a member of GM’s board of directors. Flattering? No. Looks like a high school principal’s year book picture.

Well, we dug a little and found some interesting info on one Mr. Daniel F. Akerson. For one, he lives in McLean, Virginia and is reportedly an avid golfer. Ok, not too surprising, as most corporate executives can swing a club. How about this: He’s said to be worth an estimated $190 million. Yeah, CEOing is a good gig if you can get it. Also, he currently drives a Cadillac CTS.

Finally, we’re told that Mr. Akerson’s first car was an MGB roadster, which he quickly traded in for a 1970 Oldsmobile Cutlass. Now, we don’t have confirmation on which Cutlass he had, and it makes a difference. The 1970 Cutlass was nothing special, unless you’re talking about the 442, which was a legitimate muscle car. The fact that Akerson first had an MGB makes us hopeful that he is a car guy after all and that the Olds in question was the 442… or at least was powered by a Rocket V8 of some sort.

Derek Thompson at The Atlantic:

The good news is coming from good places. Although the company cut 20,000 jobs and a dozen U.S. plants, the profits aren’t coming all from cost cuts. Revenue grew from $32 billion to $33 billion in the second three months of the year. What’s more, the company is seeing a strong North American market for its goods. While it’s certainly not bad to have a strong overseas market, any indication that the American consumer is actually breathing out there is nice to hear.

There’s lots of silver lining, but the dark cloud for tax payers is that an IPO won’t end the government’s significant stake in the company. As the Michigan Messenger reports, the federal government will reduce its stake in the company from about 60 percent to below 50 percent in the initial IPO, and sell off the rest of the taxpayers’ stake in the company bit by bit.

We Won’t Have Tony To Kick Around Anymore

Jad Mouawad and Clifford Krauss at NYT:

BP’s board is expected on Monday to name an American, Robert Dudley, as its chief executive, replacing Tony Hayward, whose repeated stumbles during the company’s three-month oil spill in the Gulf of Mexico alienated federal and state officials as well as residents of the Gulf Coast.

The planned appointment of an American to run the London-based company, which was confirmed by a person close to BP’s board, would underscore how vital the United States has become to BP. About one-third of the company’s oil and gas wells, refineries and other business interests are in the United States, and 40 percent of its shareholders are Americans.

The move would also be a recognition by the board that even though the oil has stopped spewing into the gulf, dealing with the consequences of the Deepwater Horizon accident — from tens of billions of dollars in claims to possible criminal charges and new regulations on offshore drilling — is likely to dominate the company’s agenda for years.

Bryan Walsh at Time:

When Tony Hayward became CEO of BP in 2007, replacing a disgraced Lord John Browne, he was taking over a company in turmoil. BP was still recovering from a 2005 fire at its Texas City refinery that killed 15 people—one of the worst industrial accidents in recent memory, and a result of Browne putting profits over safety. Hayward—a skilled geologist and dedicated BP lifer—was meant to be a practical antidote to the flashy, globe-trotting Browne, a professional executive who promised to consolidate the company’s sprawling multinational operations. Most of all, Hayward would change BP’s careless corporate culture; he pledged in an early speech to focus “like a laser” on safety.

It was a line that, like much else, Hayward would come to regret. The Deepwater Horizon accident showed that there was still something deeply wrong with BP, and Hayward’s tone-deaf performance during the early days of the oil spill only made things worse. By mid-June Hayward had stepped back from the oil spill, ceding day-to-day control of the response to the American BP executive Bob Dudley. Now it seems Hayward is gone for good. According to a senior U.S. official speaking to the Associated Press early Sunday afternoon, Hayward will be replaced as BP’s CEO, possibly as early as Monday when the company’s board meets in London.

Though BP was officially denying the rumors, Hayward’s departure has long been considered of when, not if. Since the spill began on April 20, Hayward has been a gaffe machine.

Christopher Helman at Forbes:

The timing of this move is significant for two reasons. First, it coincides with the Tuesday release of BP’s sure-to-be-disastrous second-quarter results. Second, and more importantly, it indicates that BP believes the blowout at the Macondo well has been stopped, that the cap in place now will continue to hold back the gusher until the relief wells can kill it for good.

Image is everything, and the image that BP needs to present is one of a heroic Dudley Do-Right arriving on the scene to rescue Nell from the clutches of Snidely Whiplash. Tall, blondish Robert Dudley even looks kind of like his namesake hero from The Rocky and Bullwinkle Show, though with none of the bombast. No matter that Dudley has been with BP for a decade, having come over in the 1998 acquisition of Amoco. As we wrote in this piece when he assumed responsibility for oil spill oversight a month ago, Dudley has proven his managerial toughness over the years (especially in tangles with the Russian government when he was head of TNK-BP). And vitally, Americans will find another American a more trustworthy oil spill cleaner than they would another Brit.

Jim White at Firedoglake:

Yes, the twit who famously told us that this pesky spill had been such a nuisance that he wanted his life back is about to get just that.

And what a life it will be. Despite being at the helm as the company’s negligence unleashed the worst oil spill in US history and the subsequent loss of almost half the company’s value, Hayward will still be rich beyond the wildest dreams of almost anyone.

CNN gives us the details on Hayward’s likely exit package and current compensation. First, CNN informs us that Hayward won’t get a huge, American-style Golden Parachute. I don’t know about you, but I certainly would settle for the chrome bungee jump or whatever this is that Hayward is getting:

“He will be lucky to get a single year’s salary,” said Paul Hodgson, a senior researcher at The Corporate Library, a governance group. “And even that could be mitigated in certain circumstances.”

His compensation package — including salary and bonuses — was worth 3.158 million British pounds ($4.87 million), according to the company’s 2009 annual report. He’s also due an annual pension of 584,000 pounds ($901,000).

Additionally, he held more than 535,000 shares in the company as of December 31, which would currently be worth about 212 millon pounds (about $327 million).

That’s right, Hayward will be “lucky” to get an extra lump of almost $5 million to go away, while pulling in a pension of almost a million dollars a year on top of his stock worth $327 million.

