Tag Archives: John Carney

We’re Talking About Money, Honey

Felix Salmon:

Individuals are doing it, banks are doing it — faced with the horrific news and pictures from Japan, everybody wants to do something, and the obvious thing to do is to donate money to some relief fund or other.

Please don’t.

We went through this after the Haiti earthquake, and all of the arguments which applied there apply to Japan as well. Earmarking funds is a really good way of hobbling relief organizations and ensuring that they have to leave large piles of money unspent in one place while facing urgent needs in other places. And as Matthew Bishop and Michael Green said last year, we are all better at responding to human suffering caused by dramatic, telegenic emergencies than to the much greater loss of life from ongoing hunger, disease and conflict. That often results in a mess of uncoordinated NGOs parachuting in to emergency areas with lots of good intentions, where a strategic official sector response would be much more effective. Meanwhile, the smaller and less visible emergencies where NGOs can do the most good are left unfunded.

In the specific case of Japan, there’s all the more reason not to donate money. Japan is a wealthy country which is responding to the disaster, among other things, by printing hundreds of billions of dollars’ worth of new money. Money is not the bottleneck here: if money is needed, Japan can raise it. On top of that, it’s still extremely unclear how or where organizations like globalgiving intend on spending the money that they’re currently raising for Japan — so far we’re just told that the money “will help survivors and victims get necessary services,” which is basically code for “we have no idea what we’re going to do with the money, but we’ll probably think of something.”

Tyler Cowen:

For reasons which you can find outlined in my Discover Your Inner Economist, I am generally in sympathy with arguments like Felix’s, but not in this case.  I see a three special factors operating here:

1. The chance that your aid will be usefully deployed, and not lost to corruption, is much higher than average.

2. I believe this crisis will bring fundamental regime change to Japan (currently an underreported issue), rather than just altering the outcome of the next election.  America needs to signal its partnership with one of its most important allies.  You can help us do that.

3. Maybe you should give to a poorer country instead, but you probably won’t.  Odds are this will be an extra donation at the relevant margin.  Sorry to say, this disaster has no “close substitute.”

It may be out of date, but the starting point for any study of Japan is still Karel von Wolferen’s The Enigma of Japanese Power.   Definitely recommended.

Adam Ozimek at Modeled Behavior

John Carney at CNBC:

The fact that Charlie Sheen has decided donate a portion of the money from his live stage shows to help people affected by earthquake in Japan should be all you need to know that donating money to Japan is a bad idea.

Earthquakes, hurricanes, floods, tsunamis, volcanoes and even chemical or nuclear disasters can provoke a strong urge on the part of people to want to provide disaster relief in the form of charitable donations directed at those afflicted by the most recent disaster. This is almost always a mistake.

Almost all international disaster relief is ineffective. Part of the reason for this is that relief groups rarely know who is suffering most, or how aid can be most effectively directed.

Reihan Salam

Annie Lowrey at Slate:

Concern and generosity are entirely human—and entirely admirable!—responses to the disaster and tragedy in Japan. But if you really want to be helpful, as Felix Salmon and others have noted, there might be better ways to donate your money than just sending it to Japan. There are two basic rules for being useful: First, give to organizations with long track records of helping overseas. Second, leave it up to the experts to decide how to distribute the aid.

The first suggestion is simple: Avoid getting scammed by choosing an internationally known and vetted group. Big, long-standing organizations like Doctors without Borders and the International Committee of the Red Cross are good choices. If choosing a smaller or local group, try checking with aid groups, Guidestar, or the Better Business Bureau before submitting funds.

The second suggestion is more important. Right now, thousands of well-intentioned donors are sending money to Japan to help it rebuild. But some portion of the donated funds will be earmarked, restricted to a certain project or goal, and therefore might not do the Japanese much good in the end. Moreover, given Japan’s extraordinary wealth and development, there is a good chance that aid organizations will end up with leftover funds they will have no choice but to spend in country—though the citizens of other nations wracked by other disasters, natural or man-made, might need it more. Aid organizations can do more good when they decide how best to use the money they receive.

Taylor Marsh:

As for giving to Japan, don’t and here’s why, unless you want to give specifically to an organization like Doctors Without Borders.


Felix Salmon wrote a column for Reuters warning people “don’t donate money to Japan.” His argument is that donations earmarked for a particular disaster often “leave large piles of money unspent in one place while facing urgent needs in other places.”

Commenters pointed out that many relief organizations accept donations with a disclaimer that surplus funds may be applied elsewhere. And other relief organizations don’t allow for earmarking of donations at all, but that doesn’t mean they can’t use a burst of cash during an extraordinary crisis.

Salmon also wrote, “we are all better at responding to human suffering caused by dramatic, telegenic emergencies than to the much greater loss of life from ongoing hunger, disease and conflict. That often results in a mess of uncoordinated NGOs parachuting in to emergency areas with lots of good intentions, where a strategic official sector response would be much more effective.”

That last probably is true. I also have no doubt that various evangelical groups already are planning their crusades to Japan to rescue the simple indigenous people for Christ in their time of need. (Update: Yep.)

So if you do want to donate money, I suggest giving to the excellent Tzu Chi, a Buddhist relief organization headquartered in Taiwan. Relief efforts in Japan are being coordinated through long-established Tzu Chi offices and volunteer groups in Japan, not by random do-gooders parachuting in from elsewhere. Tzu Chi does a lot of good work around the globe, so your money will be put to good use somewhere.

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Filed under Foreign Affairs, Natural Disasters

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.

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Filed under Economics, The Crisis

Your Daily FinReg Centerfold

Brian Beutler at Talking Points Memo:

With the Wall Street reform legislation agreed to by House and Senate negotiators now in serious doubt in the Senate, what happens if the final bill can’t muster the votes? At his weekly press availability this morning, House Majority Leader Steny Hoyer hinted that they may have to make some changes.

