Felix Salmon

Zachery Kouwe has a great article today about Capco, a highly-secretive Vermont-based insurer which looks as though it’s massively insolvent:

By some industry estimates reviewed by the insurance department, Capco could face nearly $11 billion in claims but has only about $150 million with which to meet them. The state is examining whether the company sold policies without the means to cover them, according to a person with direct knowledge of the inquiry who had signed confidentiality agreements.

Capco was in much the same business as AIG Financial Products: selling insurance against the end of the world. Such businesses tend to be extremely profitable most of the time, and then blow up spectacularly. The question is who on earth would ever buy such insurance, given that the chances of ever getting paid out are slim indeed. The answer? The same people who own the insurer!

Capco was created in 2003 by Lehman and 13 other banks and brokerage companies as a kind of marketing tool. The pitch was that while Capco would not insure customers against investment losses, it would compensate them if the firms failed. Capco promises to provide virtually unlimited coverage above the $500,000 offered by the Securities Investors Protection Corporation and its equivalent in Britain…

Capco, which is private, is something of a financial mystery. Its members include Wall Street giants like Morgan Stanley and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant. Capco was initially registered in New York but later moved to Vermont, where state law enables it to operate without disclosing much about its finances…

It’s unclear who actually serves as the current president of Capco, and the company’s main phone number connects to a recording that tells callers they’ve reached a “nonworking number at Morgan Stanley.”

It seems that these banks’ clients essentially got their Capco insurance for free, which is lucky, because it wasn’t worth anything. But that doesn’t mean they won’t go after Capco’s owners if the insurer fails to pay them what they’re owed. One thing’s for sure: a lot of lawyers are going to get a lot of work out of this fiasco.

Michael Wellman has an intriguing idea for solving all the issues surrounding high-frequency trading at a stroke: switch from a market with continuous clearing to a market which clears once per second.

Orders accumulate over the interval, with no information about the order book available to any trading party. At the end of the period, the market clears at a uniform price, traders are notified, and the clearing price becomes public knowledge. Unmatched orders may expire or be retained at the discretion of the submitting traders.

Even with a period as short as one second, the call market totally eliminates any advantage of HFT systems. It does not eliminate the opportunities for algorithmic trading in general–just those that come from sub-second response time. No party has privileged information about order flow, and no party benefits by getting a shorter wire to the “trading floor”.

According to Wellman, there would be other advantages to discrete-time trading too, including lower volatility.

Would this plan essentially give everybody in the market the advantages of being in a dark pool which only exists for one second? On its face, I think it’s a good idea. What would the downside be?

I don’t think that “laughably simple” means what you think it means, Mr Hume

Goldmanites: Good to each other, bad to everybody else

I have a Kindle, and I like it, and I also really liked Nicholson Baker’s take-down of it.

“We prefer advice from a confident source, even to the point that we are willing to forgive a poor track record.”

Always call a coin to land in the position it started in

Curse you, birch pollen!

Heidi Moore delivers 2000 words on the culture of Goldman Sachs, under the hed “Will Everyone Please Shut Up About Goldman Sachs?“

I’m sure there’s no shortage of qualified people willing to do this for free, or very little money. Why not use them?

Behavioural Economics 101: What to do with the olive pits

Merciless WSJ takedown of… cheap Australian Chardonnay?

The “theory of local truth” as explained by a Chinese Internet censor

The good news is that the bikes-in-buildings law passed yesterday, by 46 votes to 1, and will come into effect in 120 days’ time: Ben Fried calls this “the biggest legislative victory ever achieved by bicycle advocates in New York City”.

But does this mean my battle is won? Not necessarily. Before the building needs to open up its freight elevator to my bike, my employer — Thomson Reuters — needs to file with the landlord a formal “request for bicycle access”:

The tenant or subtenant of a building to which this article is applicable may request in writing, on a form provided by the department of transportation, that the owner, lessee, manager or other person who controls such building complete a bicycle access plan in accordance with section 28-504.3. Such request shall be sent to the owner, lessee, manager or other person who controls such building by certified mail, return receipt requested, and a copy of the request shall be filed with the department of transportation.

You can guess what happens after that — suffice to say that it’s a very bureaucratic process. But in any case I now need to work out who at Thomson Reuters is even authorized to file such a request. And then I need to work out how to get them to file it. And then I need to whom to talk to about finding an out-of-the-way corner of the 18th floor which I could use to store my bike during the day. My guess is that a best-case scenario has me happily wheeling my bike in to my office at roughly the same time that New York temperatures drop well below freezing. Ah well.