Poor thing, I sure hope he doesn’t feel insulted by that paltry package.

If Hayward’s exit package, pension and stock ownership are indeed as reported by CNN, I’d like to nominate his life as the ultimate definition of moral hazard. He will have destroyed the Gulf of Mexico, made billions of dollars worth of stock held around the world go poof and still will walk away with riches beyond imagination. If he is to suffer nothing more uncomfortable than the “humiliation” of losing his job, then there simply is no incentive for other CEO’s to act responsibly in the future.

Joe Gandelman at Moderate Voice:

TV and other stand-up comedians had a ball making fun of a CEO could not keep a lid on his enjoyment of his “Lifestyles of the Rich and Famous” lifestyle for even the comparatively fleeting few moments of his life required to do press briefings and who could not put off avoid being photographed in settings that underscored the stark contrast between wealthy him and those who face losing their livelihoods in the Gulf. To wit:

“BP CEO Tony Hayward said recently, ‘No one wants this thing over more than I do. I’d like my life back.’ Tony, I’m so sorry you had your summer disrupted. I’d buy you a drink, but you’d probably spill that too … and make me clean it up.” –Craig Ferguson

“This Tony Haywire guy, whatever his name is, he told the BBC on Sunday that he believes the new oil cap that they’ve installed will eventually capture the vast majority of oil spewing from the well. You know, if they could capture half the BS spewing from Tony Hayward, people would be thrilled.” —Jay Leno

“BP CEO Tony Hayward said he would just like to get his life back. He wants to get his life back. You know, I say give him life plus 20.” —Jay Leno

…..”Obama’s not the only one on the hot seat right now. The CEO of BP is taking a lot of flak. His name is Tony Hayward. Today, President Obama had a meeting with Hayward at the White House. It got off to the wrong start. Hayward arrived in a Hummer limo powered by baby seals.” –Craig Ferguson

A Tony Hayward doll was even marketed in the U.S.:

Modelled on BP oil spill hate figure Tony Hayward, it’s the toy no kid wants – Inaction Man.

The 12-inch doll depicts the gaffe-prone boss as jobless with a placard reading: BP Executive Needs Work.

Made by American firm Hero Builders, it sells for £22.75 and describes Hayward’s qualities as “whiny little b*tch”, and an “all around w*****”.

Toy company boss Emil Vicale said: “We don’t expect to sell any. That’s how reviled he is.”

The doll – which does absolutely nothing – is the latest insult to Hayward, 53.

Meanwhile, BP doesn’t seem to want to let go of its image as a company that isn’t above board but will say what it thinks it needs to say in a given moment – even if everyone thinks or knows it’s just saying what it thinks it needs to say:

BP Sunday refused to confirm reports that its embattled chief executive Tony Hayward is on the verge of leaving the oil giant.

“Tony Hayward remains our chief executive and has the full support of the board and senior management,” company spokesman Mark Salt told CNN.

So expect the Tony Hayward spirit to linger on at BP long after Tony Hayward has left the leaking oil well.

Uh… They’re Number One?

Frank James at NPR:

The U.S. is no longer the single largest consumer of the world’s energy resources. That distinction now goes to China, according to the International Energy Agency.

The IEA says that according to an analysis of its data for 2009, China, with a population of 1.33 billion compared with the U.S.’s 310.2 million, has outstripped the U.S.

It’s been known for some day that this day would come. But it happened faster than was forecast because China was hurt less by the global recession than the U.S.

Nicholas Deleon at Crunch Gear:

The actual numbers are pretty impressive, particularly when you consider that a mere 10 years ago China was quite a bit behind the U.S.

China consumed some 2,252 millions tons of the oil equivalent of sources such as coal, nuclear power, natural gas, and hydropower. The U.S. consumed 4 percent less. These are numbers from last year, by the way.

But that’s where energy efficiency comes into play. Since the year 2000, the U.S. has increased its energy efficiency by about 2.5 percent annually. China? 1.8 percent. So not a huge difference, but a difference nonetheless.

Does this really mean anything to you? Eh, maybe. Certainly it’ll have implications for the world at large though. Now that China is the biggest consumer of energy, it alone is in the position to tell energy providers, “Look, we’re willing to pay X for Y units of energy.” If China’s X is bigger than the U.S.’s X, then we may be looking at a situation where energy prices will go up simply because “someone else” is willing to pay more.

Which could mean that all the factories that produce all the lovely electronic gizmos we talk about day in, day out, could see their costs of doing business go up. And who would make up the difference? Yes, you!

Then again, it could have the very opposite effect, and end up lowering prices.

Mark Wilson at Gizmodo:

A different metric? Three years ago, China was the world’s biggest exporter of coal. Now it’s the leading importer. And last year, for the first time ever, Saudi Arabia sold more oil to China than the US.

Given that China’s consumption will give them more negotiation power in the world’s power market, it may be a good time to buck our trend of a mere 2.5% energy efficiency increase per year.

Frank Holmes at Wall Street Pit:

While most, if not all, had predicted China would become the world’s largest energy user, many didn’t think it was going to happen for another five years. China’s rise to the top can largely be attributed to a decline in energy usage in the U.S. China’s 2009 energy usage was below that of the U.S. from 2004-2008, before the financial crisis.

In fact, just ten years ago China’s energy consumption was less than half that of the U.S., according to the Wall Street Journal. The U.S. remains the biggest energy consumer on a per capita basis, the IEA economist said, consuming three times more per citizen than China. The U.S. also consumes more than twice the amount of oil that China does in a day.

But like most things with China, that statistic won’t last long. The IEA reported in last year’s World Energy Outlook that China and India will represent more than half of all incremental demand increases by 2030.

Well aware of the global politics of energy, the Chinese government was quick to dismiss the story as an overestimation by the IEA. Probably not the last time we’ll see modesty from Beijing as the country continues to put “world’s largest” in front of more and more resources.

Paul Denlinger at Forbes:

This is why the Chinese government has chosen to invest in developing new green energy technology.