“We’re trying to work with the Senate to ensure that we both take up a version that does in fact have 60 votes,” Hoyer said.

But the conference report, passed late last week, can not be amended on the House or Senate floors. It’s an up-or-down, yes-or-no proposition. If they need a new ‘version’ that has 60 votes to overcome a filibuster, they’d have to reconvene the conference committee, strip the language that offends Sen. Scott Brown (R-MA) and Sen. Susan Collins (R-ME) and try again.

Kevin Drum:

In the wake of a historic economic collapse caused largely by a financial industry allowed to run rampant, Sen. Russ Feingold (D–Wisc.) has decided to vote in favor of doing nothing at all to address this:

As I have indicated for some time now, my test for the financial regulatory reform bill is whether it will prevent another crisis. The conference committee’s proposal fails that test and for that reason I will not vote to advance it. During debate on the bill, I supported several efforts to break up ‘too big to fail’ Wall Street banks and restore the proven safeguards established after the Great Depression separating Main Street banks from big Wall Street firms, among other issues. Unfortunately, these crucial reforms were rejected. While there are some positive provisions in the final measure, the lack of strong reforms is clear confirmation that Wall Street lobbyists and their allies in Washington continue to wield significant influence on the process.

Can I vent for a minute? I know Feingold is proud of his inconoclastic reputation. I know this bill doesn’t do as much as he (or I) would like. I know the financial industry, as he says, continues to have way too much clout on Capitol Hill.

But seriously: WTF? This is the final report of a conference committee. There’s no more negotiation. It’s an up-or-down vote and there isn’t going to be a second chance at this. You either vote for this bill, which has plenty of good provisions even if doesn’t break up all the big banks, or else you vote for the status quo. That’s it. That’s the choice. It’s not a game. It’s not a time for Feingold to worry about his reputation for independence. It’s a time to make a decision between actively supporting something good and actively supporting something bad. And Feingold has decided to actively support something bad.

Scott Brown, the junior Senator from Mass:

Dear Chairman Dodd and Chairman Frank,

I am writing you to express my strong opposition to the $19 billion bank tax that was included in the financial reform bill during the conference committee. This tax was not in the Senate version of the bill, which I supported. If the final version of this bill contains these higher taxes, I will not support it.

It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis.  While some will try to argue this isn’t a tax, this new provision takes real money away from the economy, making it unavailable for lending on Main Street, and gives it to Washington. That sounds like a tax to me.

I have always strongly opposed a bank tax because, as the non-partisan CBO has said, costs would be passed onto the millions of American consumers and small businesses who rely on major U.S. financial institutions for their checking, ATM, loans or other services.  This tax will be paid by consumers who will have to pay higher fees and the small businesses that won’t get the funding they need to invest and create jobs.

Imposing this new tax is the wrong option. Our economy is still struggling. It is wrong to impose higher taxes and ignore the impact it will have on our economy without considering other ways we might offset the costs of the measure.  I am asking that the conference committee find a way to offset the cost of the bill by cutting unnecessary federal spending. There are hundreds of billions in unspent federal funds sitting around, some authorized years ago for long-dead initiatives. Congress needs to start to looking there first, and I stand ready to help.


Senator Scott P. Brown

John Carney at CNBC:

Democrats on Tuesday planned to strip out a controversial tax from their landmark financial reform bill in order to win the swing votes needed to pass it through Congress.

With crucial Republican moderates threatening to withdraw their support, Democrats were weighing alternative ways to fund the most sweeping rewrite of the Wall Street rulebook since the 1930s.

Though a supposedly final version of the bill had been hammered out last week, Democrats in charge of the process called a fresh negotiating session, which got under way shortly after 5 p.m. EDT Tuesday.

Democratic lawmakers and aides said they planned to remove a $17.9 billion tax on large financial institutions. Instead, they would cover most of the bill’s costs by shutting down a $700 billion bank-bailout program.

“I haven’t talked to everybody, but I gather from a number of people they like this option,” said Democratic Senator Christopher Dodd, one of the lawmakers in charge of the bill.

The bill had been expected to pass both chambers of Congress this week in time for President  Obama to sign it into law by July 4. But supporters have been forced to scramble for votes in the Senate, putting that goal in jeopardy.

Analysts said while that timetable may slip, the bill was still likely to become law.

“We believe that this legislation will pass, timing and the bank tax remain the final question marks,” wrote FBR Capital Markets analyst Edward Mills in a research note.

Jay Newton-Small at Time:

Senate Banking Committee Chairman Chris Dodd stood an hour ago in the Senator’s Retiring Room off of the Senate floor in an intense conversation with Massachusetts Senator Scott Brown – one of surely many they will have today. Dodd is trying to get Brown, one of four Republicans who voted for the Senate version of financial regulatory reform, to pledge his support for final passage. House and Senate negotiators last week worked out a deal to combine the two measures only to find that Brown couldn’t support $18+ billion in new bank fees. To complicate matters, Democrats are now down a vote due to the untimely death of Senator Robert Byrd, a West Virginia Democrat.

Dodd, a Connecticut Democrat, and House Financial Service Chairman Barney Frank are planning on taking the unusual step of reopening the conference committee this afternoon. Lucky for them it wasn’t formally closed or reopening it would’ve taken votes from both chambers of Congress. They have been negotiating with the four Republicans – Brown, Maine Senators Olympia Snowe Susan Collins and Iowa’s Chuck Grassley — on new offsets for the $18+ billion. Dodd says that 90% of the $18+ billion would now be paid for by the immediate end of TARP, the unpopular bank bailout fund due to expire October 3. The additional offset would come from raising fees the banks pay to the Federal Deposit Insurance Corporation, exempting all small banks under $10 billion capitalization (Dodd says he’s spoke to Sheila Bair on this and she’s fine with it). Some Republicans still have reservations that such a move, though, wouldn’t prompt the banks to pass the cost on to consumers. “Repealing TARP definitely appeals to me,” says Snowe, who met with Dodd in her office last night and again this morning.  “At this point other issues are not related to the TARP part, we’re still looking at how you replace those fees. So things are still in motion here, there are a lot of conservations developing.”