Gawker’s John Cook has the 17-page complaint which Art Capital Group has lodged against Annie Leibovitz, and it makes for compelling reading, even though the really juicy stuff — the commissions that ACG has decided to pay itself on the sale of Leibovitz’s photographs and real estate — have been redacted.

In a nutshell, Leibovitz borrowed $24 million from ACG, at what on its face looked like a reasonably attractive interest rate. (It was 275bp lower than the $22 million line of credit which it replaced.) But in doing so, she allowed ACG to go ahead and sell the rights to every photograph she has ever taken — and every photograph she’s going to take through at least 2011 — as well as her homes in Manhattan and Rhinebeck. When ACG makes those sales, it first pays itself a commission on them, and then it repays itself the money it’s owed. Only then does Leibovitz get any money left over. As a result, ACG’s total profits on this deal are likely to be substantially larger than its headline interest rate might indicate.

Leibovitz, however, isn’t playing ball. She’s not allowing real-estate agents into her homes so they can be sold, and she’s even signed an agreement with Getty Images allowing them — and not ACG — to represent her for “a special multi-assignment collaboration”. Hence the lawsuit.

Here’s ACG, in its complaint:

Defendants have stated that they will not cooperate with Plaintiff in any sale of the Fine Art Collateral, which is nonsensical given that Plaintiff obtained an appraisal for certain of the Fine Art Collateral which exceeds the loan amount and, if sold at that amount, would not only allow Defendants to satisfy their loan and other obligations to Plaintiff and its affiliate, but also allow Leibovitz to earn a profit, and to obtain financial comfort and financial stability going forward.

The implication here is that ACG can sell the Leibovitz photography rights for a sum well in excess of $24 million, pay itself commission, pay off the loan, pay off the “other obligations”, and still have enough left over to keep Leibovitz in “financial comfort and financial stability”. Her homes wouldn’t even need to be sold at all.

And the alternative? Well, there really isn’t an alternative. Even if Leibovitz had the cashflow to service the loan, which is doubtful, it comes due in September, and she certainly doesn’t have the money to repay the loan. And she can’t borrow the money from anybody else, because ACG has a lien on all her real-estate and intellectual property.

Leibovitz clearly isn’t happy with this state of affairs, but she’s got herself into it, and now she has no choice but to go through with ACG’s scheme to sell off all her intellectual property. I’d advise her to start cooperating, since that’s her only chance of keeping her houses. On the other hand, Leibovitz does have some leverage over ACG:

“The agreement with her was that we’d they’d go out and sell it for more than $24 million,” says a source close to Art Capital. “And now, she’s not making herself available. Any likely buyer would say, ‘Gee, can I meet with Annie?’ I don’t think anyone would buy it if they don’t feel they have a cooperative seller.”

Which leaves ACG in a difficult position: they have something very valuable, but Leibovitz is making it impossible for them to monetize it. I’m not clear what purpose a very public lawsuit against Leibovitz serves in this context. And I’m definitely not clear why they’re talking to Gawker. But at this point it’s obvious that things are going to be very ugly between the two sides for the foreseeable future.

Update: So this is interesting. ACG’s flack, Montieth Illingworth, just pointed out to me that the quote I had from Gawker was incorrect: if you go to the page now, it clearly says “they’d go out and sell it” rather than “we’d go out and sell it”. But of course I just copy-and-pasted: originally, the word in the quote was “we’d”. It seems that Cook has changed his quote, without noting anywhere in the post that it has been changed. What’s going on?

I believe Illingworth when he tells me that neither of ACG’s principals, Ian Peck and Baird Ryan, spoke to Cook, so the quote can’t have come from either of them. Which leaves I think three possibilities:

1. The quote came from Illingworth, which is how he was able to have it changed so easily: maybe Cook broke a verbal agreement about quotes being on background or attributable to ACG. Illingworth did talk to Cook before the piece came out, but is adamant that the quote didn’t come from him.
2. The quote is genuine, and came from one of ACG’s advisers — a banker or lawyer, most likely — who reflexively used the word “we” but who was certainly not authorized to talk on ACG’s behalf. When Illingworth complained to Cook about the quote making it sound as though Peck or Ryan were talking to Gawker, Cook changed it.
3. Cook made an honest mistake, and wrote “we’d” where his source had said “they’d”, and realized his mistake after Illingworth called, and quickly corrected it.