The country is very fortunate in that most of the discovered deposits of rare earths used in the development of new technologies are found in China. While these deposits are very valuable, up until recently, the industry has not been regulated much by the Chinese central government. But now that Beijing is aware of their importance and value, it has come under much closer scrutiny. For one, Beijing wants to consolidate the industry and lower energy waste and environmental damage. (Ironically, the rare earth mining business is one of the most energy-wasteful and highly polluting industries around. Think Chinese coal mining with acid.)

At the same time, Beijing wants to cut back rare earth exports to the rest of the world, instead encouraging domestic production into wind and solar products for export around the world. With patents on the new technology used in manufacturing, China would control the intellectual property and licensing on the products that would be used all over the world. If Beijing is able to do this, it would control the next generation of energy products used by the world for the next century.

Do They Break Out The Vuvuzelas For This?

Katherine Rust at The Atlantic with a round-up. Rust:

While American soccer fans reveled in the glory of Landon Donovan’s game-winning goal yesterday, for the nation’s tennis supporters victory was not so sweet–until today. American John Isner and Frenchman Nicolas Mahut spent the better part of Wednesday, and Tuesday, and Thursday playing in what was to become the longest tennis match in history. Battling for some 11 hours over the course of three days, the contest finally came to an end when Isner slipped a backhand past Mahut, winning the match and leaving commentators exhausted, overwhelmed and awe-struck. Regardless of the result, the day had several winners. Who came out on top?

Kamakshi Tandon at ESPN, before Isner won:

At 41-41, the net broke down. At 47-47, the scoreboard broke down. John Isner and Nicolas Mahut, however, were still standing at 59-59 in the fifth set as the match was suspended for darkness a second day.

All of tennis’ longest match records lay in tatters. And all over the grounds, all over the world, people got up knowing they had witnessed something truly historic in the annals of tennis. The longest match ever. By far.

At the end, both players were able to walk off the court without losing and everyone else was left to consider the statistical enormity of what they had just witnessed.

“What I can tell you? It’s just unbelievable. I can tell you 10 times in a row, unbelievable,” said Arnaud Clement, whose 6-hour, 33-minute match against Fabrice Santoro at the French Open in 2004 had been the previous record for the longest-ever match.

Isner and Mahut have gone longer than that in the fifth set alone, playing for 7 hours, 6 minutes.

“Everybody is watching in all the TVs here,” Clement reported of the locker room. “Players … all the staff.”

Walking off the court shaking his head in incredulity, Isner’s coach Craig Boynton said, “It’s all uncharted territory right now. The match is going to be over three days, they’ve played over seven hours. It’s nuts. What do you do? There’s no playbook.

“Physically, we’ll get him ready [for Thursday]. We’ll make a few adjustments tactically. What do you say — ‘It’s 59-59. Go have fun?’

“I’m going to put my arm around the kid and tell him how proud I am, win or lose here.”

Hal Spivack at Fanhouse:

Here is the record-setting time breakdown of the first-round match for the ages (all London time):

On Tuesday, the match began at 6:13 PM.

On Tuesday, the match was suspended due to darkness at 9:07 PM after Isner won the fourth set and tied the match up at two sets apiece.

On Wednesday, play resumed with the players square at the start of the fifth set at 2:04 PM.

After 118 games on Wednesday with no breaks of serve in the fifth, play had to be suspended due to darkness again at: 9:10 PM, tied 59-59 in fifth-set games.

On Thursday, the match resumed at 3:43 PM at 59-59.

The match finally ended on Thursday at 4:48 PM in the 138th game of the fifth set, with Isner winning 70-68, finally breaking Mahut’s serve.

The fifth set alone – at eight hours, 11 minutes – took more time to complete than any other previous completed match in the history of Open Era tennis.

Fabrice Santoro and Arnaud Clement had previously held the record for the longest match in Open Era history by playing a six-hour, 33-minute contest over two days at the 2004 French Open. Santoro defeated Clement 6-4, 6-3, 6-7 (5), 3-6, 16-14 at Roland Garros that year.

The match lasted longer than any Major League Baseball game ever played. The White Sox played the Brewers in an eight-hour, six-minute contest that spanned 25 innings in 1984.

James Fallows, before the Isner win:

Last summer my wife and I went to the Legg-Mason tennis tournament in DC, early in the week’s play. By far the best part of seeing any pro tennis tournament in person is on the first couple of days, when you don’t have to sit in the stadium seeing matches from a distance but can wander around the side courts and see players from a few feet away.

At one of the practice courts, I saw what seemed to be an absolute giant warming up with a partner. It was Isner, whom at that point I’d never heard of, and some also very tall Eastern Europe person. I was able to stand directly behind the fencing — that is, 20 feet behind Isner’s opponent as he waited behind the baseline to deal with Isner’s incredible serve. On TV it is really hard to get an idea of the velocities, reflexes, and different-from-the-rest-of-us skills of top-level athletes. I watched Isner wallop serves for about an hour and was amazed that anyone could touch any of them. He is said to be 6’9″ but appeared to be about 11’2″, hitting serves more or less straight down

Peter J. Schwartz at Forbes:

Whether or not John Isner’s name is ultimately engraved on the Wimbledon trophy next weekend, he’s already emerged as this year’s champion. Earlier today, the former NCAA standout won what was, by far, the longest match in tennis history, measured in both games (183) and elapsed time (11 hours, five minutes). He obliterated the records for aces (112) and winners (246) in the process. Afterwards, his opponent, Nicolas Mahut, called it “the greatest match ever.” The three-day marathon was Isner’s Tin Cup moment, an event so dramatic that it is likely to overshadow the rest of the tournament. (It already stole the limelight from the Queen, who visited the All England Club on Thursday for the first time in 33 years).

What’s more, Isner’s win could make him rich. The retirements of Pete Sampras and Andre Agassi created a huge vacuum in American tennis. Try as they might, Andy Roddick and James Blake haven’t been able to fill that void. Last year, those two players pulled in a combined $19 million in endorsements and appearance fees, $6 million less than Agassi’s take five years prior.