Brown, emerging from his meeting with Dodd, says he’s waiting to see the final product and hasn’t made any decisions yet. Brown sent Dodd and Frank a letter this morning announcing his opposition to the $18+ billion in fees, prompting today’s dramatics. Collins told reporters she was pleased with her meetings with Dodd but that she also had made no final decision. Grassley was nowhere to be found. “I gather there were a number of people who were uneasy with the earlier pay-for who like this alternative and so the present plan is to probably reconvene the conference this afternoon,” Dodd said, heading into a meeting in Senate Majority Leader Harry Reid’s offices. If all four Republicans sign on, Dems should have enough votes to pass the Senate as they race to finish the legislation by the end of the week.

Annie Lowrey at The Washington Independent:

Rather than charging the hedge funds and big banks considered most responsible for the financial crisis a reasonable fee for implementation, the conference committee will settle for ending a government stability program and spreading the pain around to all federally insured banks — including small community-focused banks — to satisfy the demands of one Republican. So it goes in Washington.

Felix Salmon:

It would be a fiasco of tragic proportions if the banks managed to remove these taxes from the final bill, essentially absolving themselves from cleaning up after their own mess. The arguments against the taxes are weak indeed: either you simply oppose all taxes on principle (which seems to be the Scott Brown stance, and which is fiscally disastrous), or else you’re forced into John Carney’s corner.

Carney is worried that we don’t know exactly where the tax will be applied — but that’s a feature, not a bug. Setting up the tax in great deal ex ante is essentially just asking banks to spend millions of dollars on tax consultants who can help them skirt the new levies. And as the risks in the system evolve and change, so to should the way that they’re taxed. It’s right and proper that the newly created Council for Financial Stability will be charged with taxing systemic risk, rather than having a bunch of politicians try to do so at the beginning and then watch as the banks and other financial institutions nimbly sidestep the new taxes.

An increase in the FDIC premium would be a gift on a platter to banks like Goldman Sachs and Morgan Stanley which don’t have insured deposits — not to mention non-bank players like Citadel which are systemically very important. I’m unclear on what exactly this Republican “procedural hurdle” is — I thought that after reconciliation, you just needed a simple majority to pass a bill. But I’m getting very annoyed about it.

UPDATE: Russell Berman at The Hill

UPDATE #2: Eric Zimmermann at The Hill

Noam Scheiber at TNR

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Filed under Economics, Legislation Pending, The Crisis

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

Foster Kamer at Village Voice:

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

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

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

Felix Salmon:

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

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

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

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

The Blodget/Salmon TwitSpat at Clusterstock

Henry Blodget at Clusterstock:

A Reuters blogger attacked us on Twitter this afternoon.

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

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

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

More Blodget:

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

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

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

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

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

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

Salmon responds:

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

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

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

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

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

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

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

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

Choire Sicha at The Awl:

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

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

Elizabeth Spiers:

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

Heather Horn at The Atlantic, with the tweets:

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

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

Mike Taylor at Fishbowl NY

Andrew Sullivan

More Kamer at Village Voice:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Not likely. But still. Maybe.

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

Juli Weiner at Vanity Fair:

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

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

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

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

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

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

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Filed under New Media

Dodd’s The Word, Part II

Wall Street Journal prints Chris Dodd’s fact sheet on the bill:


Consumer Protections with Authority and Independence: Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.

Ends Too Big to Fail: Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Advanced Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.

Transparency & Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated – including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Federal Bank Supervision: Streamlines bank supervision to create clarity and accountability. Protects the dual banking system that supports community banks.

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation.

Protects Investors: Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.

Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.

David Corn at Mother Jones:

Elizabeth Warren, the lead advocate for the proposed Consumer Financial Protection Agency, seems to like—or, at least, not dislike—the financial reform package (finally) released on Monday by Sen. Chris Dodd, the Democratic chairman of the Senate banking committee. In the summary of the legislation, Dodd notes that his bill would create the CFPA as an independent bureau within the Federal Reserve—which could pose problems—but that it will have the power to write and enforce rules governing the sale of various financial products, including credit cards and mortgages. Yet its enforcement powers would not extend to banks with less than $10 billion in assets. In a statement, Warren notes:

Since bringing our economy to the brink of collapse, Wall Street has spent more than a year and hundreds of millions of dollars in an all-out effort to block financial reform. Despite the banks’ ferocious lobbying for business as usual, Chairman Dodd took an important step today by advancing new laws to prevent the next crisis. We’re now heading toward a series of votes in which the choice will be clear: families or banks.

That sounds like a cautious endorsement

John Carney at Forbes:

Spreading the Fed’s authority risks making this problem of market homogenization even worse. Hedge funds and insurance companies escaped the financial crisis intact, largely because they weren’t subject to the same regulators whose views on prudence so damaged the banks. Subjecting a broader range of financial firms to the Fed’s market views will create more systemic risk, leaving more firms in vulnerable if the Fed gets it wrong again.

The new powers being proposed for the Fed would allow it to order financial firms to “reduce risk.” Which is to say, the Fed’s view of risk will even more directly control the financial system. The Fed will be able to impose its views of risk on a broader range of financial firms. But that is exactly what regulators thought they were doing when they incentivized banks to buy up mortgage backed securities through sliding-scale capital requirements.

In short, the regulators’ views of prudent banking got us into this mess. Allowing the Fed to fail upward is just a recipe for another—likely worse—crisis.

Daniel Indiviglio at The Atlantic:

The next stop as I continue to go through Senate Banking Committee Chairman Christopher Dodd’s (D-CT) new financial reform proposal (.pdf) is how he intends to resolve too big to fail firms. As with most other sub-proposals I’ve discussed thus far, this one largely resembles what’s found in the House bill. The big differences have to do with the creation of a “Orderly Liquidation Authority Panel” of bankruptcy judges to bless the resolution and the size of the fund to pay for it.