The main thing I don’t like here is the way in which Gawker changed their item after it was published, with no indication that they had done so. Blogs make errors all the time, and then correct them, publicly. They don’t go back and erase their steps, trying to make it seem that there never was an error in the first place. Or, at least, they shouldn’t.

Update 2: Annie Leibovitz has released a formal statement:

The claims in the lawsuit are false and untrue. This is part of Art Capital’s continued harassment and attention-getting efforts. There has been tension and dispute since the beginning. Annie is in the same shoes as many other people involved with Art Capital. For now, her attention remains on her photography and on continuing to organize her finances.

Walter Hussman, the publisher of the Arkansas Democrat-Gazette, adds an interesting datapoint to the question of self-cannibalization in the newspaper industry:

Hussman, an early pioneer in newspaper paid online content and frequent speaker on the topic, said his newspaper now has about 3,400 online subscribers who pay $5.95 per month for access to everything on the Web site. Non-subscribers still get a significant portion of online news – including some blogs, multimedia, AP and others – but not everything.

Hussman said the paid content online generates just one-tenth of 1 percent (0.1 percent) of the newspaper’s total revenue. But the newspaper has been very successful in keeping print circulation up in part because the newspaper is not giving all its content away for free. The Democrat-Gazette’s daily circulation is up 3,000 to more than 176,000 over the past 10 years, while other newspapers in the Southeast are down (some significantly). Sunday circulation for the Democrat-Gazette is down just 1 percent in 10 years.

A USC-Annenberg study this spring (the Annual Internet Survey by the Center for the Digital Future) reported 22 percent of survey respondents said they stopped their subscription to a printed newspaper or magazine because they could access the same content while online.

My general opinion on the subject of self-cannibalization is that you first need to get past the natural hubris of newspaper publishers. Yes, there is a degree to which print and online versions of a newspaper compete with each other. But there’s an even greater degree to which a print newspaper competes for its readers’ attention with the entire rest of the internet. If you put your website behind a subscription firewall, there’s no shortage of other content which your readers will happily consume for free.

That said, Hussman has a point: in terms of reader psychology, newspaper subscribers lose a free excuse for not renewing if you create an online firewall. If the paper is available online for free, they can say “I’ll just read it online” — even if they don’t. But if they have to pay for it online, they realize that in order to read the content they’re going to have to pay for it somehow, and if they’re paying a subscription fee anyway, they might as well get the paper delivered to their door, like they’re used to.

I’m interested in Hussman’s online subcription level, too, or $5.95 per month: it’s higher than I would have guessed. The obvious model to use is the magazine subscription model: sell subscriptions at $10 or $12 per year — the minimum possible level at which advertisers really value your readership, on the grounds that you make much more from advertising than you do from subscriptions. Advertisers will pay a premium to reach paying subscribers, but they don’t much care how much those subscribers are paying. So you make the subscription price as low as you can, in order to maximize the number of subscribers and therefore the amount of money you can get from advertisers.

What’s more, the effect of a subscription firewall on print circulation is effectively binary: it’s the existence of the firewall which matters, not the price level at which it’s set.

So what’s the reason for charging $71 a year rather than $10, if online subscriptions account for only 0.1% of your total revenue? I suspect that there’s an anchoring effect at work: a print subscription is $17 a month, or $204 a year, and the online subscription has been set at 35% of that figure.

In any case, if a newspaper is both increasingly reliant on paper subscription revenues and is seeing its paper subscriber numbers decline, there might indeed be a colorable case for implementing a subscription firewall in front of the online content. That doesn’t apply to big papers like the WSJ, FT, and NYT which are not seeing their print subscription numbers fall, and which aspire to being global news sources. But it does apply to smaller, regional papers, where the economics of newspaper publishing are particularly gruesome.

Mike Konczal picks up on a great Taunter post about conditional probabilities, which comes with a nasty sting in the tail. When you buy health insurance, the main thing you’re concerned about is tail risk: you want to be sure that in the unfortunate event you have stratospheric medical bills, the insurance company will be there to pay them.

The problem here is that you can’t be sure of that. Indeed, by Taunter’s math, if you have stratospheric medical bills (this is where the conditional probability comes in), the chances of the insurance company paying them are quite possibly no higher than 50-50. The term of art for an insurer not paying an insured’s medical bills is “rescission”: the insurer rescinds the policy rather than pay the bills.