I’ll Be Paying With Cash, Thanks

Robin Sidel and Dan Fitzpatrick at WSJ:

Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.

Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.

Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don’t generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts.

“If you put $1,000 in a checking account and don’t do anything with it, it will be hard to get that for free,” says Sherief Meleis, a managing director at Novantas LLC, a consulting firm that advises banks.

Felix Salmon:

Why do most people hate their bank? Because their relationship is based on the lie of “free checking”, and a relationship based on a lie is always going to be a dysfunctional relationship. Checking is never free, but in recent years banks have been able to conjure the illusion of free through a system of regressive cross-subsidies, where the poor pay massive overdraft fees and thereby allow the rich to pay nothing.Interchange fees are a cross-subsidy too: this time it’s merchants who help pay for the checking accounts of the rich. In fact, they do more than pay for their checking accounts, they pay them a nice tax-free income, when the rich people accept debit rewards cards.

With the federal government finally cracking down on overdraft fees, and with the Durbin amendment threatening interchange fees to boot, the fiction of free checking looks as though it’s reaching the end of its natural life:

More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.

Checking accounts pay zero interest these days, but even being able to borrow money for free from depositors isn’t worth $300 per year to a bank. If a checking account has $1,000 in it on average, and the bank can lend that money out at 7%, net of defaults, then it’s making $70 a year on the account, which isn’t enough to cover its costs.

The natural answer, here, is to restart charging monthly fees on modest-balance checking accounts — and to shed few tears when your low-balance customers leave:

The offers of free checking without any minimum balance requirements attracted a new wave of low-income customers, who previously went to check-cashing stores. Some consumer advocates have warned that the elimination of free checking could drive some of those customers out of the banking system.

From the banks’ perspective, though, many of those customers aren’t profitable.

All of which provides some important background in understanding the stance of Patrick Adams, the CEO of St Louis Community Credit Union. Adams’s customers are relatively poor: his credit union is designated a Community Development Financial Institution, which targets the African-American community in St Louis. And he’s dead-set against any regulation of interchange fees, which provide an important source of income for his institution; he’s written three blogs on the subject, here, here, and here.

Adams, unlike Harriet May, was willing to provide me with concrete numbers:

We have 25,000 debit card holders with a 50/50 split on debit vs signature. We had 3.2 million debit card transactions in 2009 totaling $892,490 in debit interchange income or an average per transaction of just under 28 cents per. At an average interchange rate of 1.3%, our average member debit transaction is for 21.40. Our all in expense (including fraud) is $521,000.

We project that a 50% reduction in interchange would cost us $446,000 of top-line revenue. Something has to give if we lose that revenue. A $20 per year annual fee works, but we don’t want to fee our members.

Essentially, St Louis Community CU is getting about $35 of top-line revenue per year, per debit card. If that revenue disappears, it hurts the credit union’s finances. And so Adams is railing against interchange regulation:

Here’s another surefire lock of a bet. You will be more frustrated than ever. Your costs at the bank will be up. Your costs at the retailer will be up. You will be confused as to which retailers accept your debit card and which ones don’t. You will have no clue what the minimums and maximums of your debit card activity will be because there will be no consistency among retailers.

As a result, you will carry more cash and more checks… And, what about this double-dip possibility? You’ll use more checks at the check-out counter and the retailer will charge you a processing fee for doing it. (See, their handling of checks and cash are more expensive than debit cards.) You’ll pay for that, as well.

If this legislation is passed, I will mark my calendar to re-visit this issue a year after enactment. If I am wrong, I will eat the biggest piece of humble pie ever, including a public apology to everyone – starting with Senator Durbin. I must tell you that I’m extremely confident that an apology won’t be forthcoming.

I’ll take Adams’s bet. Yes, the costs of a checking account will be more transparent and visible to consumers. But costs at the retailer will not rise, since the retailer’s costs will have fallen. There will be no confusion about which retailers accept which debit cards, and debit-card minimums and maximums will be a non-issue. People will not carry more cash, and they certainly won’t carry more checks. And Adams will owe a public apology to Durbin.

Stephen Spruiell at The Corner:

The old model: Banks use high fees on avoidable behaviors that are nevertheless common among the financially inept, such as account overdrafts, to subsidize free checking accounts and other reward programs for customers who use their accounts responsibly.

The new model: Liberals argue that overdraft fees are abusive and should be banned. Democrats enact new restrictions on overdraft fees. Banks end free checking accounts and other reward programs for responsible customers.

And we haven’t seen anything yet. Just wait until the new Consumer Financial Protection Bureau gets to work.

Matt Welch at Reason:

It was just terrible that the fine print of free-checking accounts included language saying “We will charge you for overdrafting your account, loser,” a sad fact easily divined by, for instance, overdrafting your account. So, consumer advocates, noble regulators, and other champions of the little guy came up with a genius solution: require banks to obtain letters from customers saying “Please charge me a lot of money when I write a bad check.” The result?

Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.

Hooray for progress! Back to the mattress!

Kevin Drum:

This is fundamentally my problem with overdraft and interchange fees: they’re basically surreptitious ways for the poor to subsidize the rich. There’s no law against that, of course, but the practice is so grotesque that in this case I’m perfectly willing to make one.

Basically, what banks have learned is this: it’s mostly poor people who pay overdraft fees. That makes sense, of course: they’re the ones most likely to run out of money, aren’t they? The thing is, it’s easy to fool unsophisticated consumers into not noticing these fees, or into thinking that they’ll never have to take advantage of them. But banks know better. They know to three decimal places how often low-income customers are likely to screw up slightly and overdraw their account by twenty bucks. And when they do, they’re charged obscenely more than the actual cost of servicing the overdraft. So who benefits? I do. I always have plenty of money in my checking account and I’ve never overdrawn it. So the entire debit card system is, for me, free.