Both proposals call for firms to create resolution plans. In each proposal, the Treasury Secretary, Federal Reserve Chairman, relevant regulator or the firm itself requests resolution. The firm’s failure must pose a systemic risk to the U.S. economy in order to utilize this process instead of the bankruptcy code. The Federal Reserve Board and the relevant regulator’s board or commission vote on whether or not to proceed. A two-thirds vote is required. All of this is essentially identical for both Dodd’s and the House’s versions.

Orderly Liquidation Authority Panel

Next, the House version turns the process over to the FDIC, who completes the resolution process. Dodd’s proposal, however, takes a quick detour. He wishes to establish a panel of three bankruptcy judges who must first approve. If they agree that the firm in question is, indeed, in default or in danger of default, then the FDIC takes over.

This is an interesting deviation, and I suspect that Senate Republicans may have had a hand in this provision, based on reports during the compromise process. I’m a little mixed on whether it’s a good idea or not. I don’t know that it would hurt much — the judges must decide within 24-hours, so it would still be pretty quick. But then, a lot can happen in the world of finance in a day’s time.

John Berlau at Big Government:

For more than 150 years, state law has governed the director nomination and election process for corporations and their shareholders. In states such as Delaware and Nevada, where many companies are incorporated, any shareholder can nominate a candidate for the board, but that candidate has to pay for the campaign out of his or her own pocket. Under Dodd’s bill, the federal government would force the companies and other shareholders to subsidize the campaigns of dissident shareholders and include their candidates in a company’s own proxy materials.

But as I have written in BigGovernment.com, subsidizing certain shareholders to let them run director candidates on the cheap opens the floodgates to special interest agendas that hurt the bottom line for ordinary shareholders. “Groups from unions to animal rights groups could run their own candidate for corporate directors and promote their special interest agendas at the company’s (and ultimately other shareholders) expense,” I wrote.

And leaders of 17 groups representing a broad spectrum of the center-right coalition — from my Competitive Enterprise Institute and Americans for Tax Reform to the Christian Coalition of America – recently sent a letter to members of the Senate Banking Committee pointing out that with proxy access: “Everything on the anti-market political wish list from cap-and-trade carbon restrictions, to animal rights activism, to interfering with defense contractors to advance foreign policy objectives would be possible. These initiatives, whatever their merits, belong in the political arena, not in corporate boardrooms where the focus should be on maximizing shareholder value.”

The bill also takes the unwise step of coercing companies into cookie-cutter corporate governance procedures such as separating the chairman and CEO. Some corporate governance activists have flagged this as a bad practice, but there is no empirical evidence that it harms shareholder returns. In fact, shareholders of Google and Berkshire Hathaway seem quite pleased with their CEOs – Eric Schimidt and Warren Buffett, respectively (both of whom supported Obama) –  also serving as chairmen, and would be quite angry if the government were to penalize this practice that had been so effective for these companies’ growth and profitability.

In the meantime, as I have noted in the New York Daily News, Citigroup’s having a separate chairman and CEO throughout most of the last decade did nothing to prevent that firm’s financial implosion that resulted in taxpayer bailouts. Different governance structures may work better for different firms, as an entrepreneurial startup may opt for a close-knit board and a more established company may want to separate these positions. Regardless, shareholders are perfectly capable of deciding on things like whether the chairman and CEO should be separate, and that these matters shouldn’t be dictated to them by the government

Finally, the one-size fits all corporate governance procedures would greatly reduce the competitiveness of Delaware and Nevada in attracting firms from all over the world incorporating their because of the variety of corporate structures the states allow that work both for entrepreneurs and investors.

Paul Krugman:

OK, I’m still evaluating the Dodd proposal for financial reform. But here’s my puzzle: the bill, as I understand it, calls for an independent Consumer Protection Agency, with a director directly appointed by the president, but one that is “housed” at the Fed.

What, exactly, does that mean? Physical location is presumably not the issue; I don’t know if all Fed staffers are currently in the main complex, but there have certainly been times when some departments spilled over into other locations. (Back in 1977, when I was an intern at the International Finance Section, we were located in the Watergate!)

Does it mean that the staff will all be long-term Fed employees? Then that would, to at least some degree, compromise the agency’s independence. Or is it purely a cosmetic issue? If so, who exactly is being diverted?

I’m not prejudging this — there’s a lot to look at. But I’m puzzled.

Joseph Lawler at The American Spectator:

That is, it’s written up to include loopholes to allow hedge funds to continue whatever risky or abusive practices they’ve engaged in previously. The key loophole is that there is no real common definition of a hedge fund. The only concrete distinguishing feature of a hedge fund is that it has under 100 owners. Usually a hedge fund entails some combination of a long/short strategy and leverage, but not necessarily. There is no bright line dividing what are referred to as hedge funds, private equity funds, and venture capital funds — they are legally similar firms distinguished mostly by different business models . Yet Dodd would attempt to “close loopholes” on hedge funds without affecting private equity or venture capital firms. How? From the text (pages 377-378, pdf):

Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules to define the term ‘venture capital fund’ for purposes of this subsection….   Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules… to define the term ‘private equity fund’ for purposes of this subsection.’

In other words, the Democrats would pass the bill, satisfying the left-wing’s resentment of Wall Street fat cats, and then give hedge fund managers six months either to lobby for very wide definitions of venture capital and private equity or to make whatever small organizational changes are necessary to get away with calling their firms venture capital or private equity instead of hedge funds.