The same is true for interchange fees. Banks charge merchants far more in interchange fees than it costs to actually run their payment networks, and merchants pay because they have no choice. Visa and Mastercard are functional monopolies, so if you want to do business with them — and what merchant can afford not to? — you have to pay whatever they tell you to pay. This cost gets passed on to consumers, of course, and the poor and working class pay it. The middle class and the rich, however, don’t: they basically get the fees rebated in the form of reward cards.

So you have two cases here of a system that costs money to operate, and in which the costs are largely borne by the poor in order to make them free (or cheap) to the better off. If you can sleep easily at night even after you understand how this works, you have a heart of stone.

So what’s the alternative? Simple: fees that are fair and transparent. Overdraft fees should cover the average actual cost of overdrafts plus a small amount. Interchange fees should cover the actual cost of operating an electronic payment network. Credit card interest rates should cover the risk-adjusted cost of actually loaning out money.

And to those interchanges, Reihan Salam in Forbes:

As trousers grow skinnier, our mobile phones are following suit, as evidenced by the ultraslim iPhone 4. But the U.S. Treasury, alas, has no intention of altering the design of its coins to accommodate America’s evolving fashion sense. At home my coins accumulate in jars and paper cups and drawers, perhaps to serve as raw material for some future magnetic art project. And as for bills, I only use them when absolutely necessary.

Generally speaking merchants will accept debit cards for even very small transactions. But as we all know, they don’t like it. In New York City, where cab drivers are required to accept electronic payment, many drivers will plead with you to use cash, citing the onerous fees collected by the banks.

These swipe or interchange fees are the target of a new regulation proposed by Sen. Dick Durbin of Illinois, a liberal stalwart keen to pick a fight with the financial sector. Merchants have been urging Congress to take action on swipe fees for years, but it’s only now, when esteem for the financial sector is at a low ebb, that there’s been any hope of a tough regulatory response.

My gut instinct is to distrust sweeping regulatory efforts. When the interests of one set of businesses are pitted against another set of businesses, I’m inclined to let consumers decide who should come out ahead. Yet swipe fees pose a number of interesting puzzles.

In January Andrew Martin of The New York Times published a scathing exposé of how Visa and MasterCard squeeze retailers. The two big payment networks dominate the marketplace by making their offerings attractive to banks and credit unions that, in turn, issue debit and credit cards. Visa and MasterCard set fees for every debit card transaction, fees which vary by type of card, among other things. But the banks collect the fees and, all other things being equal, they like making more money rather than less.

Visa and MasterCard are serving their customers extremely well. The trouble is that their customers are banks–not consumers, who face higher prices as merchants pass on higher fees in the form of higher prices. Indeed Visa was, according to Martin, the first to pursue the high-fee strategy. MasterCard found that it was losing market share to Visa by continuing to offer lower fees, and so it quickly matched its rival. It’s hard to see how Visa and MasterCard might break out of this very stable dynamic; last fall the Government Accountability Office issued a report describing how swipe fees have steadily increased.

One argument, raised by scholars Todd Zywicki and Geoffrey Manne, is that swipe fees are a way to pass on credit losses to merchants. Yet as financial blogger Felix Salmon of Reuters observes, merchants don’t also benefit from the much larger credit profits derived from fees and interest payments enjoyed by banks.

Swipe fees could be increasing due to rising levels of fraud and identity theft. That, however, would represent a case for shifting away from signature debit and towards PIN credit. But signature debit is more profitable for card issuers, which is presumably why there hasn’t been aggressive movement in this direction. In Salmon’s view, rising swipe fees represent pure rents for the effective duopoly of Visa and MasterCard, and the Durbin amendment would help shift the balance of power towards merchants and consumers.

The case for regulation does seem fairly strong. To me that suggests that there’s been a serious failure on the part of entrepreneurs. One wonders how the Visa-MasterCard duopoly has become so robust. In the absence of new swipe fee regulations, it’s possible that merchants will band together to find a superior alternative. The trouble is that the retail sector remains fairly fragmented, and cooperation on this scale would be very difficult to achieve. The past decade has seen a number of innovative payment systems emerge, from PayPal to Square.

Mike Konczal at Rortybomb:

Remember this debate is about reward cards versus debit cards. Merchants love debit cards, they are easier than cash. They don’t want to subsidize the airline industry by having to pay for rich people’s frequent flyer miles reward card for free, without anything in exchange for providing an additional good or service.

But they can’t give incentives for debit cards under current law. They can’t offer you a free loaf of bread with your groceries for typing in your pin, or give you your very own pin express checkout lane, for using debit. That is valuable local information and retail innovation that is lost. So watch for interchange rates being juked between high rewards credit cards, generic credit cards, the abomination that is “signature debit”, and pin debit.

I am not certain whether or not Hill staffers are currently being bombarded with financial lobbyists with vested interests claiming all kinds of decreases in interchange over the past decade. This data is very hard to find, as the credit card companies guard it vicious. Now, I’m just a dude with a matlab license and a free blog, so let me tell you what other credible people have researched and found recently.

Tim Lee at McArdle’s place:

Most of the commentary on interchange fees have focused on the rate paid by merchants, but this is the wrong number to focus on. Rather, we should care about the net of merchant fees minus cardholder benefits. If credit card fees rise but benefits rise by an equal amount, the result is a wash as far as the customer is concerned. I’m not aware of any precise data on cardholder benefits, but judging from the fact that companies used to charge an annual fee to issue credit cards and they now frequently offer generous cash back, I think it’s safe to say that benefits have gotten more generous over time. So looking only at interchange fees gives us a distorted picture.

Now maybe you don’t believe that banks will continue to pass increased fee revenues on to their customers. But notice that this is a symmetrical situation. If you doubt that competition among banks will shift most of the benefits of higher fees to consumers, then you should be equally skeptical of claims that competition among merchants will translate lower credit card fees into lower retail prices.

Konczal writes derisively about cardholder benefits, arguing that merchants “don’t want to subsidize the airline industry by having to pay for rich people’s frequent flyer miles reward card for free, without anything in exchange for providing an additional good or service.” But this misses the point in a couple of important ways. First, the benefits are limited neither to frequent flyer miles nor to rich people. But more fundamentally, what merchants want is irrelevant, because there’s no reason to think consumers’ interests are more aligned with merchants than with banks. Indeed, you could view the credit-card-issuing banks as agents for cardholders, negotiating for discounts that are passed along to their customers.

Advocates of regulation like to tell a populist story of consumers against rapacious banks. But there are wealthy corporations on both sides of the bank-merchant relationship. There’s no reason for regulators to side with Wal-Mart over Wells Fargo. Policymakers should focus on ensuring that both sides of the market (card-issuing banks and card-accepting merchants) are robustly competitive. Then consumers will reap most of the benefits whether interchange fees go up or down.

Konczal responds:

This argument is predicated on the idea that all people in the United States have access to the high-end consumer credit market. In general, the “two-sided markets” argument assumes a single representative consumer and a single representative business in a closed loop, where value can’t really be transfered in or out. That’s not the real world, where there are multiple payment systems, including cash, debit and credit cards with different prices, and multiple people with different access to credit.

Rich is a loaded term, but let’s throw some numbers out there. Here is an estimate that 13.2% of American households don’t own a checking account and about 9.5% of American households hold no bank account at all. They’ll pay the same price for goods and services as Tim, but not receive 1% back in cash. There’s a move to try and get the unbanked decent prepaid debit cards. They’ll definitely not get a good rewards problem out of it.

Is there inequality within the credit market for those who have access to it? From Adam Levitin’s Priceless? The Social Costs of Credit Card Merchant Restraints (19), which gives a history of the “merchant restraints” on distinguishing between debit and credit, we know that: “Visa Signature cards, which carry a high level of rewards and are marketed specifically to affluent consumers, comprise only 3.5% of all Visa cards but have accounted in recent quarters for 22.2% of all Visa purchases.” That’s a high volume of purchases with high rewards going to just a few people. Many people have rewards cards, but the very best ones are reserved for the high end, and those at the high end spend more than those not at the high-end. And everybody pays the same price.

We also know that around 45% of interchange goes to fund rewards. These high interchange rates drive up prices. Tim’s 1% back requires a merchant to pay an estimated 2.22% interchange for that feature alone. People who get less back, or who use debit, or who pay with cash, are paying higher prices to transfer money to Tim.

Want to get even more regressive? The people with poor access to high-end credit are paying higher prices to transfer tax-free income to Tim. Tax-free! It’s true many people have access to rewards cards, but some use them significantly more, and with much nicer, rewards than others. Those few are not scattered randomly among the population.

Tim Lee responds:

Mike Konczal has a sharp response to my post on interchange fees. He’s been following this issue more closely than me, so there’s a lot of good information there. But one part of his argument that doesn’t seem quite right is this:

Is there inequality within the credit market for those who have access to it? From Adam Levitin’s Priceless? The Social Costs of Credit Card Merchant Restraints (19), which gives a history of the “merchant restraints” on distinguishing between debit and credit, we know that: “Visa Signature cards, which carry a high level of rewards and are marketed specifically to affluent consumers, comprise only 3.5% of all Visa cards but have accounted in recent quarters for 22.2% of all Visa purchases.” That’s a high volume of purchases with high rewards going to just a few people. Many people have rewards cards, but the very best ones are reserved for the high end, and those at the high end spend more than those not at the high-end. And everybody pays the same price.

We also know that around 45% of interchange goes to fund rewards. These high interchange rates drive up prices. Tim’s 1% back requires a merchant to pay an estimated 2.22% interchange for that feature alone. People who get less back, or who use debit, or who pay with cash, are paying higher prices to transfer money to Tim.

I’m not sure I follow Mike’s math here. The fact that 44 percent of interchange fees get passed through as rewards doesn’t mean that a dollar of rewards “requires” a fee of $2.22. Offering a credit card at all costs money; you have to do things like printing statements, processing checks, staffing help lines, and the like. For less affluent customers, the revenue from interchange fees may barely cover these fixed costs, leaving little revenue for benefits. For more affluent customers, in contrast, the fixed costs will be a small fraction of interchange fee revenues, and so the company can afford generous benefits. This isn’t a transfer of wealth from poor to rich, it’s just a reflection of the fact that wealthier customers are more lucrative.

If regulatory measures push down interchange fees, it will likely mean that affluent customers get less generous benefits. But it may also mean that the least affluent credit card holders have to start paying annual fees again (or won’t get cards at all) because interchange revenues no longer cover the cost of providing the card. This isn’t an outcome we should cheer if we’re concerned about those at the margins of the banking system.

UPDATE: Katherine Magu-Ward at Megan McArdle’s place

Matthew Yglesias responds to Drum

Drum responds to Yglesias

UPDATE #2: More Drum

Yglesias responds to Drum

Megan McArdle

John Cole

These Maps Look Like The Flight Plans In Those Airline Magazines

Map comes from Jon Bruner at Forbes

Free Exchange at The Economist:

Lately I’ve been spending lots of time in Austin, Texas. Enough so that I’ve had to start driving again. When you go many years without driving, it becomes terrifying. So to refresh my skills I took lessons with a wonderfully patient and brave woman who has taught driving in Austin for nearly thirty years. I expected to be one of her few adult students, but no. My instructor claimed in the past few years the number of adult students increased exponentially, not quite rivalling the number of teenagers. Most are tech workers who come from all over the world, drawn by the vigorous labour market. Adult driving students struck me as a rather interesting economic indicator.

It doesn’t tell us anything we didn’t already know. Migration statistics reveal that people are moving in droves to Texas. Why? Jobs and no state income taxes. High earning New Yorkers and Californians can take home between 9% and 11% more of their income by moving to Texas. Every trip down I speak to at least one bitter New Yorker/Californian fed up with high taxes and cost of living.