Tim Fernholz at The American Prospect:

So what happened to the much-lauded Volcker rule, which would limit the size and scope of bank activities, in Sen. Chris Dodd’s latest financial reform bill? It’s a bit complicated, but essentially the rule is gone.Regular readers will recall that the key distinction between the Volcker rule, as proposed by the Obama administration, and similar provisions in the House bill, was that the Volcker rule was mandatory: It required regulators to ban proprietary trading, hedge and private-equity funds from commercial banks, and would offer specific limits on the size of a bank’s liabilities. The House bill, on the other hand, would simply give regulators the authority to limit a firm’s size and scope however they pleased if they determined it was necessary. While the House authorities were more powerful, they are also less likely to be implemented; the Volcker rule provides definitive, hard and fast lines.

Well, no more. The new method is that the Systemic Risk Council will have six months to study how and why to implement the size and scope rules, and then recommend how to write those rules, or even if they should be written at all. Basically, it’s regulatory discretion with a time limit: The council has six months to do the research and nine months after that to write rules that could be either totally cosmetic or, less likely in my view, actually effective.

Chris Good at The Atlantic:

In a CNN/Opinion Research Poll conducted in January (results at PollingReport.com), Wall Street reforms ranked behind the economy, unemployment, terrorism, the deficit, health care, education, Afghanistan, Iraq, and taxes–in that order–as an issue that President Obama and Congress must deal with. 64% said it was important; 36% said it wasn’t.

Polling has indicated that many Americans think the federal government helped Wall Street too much in its response to the financial crisis, and Obama has said, many times, that no one wanted to undertake the financial bailout initiated under the Bush administration and then stewarded by the Obama administration–that helping the banks was a distasteful necessity.

It would stand to reason that financial reform is the counterweight, politically, to the unpopular bailout; that if the public is angry that banks got saved, an ensuing regulatory crackdown is the political move that would placate that sense of unjustness–the price the banks must pay to the taxpayer, so to speak.

But if it isn’t high in voters’ minds right now, will it have much political effect?

UPDATE: Kevin Drum collecting reactions. His collection:

Ryan Avent at Free Exchange at The Economist

Mike Konczal at Rortybomb

UPDATE #2: Paul Krugman

UPDATE #3: Krugman in NYT

More Konczal at Ezra Klein’s place

Jonathan Chait at TNR


Filed under Economics, Legislation Pending, The Crisis


Veronique de Rugy at The Corner:

George Mason University’s brilliant economist and great teacher Russ Roberts teamed up with filmmaker and armchair economist John Papola to create this amazing rap-music video, “Fear the Boom and Bust,” that features Lord Keynes and F. A. Hayek. In the video, the renowned economists come back to life to attend an economics conference. At Lord Keynes’s insistence, they head out for a night on the town and as a result we learn about why there’s a “boom and bust” cycle in modern economies and a good reason to fear it.

John Carney at Business Insider:

In the background of much of the debate over how policy makers should respond to the economic downturn have been the ideas of John Maynard Keynes and F.A. Hayek, two of the great economists of the 20th century.

Whether or not this is familiar to you, you definitely want to watch “Fear the Boom and Bust,” in which Keynes and Hayek face off in a hip hop battle. In the video, both economists come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there’s a “boom and bust” cycle in modern economies and good reason to fear it.

Megan McArdle:

This is officially my favorite new music video

Alex Knapp

Matthew Yglesias:

That said, it’s worth saying that this presents a somewhat oddly polarized view of the issue. The Hayek character presents what I think “real business cycle” types really think. But the Keynes character emphasizes as the sole alternative what are really the wackiest Keynesian suggestions (dig ditches, start wars) as remedies for the most severe possible problems. But the abstract idea that stabilization needs to emphasize creating stable nominal spending flows doesn’t normally involve any especially weird ideas. Nor does it normally involves any specific leftwing ideas.

The rappers have Keynes saying, for example, that he wants to “steer markets” whereas Hayek wants to “set them free.” Which is true to those two guys’ political perspectives. But Alan Greenspan is a serious free market guy and he, like Keynes, thinks the government should respond to economic downturns by boosting spending via lower interest rates. Milton Friedman thought the same thing. Ben Bernanke, conservative Republican, has the same view. And it’s perfectly coherent to both think that fiscal stimulus is useful and also that government spending is almost always wasteful—you just need stimulus that’s heavily weighted toward tax cuts.

Conversely, Karl Marx was a bit of a real business cycle theorist who would agree with the “Austrian” perspective that busts and mass unemployment are just part of the capitalist process. That, to Marx, was one reason to get rid of capitalism. And to Keynes, checking the Marxist attack on capitalism was one reason to pursue stabilization policy. Last I think it’s perfectly open to the Keynesian to concede that there is some “real,” structural element to unemployment while merely denying that the business cycle is all real or totally resistant to remediation.

Chris Mohney at Black Book:

The guys who made the rap happened to be in the NPR studio when Ke$ha was also there to be interviewed, and they consulted her opinion on the musical side of their efforts. She declared the rap “legit” and admired the raps as well

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Riding The Housing Data See-Saw

Daniel Indiviglio at The Atlantic:

Today, we have more conflicting reports about the health of the U.S. real estate market. The National Association of Realtors reports that existing home sales increased by 7.4% in November. But the Commerce Department says (.pdf) that purchases of new homes fell by 11% in November. What should we make of these conflicting reports?

First, the NAR says:

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 7.4 percent to a seasonally adjusted annual rate1 of 6.54 million units in November from 6.09 million in October, and are 44.1 percent higher than the 4.54 million-unit pace in November 2008. Current sales remain at the highest level since February 2007 when they hit 6.55 million.Total housing inventory also declined by 1.3%, according to the report. You’d have to go all the way back to April 2006 to find a lower unsold housing inventory level, which is pretty good news. The national median home price, however, was 4.3% lower than a year ago in November.

The Commerce Department reports:

Sales of new one-family houses in November 2009 were at a seasonally adjusted annual rate of 355,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.3 percent (±11.0%) below the revised October rate of 400,000 and is 9.0 percent (±15.3%)* below the November 2008 estimate of 390,000.At this point it should be clear why these reports conflict — they’re considering different populations of houses. The NAR is talking about existing home sales, while the Commerce Department reports on new home sales. So what this really means is that Americans are buying more existing homes, but fewer new homes.