Brad DeLong responds:

At Free Exchange, A.S. punches her internal Economist credentials by telling only half the story:

[…]

No, not half the story. Much less than half the story. The Tax Foundation tells us that “Tax Freedom Day” in Texas is April 5–that is, that Texans pay 26.0% of their income in taxes–while “Tax Freedom Day” in California is April 14–that is, that Californians pay 28.5% of their income in taxes. Roughly half of that difference comes from the fact that our federal tax system is somewhat progressive: the amount by which Texas is a low-tax state is not (as a naive reader of A.S. would suppose) 10% of income but rather about 1.3% of income.

And, of course, to at least some extent you get what you pay for.

And then there is the other half of the story: costs of living in New York and (coastal, metropolitan) California are high because there isn’t much space and because they are very nice places to be:

Matthew Yglesias:

I suspect A.S. is being somewhat misled by this fascinating interactive tool which charts domestic migration only and thus gives the impression that certain places are experiencing massive net population flight when in fact they’re just attracting a lot of immigrants.

What’s more, though Texas certainly has lower-than-average taxes, it’s hardly the lowest tax state in the union. According to the tax foundation that prize is owned by Alaska (which is an unusual case) followed by Louisiana, Mississippi, South Dakota, West Virginia, New Mexico, Tennessee, Nevada, Alabama, and Kentucky which I don’t think is anyone’s top ten list of economic and civic dynamism. Conversely, the most-taxed states, Connecticut and New Jersey, are also the most prosperous.

The issue tax-wise, especially when it comes to state government that’s not involved in so much pure transfers, is value rather than levels. Paying relatively high taxes in exchange for excellent services is going to be fine for your state. Having subpar services paired with low taxes is also workable. The problem arises if your high taxes don’t actually deliver good schools or nice parks or functioning transportation.

Andrew Sullivan

James Joyner looks at a different map:

Below is the graphic for Los Angeles County:

Two things strike me as interesting here.  First, the outward migration appears to be vastly outweighing the inward migration. Second, the outward flow is much more scattered than the inward flow.   Both of those surprise me, given the incredible attractiveness of Southern California.

It appears that, in 2008 at least, most of the people moving to LA were doing so from the Boston-New York-Washington corridor whereas most leaving LA were staying either on the West Coast or somewhere else in the Sun Belt.   I would have guessed that LA would be getting a much larger chunk of people from the Upper Midwest.    Maybe the graphic is just overwhelmed by population clusters.

Barry Ritholtz at The Big Picture:

Forbes doesn’t go into the qualitative factors, but one would imagine it includes things like employment opportunities, social options, housing costs, taxes, etc.

>>

Manhattan: Young people move in, older marrieds move out

>>

click thru for Detroit, LA and Seattle

Detroit: (Everyone Out of the Pool!)

>>

Seattle: So that’s Where everyone else went!

>>

Los Angeles: Last person out of Cali please turn off the lights!

>>

And for those of you who blame high California taxes for their exodus, how do you explain Miami ?

UPDATE: Kevin Drum

Gawker And Apple, Yet Again

Ryan Tate at Gawker:

Apple has suffered another embarrassment. A security breach has exposed iPad owners including dozens of CEOs, military officials, and top politicians. They—and every other buyer of the cellular-enabled tablet—could be vulnerable to spam marketing and malicious hacking.

The breach, which comes just weeks after an Apple employee lost an iPhone prototype in a bar, exposed the most exclusive email list on the planet, a collection of early-adopter iPad 3G subscribers that includes thousands of A-listers in finance, politics and media, from New York Times Co. CEO Janet Robinson to Diane Sawyer of ABC News to film mogul Harvey Weinstein to Mayor Michael Bloomberg. It even appears that White House Chief of Staff Rahm Emanuel’s information was compromised.

It doesn’t stop there. According to the data we were given by the web security group that exploited vulnerabilities on the AT&T network, we believe 114,000 user accounts have been compromised, although it’s possible that confidential information about every iPad 3G owner in the U.S. has been exposed. We contacted Apple for comment but have yet to hear back. We also reached out to AT&T for comment. [Update: AT&T has confirmed the breach and the FBI has opened an investigation. Updates below.] A call to Rahm Emanuel’s office at the White House has not been returned.

Taylor Buley at Forbes:

Gawker contributor Ryan Tate set the Web ablaze on Wednesday with a blog post detailing the alleged breach of 114,000 iPad users’ email addresses. The post named names: among them, executives at News Corp, The New York Times Company and Dow Jones.

According to “Weev,” a well known Internet “activist” who we likened to Shakespeare’s Puck after a baffling Amazon.com security incident last year, the “Goatse” security group alerted various members of the mainstream press via email before granting Gawker’s Tate an exclusive on the data.

“i disclosed this to other press organizations first (ones who had ipad users affected by the breach, lol) and was ignored,” writes Weev in an email. “gawker found out and ran with it immediately.”

To prove it, Weev sent Forbes copies of emails sent to press at Reuters, News Corp, The Washington Post and The San Francisco Chronicle. The veracity of the emails has not been confirmed, but each has a timestamp dating back to Sunday night.

[…]

Asked if Gawker paid for the scoop, Weev said the publication did not provide remuneration. “we did a benefit analysis and decided they could take our story viral the fastest,” he writes in an email.

Hello Reuters!

An information leak on AT&T’s network allows severe privacy violations to iPad 3G users. Your iPad’s unique network identifiers were pulled straight out of AT&T’s database.

Every GSM device (including 3G iPads), has an ICC-ID on its SIM card. This ICC-ID is a unique identifier to the cellular network that is used by the carrier to route calls to your cellphone. If this ICC-ID is compromised an attacker could theoretically (thanks to recent cryptanalysis that cracked GSM’s hash and stream functions) clone your SIM card to act as you on the AT&T network.

Devin, the iPad you registered to your email has the ICC-ID of 8901xxxxxxxxxxxxxx94.
Shannon, yours is 8901xxxxxxxxxxxxxx73.
James, yours is 8901xxxxxxxxxxxxxx74.
Carl, yours is 8901xxxxxxxxxxxxxx72.
David, yours is 8901xxxxxxxxxxxxxx71.
Neil, yours is 8901xxxxxxxxxxxxxx05.
Rob, yours is 8901xxxxxxxxxxxxxx03.
Joseph, yours is 8901xxxxxxxxxxxxxx11.
Mike, yours is 8901xxxxxxxxxxxxxx57.

You can locate your ICC-ID number of your iPad and verify this information by using the following item from Apple’s FAQ:
http://support.apple.com/kb/HT4061
There is nothing in Apple’s SDK APIs that would allow an application to have this identifier– it is a shared secret that should indicate physical proximity to the iPad. In addition, by harvesting ICC-IDs, an attacker can build a complete list of contact information for all iPad 3G customers. All these Thomson Reuters employees were revealed in a short data harvest by my working group along with hundreds of thousands of other iPad 3G customers.

If anyone in your organization would like to discuss this particular issue for publication I would be absolutely happy to describe the method of theft in more detail.

Have a good evening.

John Hudson at The Atlantic

David Coldewey at Crunch Gear:

he hackers, a group known as Goatse Security (I’ll let you work out the reasoning for the name yourself), organized a brute-force attack in which they pummeled a public AT&T script with semirandom ICC-ID numbers, which would return nothing if invalid but an email address if valid. A few hours later, they had the ICC-IDs and email addresses of everyone from Michael Bloomberg and Diane Sawyer to a Mr. Eldredge, who commands a fleet of B-1 bombers.As is occasionally the case with grey-hat hacker actions like this, the hack seems to have been executed first and AT&T notified shortly afterward — though not before an unknown number of third parties had access to the script. AT&T closed the hole immediately (it was as simple as turning off the script), and apologized as follows:

AT&T was informed by a business customer on Monday of the potential exposure of their iPad ICC IDS. The only information that can be derived from the ICC IDS is the e-mail address attached to that device.

This issue was escalated to the highest levels of the company and was corrected by Tuesday; and we have essentially turned off the feature that provided the e-mail addresses.

The person or group who discovered this gap did not contact AT&T.

We are continuing to investigate and will inform all customers whose e-mail addresses and ICC IDS may have been obtained.

We take customer privacy very seriously and while we have fixed this problem, we apologize to our customers who were impacted.

Impacted. Like wisdom teeth. Why not “affected?” Anyway, I notice they say they were not contacted by the group but by some business customer. The timing isn’t clear from the Gawker article, but I wonder if there’s a little more to this than anyone cares to admit. Groups like Goatse often warn their targets beforehand, but it seems like one or the other would have mentioned that if it happened. You’d think a company as exposed as AT&T would have bells on its scripts that would ring if suddenly requests increased by 1000%, but practices like that are perhaps too much to be expected.

Jason O’Grady at ZDNet:

Even worse is the potential security threat this could expose to members of the military that adopted the iPad. On the list are several devices registered to the domain of DARPA, the advanced research division of the Department of Defense, including William Eldredge, who “commands the largest operational B-1 [strategic bomber] group in the U.S. Air Force.”

Um, yeah. It’s that bad.

Media moguls and celebrities are one thing, but I’m guessing that the government and military users are taking this one pretty seriously too.I’m guessing that Al Qaeda would pay big bucks to have access to Eldridge’s iPad 3G?

According to data furnished to Gawker by the Web security group that exploited vulnerabilities on the AT&T network at least 114,000 user accounts have been compromised, although it’s possible that confidential information about every U.S. iPad 3G owner in the U.S. has been exposed.

Tony Bradley at PC World:

In truth, there was nothing elite (or ‘l33t’ in hacker speak) about the iPad 3G data leak. In fact, according to an interview on CBS News by Larry Magid with Goatse Security analyst Jim Jeffers, the security researchers more or less stumbled upon the authentication glitch. Jeffers said the exploit “was almost discovered by accident. One of our employees is an iPad 3G subscriber, and he noticed it in the process of the normal user experience of this device. It was something he just noticed as he was using it.”

Sort of like how finding and taking a car with the driver’s door open, keys in the ignition, and engine on does not make one an elite car thief. The lesson for IT administrators is to be more vigilant about closing these holes and making sure that the car door isn’t open, with the keys in the ignition, and the engine on–especially for Web-facing servers.

There is an entire genre of hacking dedicated to finding sensitive or confidential data inadvertently exposed to the Web. The book Google Hacking by Johnny Long, and the accompanying online Google Hacking Database, list hundreds of search queries that can be used to ferret out juicy information not meant for public consumption. It is actually not unique to Google. It should be called “Web search hacking”, but Google is essentially synonymous with Web search and “Google hacking” has a better ring to it.

George Kurtz, McAfee CTO and proud owner of not one, but two iPads, provides a detailed analysis of the iPad 3G data leak in which he ponders, “why is there such a dust storm over the recent AT&T/Apple iPad disclosure of 114,000 iPad owners and is it warranted?”

Kara Swisher at All Things Digital:

Now the Federal Bureau of Investigation is looking into the AT&T breach, according to an article in The Wall Street Journal, in what seems to be an early probe.

Oooh, the Feds are involved now.

I wish I could say it will make a difference. Because it won’t.

In fact, coming on the heels of privacy controversies at Facebook and Google (GOOG), it’s just another log on the digital fire that has been burning up privacy for a very long time now.

And now more than ever, it is part of a massive confluence of trends, including:

Consumers more interested than ever in sharing information about themselves in order to make ever better social networking connections online; a plethora of innovative devices–mostly mobile–and Internet tools available to seamlessly and easily allow those consumers to do so; and, perhaps most of all, Internet companies intent on hoovering up as much information as possible, in order to garner more consumers and sell it to advertisers.

In large part, this is all well and good, creating a range of valuable and entertaining services at little or no cost and making the computing experience more personal and relevant.

Because of that, I have to admit I was less tweaked than I thought I would be, although I wish I were not.

New York City Mayor Michael Bloomberg, whose email was also compromised, expressed the feeling best.

“It shouldn’t be pretty hard to figure out my email address,” he was quoted saying in the Journal article. “To me, it wasn’t that big a deal.”

That’s because all of us are thinking less that such information is private or will remain that way for long.