And that probably isn’t surprising. In a buyer’s market, you can likely get better deals on older homes than newer ones. In particular, foreclosures and distressed homeowners will provide buyers with rock-bottom deals. The NAR data confirms that 33% of November sales included distressed properties, up from 30% in October.

Connie Madon at Bloggingstocks:

Much of the increase came from government incentives for first time home buyers. A tax credit of $8,000.00 was extended into next year. A second incentive of $6,500.00 was added for homeowners who lived in their homes for five years and are willing to relocate.

About half of all sales came from buyers who used these incentives, an estimated 2 million units. Next year, 2.4 million buyers are expected to use these tax credits.

Housing is bottoming out as evidenced by the slower rate of decline in prices. The National Association of Realtors reported that prices fell 4.3% in November to a median price of $172,600. This was the slowest rate of decline since 2007.

Nevertheless, the inventory of unsold homes is still high with 3.5 million units still on the market. This amounts to a 6.5 months supply. So far, buyers are aware of this “buyers market” and are not rushing in to snap up any deals.

Tim Iacono at Seeking Alpha:

It should be very interesting to see what this chart looks like in a few months, particularly if mortgage rates continue to rise. There will surely be a plunge in sales over the winter, what is normally a very slow time of the year for real estate purchases, but seasonal adjustments might make this winter’s numbers look just as bad as it made the fall numbers look good given that so much demand has been drawn forward and there is now no urgency for anyone to buy a home, at least until the snow stops falling.

Calculated Risk:

The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 355 thousand. This is a sharp decrease from the revised rate of 400 thousand in October (revised down from 430 thousand).


Note that new home inventory does not include many condos (especially high rise condos), and areas with significant condo construction will have much higher inventory levels.

Months-of-supply and inventory have both peaked for this cycle, and sales have probably bottomed too. New home sales are far more important for the economy than existing home sales, and new home sales will remain under pressure until the overhang of existing housing inventory declines much further.

Obviously this is a very weak report. I’ll have more later …

John Carney at Clusterstock:

Some additional data points:

  • The median new home sales price was $217,400,  a 3.8% increase over the month and a 1.9% decline over the past year.
  • The average new home sales price increased 9.5% to $280,300 over the month, reflecting a 3.4% decline over the past year.
  • The inventory of new homes available for sale at the end of the month dropped to a 7.9 month supply. That’s a decline of 5,000 to 235,000 units.
  • Over the past year, new homes available for sale are down 36.5% while the inventory of new homes is down 30.7%.
  • The South took the worst beating, with a decline in new home sales of 21.1&. The West saw a decline of 9.2%. The Midwest saw the strongest performance, with sales rising 21.4% over the month. (Note: If you want to know why the home sales are heading in opposite ways regionally, check out this map of the recession.)

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What Do We Buy It For The 80th Anniversary? Lehman Stock?


This week marks the 80th anniversary of the Crash.

David Roeder at Chicago Sun-Times:

The stock market’s famous Black Tuesday was exactly 80 years ago. Today’s investors can be excused if they feel somehow like they witnessed it firsthand.

Most of this decade, the stock market has been in bear territory. The current recession is quite old by historical standards, though believed to be technically over, and foreclosed and vacant homes pockmark the land. So do empty storefronts.

Credit was too freely given before the crisis started, and it may be unjustly denied now, especially to homeowners or businesses trying to restructure debt.

It feels like the Great Depression and hence its informal name, the Great Recession. And yet it’s not in the same league.

So far this year, federal authorities have closed 106 banks across the country, a number that’s gotten substantial attention. In the early 1930s, 10,000 banks shut down, and that was before the protections of the Federal Deposit Insurance Corp.

The Great Depression shaved about 30 percent from the value of the nation’s economic output. The Great Recession has cost about 5 percent.

Unemployment during the 1930s was more than 20 percent. Today, the official rate is 9.5 percent. It might be in the mid-teens if you count people who have given up the job hunt, or taken just part-time work to get by, but by that standard, the figures from 70 years ago probably understate the problem too.


The Huffington Post has a series of blog posts from New Deal 2.0. Eliot Spitzer:

How little we have learned! Reviewing the 80 years that have passed since the ’29 Crash and reflecting on the abyss into which we descended just over a year ago, it is easy to feel despondent at our lack of accrued wisdom. Sure, we had several decades where sound banking principles were foisted upon a cowed banking community. For a time, institutions were permitted neither to be “too big to fail” nor “too big to manage.”

But the story changed.

Over the past several years, we have seen the all-too-predictable return of irrational euphoria and the belief that those who ride a speculative wave have actual wisdom, not luck. We have suffered collective amnesia with respect to the cost of undervalued financial risk. We willingly believed in an alchemy that pretends to turn debt into equity. We subscribed to a naive view that unbridled leverage is a sound financial architecture.

Is there a way to shake off our amnesia? Of course: We need reasoned rules limiting the rapacious excesses of the untamed financial world, regulatory symmetry between risk and reward, safe guardianship of the public fisc, regulators willing to brave prevailing winds and power brokers, and a sense of humility whenever we believe we are truly smarter than those who preceded us.

John Carney at Business Insider:

The greatest lesson of 1929 and the Great Depression–that excess credit would distort the economy so badly that it could take years to put it back on track–was made to seem irrelevant and outdated, especially in the go-go economic climate of the new millennium.

There are frightening parallels between 1929 and 2009. Post-1929 Wall Street’s leaders more or less controlled the shape of regulation that emerged.  Likewise their current-day counter-parts are fighting to control the next generation of regulation. Even something as innocuous as the consumer financial protection agency seems designed to support more bank consolidation and punish local, independent banks.

The fight over pay is largely a side show. It attracts lots of headlines but pales in significance to matters such as the role of ratings agencies and the correct structure of capital requirements. And even when those subjects are raised we’re told nonsensical lies such as the idea that it is the way ratings agencies were compensated that derailed them, that it was the repeal of Glass-Steagal that ruined banking, that the problem was unregulated markets, or that unregulated hedge funds or derivatives need to be brought to under control.

Anything but the critical matters: a credible policy of allowing market failure, better capital reserve requirements for banks and an end to overly permissive credit coming from the central bank.

Can we have banking regulation that isn’t designed by bankers or immediately captured by bankers? The historical lessons are not reassuring.

Barry Ritholtz:

Has it only been 80 years? Gee, time really flies when you are accumulating debt at compound interest rates.


Matthew Scott at Daily Finance:

To safeguard investors and the markets after the 1929 crash, tighter banking regulations were enacted. Margin accounts were regulated to prevent investors from borrowing their way to ruin. The FDIC was established to insure bank deposits and restore confidence in the markets. The SEC was created to fight corruption in the stock markets. And the precursor to Fannie Mae was created to stop the need for short-term lending that had also played a role in causing people to be overleveraged during the 1929 crash.

Diane Swonk, chief economist of Mesirow Financial, doesn’t expect investors will see the federal government acting to protect their interests with the same level of regulatory reform this time around.

“The policy response [to stop the market slide] was pretty swift and dramatic, but the change in regulation in terms of the structure of our financial services industry has yet to really take its full form,” she said. “Although we’re seeing things come out piecemeal right now, the type of seismic shift you saw coming out of the Great Depression, we have yet to see.”

So the markets lose 45 percent in seven months and regulators don’t see a need to change anything? In Swonk’s opinion, because fiscal policy was handled better during the current crash and markets rebounded quickly, regulators are probably more inclined to add a few new rules or reinforce rules already in place, rather than do a major restructuring. The Great Depression was different in that it lasted about ten years: “Partly because it went on for so long, it forced us to make much more dramatic changes in the way financial markets were structured,” Swonk said.

So with few major regulatory changes coming and a rocky recovery on the horizon, where is the investor left? Speculation is still a problem, pushing up the price of everything from stocks to gold to oil. And both Inflation and deflation lurk as dangers.

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Paying The Cost To Be The Boss

Stephen Lebaton in NYT:

Responding to the furor over executive pay at companies bailed out with taxpayer money, the Obama administration will order the firms that received the most aid to slash compensation to their highest-paid employees, an official involved in the decision said on Wednesday.

The plan, for the 25 top earners at seven companies that received exceptional help, will on average cut total compensation this year by about 50 percent. The companies are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the financing arms of the two automakers.

Some executives, like the top traders at A.I.G., will face tight limits on their pay. In addition, the top-paid employees at all the affected companies will face new limits on their perks.

The plan will also change the form of the pay to align the personal interests of the executives with the longer-term financial health of the companies. For instance, the cash portion of the executives’ salaries will be slashed on average by 90 percent, and the rest will be replaced by stock that cannot be sold for years.

Naked Capitalism:

The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.

If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don’t like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments.

Alex Tabarrok:

There is no way this will work as advertised.  If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere.  Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut.  Chaos will be created at these firms as top people leave in droves.  Will the administration then order people back to work?

Felix Salmon:

Are you feeling outraged? Well, remember that $200,000 a year makes you rich. (Yes, really.) But these guys are effectively civil servants now, and they deserve to be paid as such. And if they have any fiscal responsibility at all, they will have saved up a huge amount of their past compensation to tide them through this fallow period.

What this means is that the people who used to be the 25 best-paid employees are now going to be far down the list, with underlings making much more than they do. That’s OK too. There’s no particular reason why senior executives should always be the best-paid employees in any organization. Quite the opposite, in fact.

John Hinderaker at Powerline:

We are living through dark times. The administration’s demagoguery will have far-reaching consequences. Presumably most of the executives affected by the cuts will leave their companies, while adequate replacements can hardly be hired at the rates the federal government is offering. And it isn’t clear what ripple effects the government’s high-handed decree will have. At Citibank or Bank of America, for example, will there be hundreds of employees paid more than the former top 25? Or will the pay cuts work their way down the chain? Any way you look at it, this decree will make it harder for the affected companies to regain profitability, the ostensible point of the TARP program.

Kevin Drum:

There’s certainly some justice in this.  But I’d prefer something less punitive and more useful: a limit on the total bonus pool at these banks.  The point isn’t just that executives who imploded their companies don’t deserve huge paydays — though there’s a lot to be said for that — it’s that financial companies in trouble should be using their retained earnings to build up their capital base, not to pay their staffs outlandish salaries.  Today’s action is nicely symbolic, but insisting on a more wide-ranging cultural change that helps the entire system recover would be even better.

James Pethokoukis

If I made of list of factors contributing to the recession and financial crisis, Wall Street pay would come in around 6th, after 1) easy monetary policy; 2) TBTF; 3) US housing policy; 4) global savings glut/China labor shock; 5) Wall Street group think.  Yet pay is where so much energy is being directed at this issue thanks to its populist appeal. America hates TARP so Washington needs to make amends by hammering execs at TARP recipients.

John Carney at Clusterstock

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In A Hotel Room In Russia, Yakking With Your Buddies


Andrew Ross Sorkin in NYT, an excerpt from his new book. The Vanity Fair excerpt.

Felix Salmon:

Take it away, Andrew:

“When Paulson learned that Goldman’s board would be in Moscow at the same time as him, he had [Treasury chief of staff] Jim Wilkinson organize a meeting with them. Nothing formal, purely social — for old times’ sake.

For fuck’s sake! Wilkinson thought. He and Treasury had had enough trouble trying to fend off all the Goldman Sachs conspiracy theories constantly being bandied about in Washington and on Wall Street. A private meeting with its board? In Moscow?

For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink’s BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.

Anxious about the prospect of such a meeting, Wilkinson called to get approval from Treasury’s general counsel. Bob Hoyt, who wasn’t enamored of the “optics” of such a meeting, said that as long as it remained a “social event,” it wouldn’t run afoul of the ethics guidelines.

Still, Wilkinson had told [Goldman chief of staff John] Rogers, “Let’s keep this quiet,” as the two coordinated the details. They agreed that Goldman’s directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the “social event” on his official calendar…

“Come on in,” a buoyant Paulson said as he greeted everyone, shaking hands and giving bear hugs to some.

For the next hour, Paulson regaled his old friends with stories about his time in Treasury and his prognostications about the economy. They questioned him about the possibility of another bank blowing up, like Lehman, and he talked about the need for the government to have the power to wind down troubled firms, offering a preview of his upcoming speech.”

How on earth did Paulson think this was OK? Goldman Sachs was a hugely powerful for-profit investment bank, and there he is, giving private chapter and verse on his opinions about the US and global economy, talking about internal Treasury matters, and previewing an upcoming (and surely market-moving) speech. All in secret, at a “social event” which somehow got kept off his official calendar. Oh, yes, and one other thing — the whole shebang took place in the Moscow Marriott Grand Hotel, in the context of Goldman directors joking about how all the Moscow hotels were surely bugged.

This is sleazy in the extreme, and will only serve to heighten suspicions that Paulson’s Treasury was rigging the game in favor of Goldman all along. (It’s also a bit peculiar, to say the least, that the only two times Paulson met with private-sector boards he was out of the country, and arguably outside US jurisdiction.)

Paulson didn’t have this meeting out of fear or necessity: in fact, he told the directors that although there might be tough times ahead, “I think we may come out of this by year’s end.” (Blankfein was skeptical.) There was nothing in the way of extenuating circumstances which could possibly justify the secret rendezvous. This is definitely a situation where Wilkinson should have pushed back and said no way — but it’s hard to say no to Hank Paulson. Whose reputation has now taken yet another serious lurch downwards.

John Carney at Clusterstock:

You might recall that trip to Russia. It was a disaster. Paulson had gone to encourage Russian investment in the US economy, which was rapidly sliding into a recession. He wound up just being mocked by Russian officials.

Bess Levin at Dealbreaker:

So Hank Paulson held secret meetings with Goldman in a hotel room in Russia and now we also find out, from Andrew Ross Sorkin’s new book, that matchmakers Paulson and Geither arranged a midnight meeting between Dick Fuld and Ken Lewis on Monday, July 21, 2008 to discuss the possibility of something going down between the two men’s firms. The rendez-vous took place after a dinner honoring the then Treasury Secretary, at which all of Wall Street’s CEO’s were assembled and one sort of gets the impression that maybe if Geithner had thought to talk Fuld/Lehman up to Lewis a little more (“he’s a grower, not a shower”), and told Fuld “for god’s sake, don’t look so desperate, play it cool,” the outcome might’ve been different. (It probably also would’ve required Richard to not be delusional about what he was trying to sell which, admittedly, TG couldn’t have helped.)

Naked Capitalism:

The Japanese tell their children, “You should hear one thing and understand ten.” Sorkin’s snippet reveals quite a lot.

It was obvious to even outsiders in the late stages of the unravelling of Lehman was that Fuld missed possible deals because he set his price targets too high. One of the cardinal rules of dealmaking is everything can be solved by price. He probably could have unloaded Neuberger Berman and limped along for a while. He could have sold a stake to the Koreans. Would these moves in August have rescued the firm? As an independent player, no, but a sale of all or part of the firm still would have been a better outcome, and realistic conversations might have led to a sale of more operations, and saved more jobs. Bear’s employees did get something for their stock holdings, and a minority kept their jobs. Now Bear did get a government backstop, but that was after the investment bank was clearly terminal.

But three things are striking about the Sorkin-provided details:

First, Fuld (and presumably the underlying business) was desperate as of early July. Sorkin has Fuld arranging for contacts to be made to possible buyers like Bank of America on a Saturday. Huh? He was clearly flailing about, yet not offering a price or deal terms commensurate with his obviously panicked state.

Second, Paulson and Geithner were aware of Fuld’s desperation. The Wall Street Journal reported earlier that Fuld was calling Paulson almost daily (and suggested Paulson was somewhat puzzled).

Free Exchange at The Economist

John Cook at The Gawker:

New York Times wunderkind Andrew Ross Sorkin was on CNBC twice today, promoting his new book, Too Big To Fail. Which is interesting, because CNBC tough-guy Charlie Gasparino is very, very angry at Sorkin over the book. Lawyers are involved.

For all his bluster, Gasparino can be a bit thin-skinned. His primary beef with Sorkin is over this passage from Too Big to Fail, in which Sorkin quotes Goldman Sachs CEO Lloyd Blankfein’s thoughts on Gasparino’s reporting:

“While the 53-year-old Goldman C.E.O. kept a television in his office, he was so disgusted with what he believed was CNBC’s Charlie Gasparino’s “rumor-mongering” that he had turned it off in protest. “That’s not my thing,” he told [Morgan Stanley CEO John] Mack. “I don’t do TV.””

Do not call Charlie Gasparino a rumor-monger, or quote someone else doing so. He doesn’t like it! Especially when it appears not to be true: According to Business Insider, a Goldman Sachs spokeswoman confirmed the anecdote about Blankfein turning off CNBC, but said “‘rumor-mongering’ is not a direct quote.”

Gasparino was so broken up about the alleged misquote that he had his lawyer send letters to Sorkin’s publisher Viking and to Vanity Fair, which reprinted the anecdote in an excerpt this month, demanding corrections. When we heard that Sorkin was going to be on Gasparino’s turf twice today, we gave him a call to see what he thought about that.

UPDATE: Megan McArdle


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