Here’s James Kwak:

The legal basis for rescission is that when you sign an insurance application, you are warranting that the information on the application is true; if it turns out not to be true, the insurer can get out of your insurance contract. It’s particularly nasty in practice because the insurer does not immediately investigate your application to determine if it is accurate before selling you the policy (that would be impractically expensive); instead, the insurer waits – years, in many cases – until you actually need expensive health care, and then does the investigation, which at that point is worth it because of the payments the insurer could potentially avoid. Also, you can lose your coverage for innocent mistakes, which are easy to make since the application form asks you if you have ever seen a doctor for any one of a long list of medical conditions that you are certain not to recognize or understand. (In a Congressional hearing, the CEO of a health insurer admitted that he did not know what several of the conditions listed on his company’s application were.)

Kwak’s parenthetical about how insurers can’t examine applications before they’re approved on the grounds that that would be “impractically expensive” misses the true evil here: the insurer wants to cash the insurance-premium checks of people who made fraudulent applications. Those are the most valuable insureds of all, because the minute they make claims which cost more than their premiums, their policies can be immediately rescinded. As Taunter puts it, you are free to play, you just aren’t free to win. And that’s why you get people being denied breast-cancer surgery on the basis of having had acne in the past.

This is a huge problem with any private-sector health insurance: it’s essentially impossible to gauge the quality of that insurance until it’s too late.

More generally, as Konczal says, this applies to other insurance policies too: CDS, for instance, or even hurricane insurance. In general, if you’re making a series of small payments now on the grounds that you will be paid a large sum of money if something bad happens, you’re running some large and unhedgeable counterparty risk. Which just goes to confirm what everybody deep down suspects: that a significant part of the money we spend on insurance policies is wasted.

Last month, I wondered whether banks’ seeming inability to effectively modify mortgages was a function of “greed on the part of the banks — that while they pay lip service to the idea of modifying mortgages, they actually make more money by being recalcitrant and obstructive and unhelpful.”

It turns out that the answer is yes, it is — and the NYT’s Peter Goodman has chapter and verse:

Many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

In a sidebar, Goodman examines the case of a mortgage servicer, Countrywide, which refused to let Alfred Crawford sell his house for $620,000 in settlement of mortgage debts exceeding $800,000. The latest offer on the house is now just $465,000, and still no short-sale is being allowed.

In the meantime, Countrywide is paying itself lots of fees — fees which will ultimately come out of the pockets of the investors who bought the mortgage-backed bonds which Crawford’s loan was bundled into. The minute that Countrywide allows the house to be sold, that fee income dries up.

Countrywide’s official response is hilarious:

David Sunlin, Bank of America’s senior vice president in foreclosures and real estate management, acknowledged that Mr. Crawford’s applications for short sales had suffered from “a number of communication issues,” but he said that the bank had acted in good faith.

“We have to protect our investors’ interests,” he said. “We have reputational risks involved.”

A bank spokesman, Dan Frahm, said Bank of America owned a second mortgage on the property with a balance of $85,000 and stood to “take the full losses on it,” so it is at risk of loss along with the investors who own the first mortgage.

Countrywide clearly isn’t protecting its investors here: in fact, it’s gouging them for fees. And the second lien is a sideshow: that’s going to zero whether the house sells for $620,000, for $465,000, or for even less.

It’s not going to be easy to solve this problem. And I particularly feel for Mr Crawford, who moved out of his house two years ago, but who, it turns out, could simply have lived there rent-free for the past two years instead, while the process dragged on. Why should the servicers be the only people benefitting from all this inefficiency?

I have a bit more clarity on the $20 billion figure for total profits from high-frequency trading: it comes from the TABB Group. In a recent publication, TABB’s Robert Iati writes:

TABB Group estimates that annual aggregate profits of low latency arbitrage strategies exceed $21 billion, spread out among the few hundred firms that deploy them. While we know all the large investment banks such as Goldman Sachs are committed to prop trading profitability, the hundreds of smaller, private high frequency prop shops extend much greater influence in the marketplace by providing liquidity that keeps activity flowing.   

The Bloomberg article, meanwhile, explains the figure thusly:

The firms compete for a slice of $21.8 billion in annual profits from equities and derivatives market making and arbitrage, according to Tabb. Among the largest are hedge funds Citadel Investment Group LLC, D.E. Shaw & Co. and Renaissance Technologies Corp., as well as the automated brokerages Getco LLC, Hudson River Trading LLC and Wolverine Trading LLC.

When John Hempton, then, says that “quantifications of this as a $20 billion issue are insane”, I think there are two questions: firstly, what is “this”, and secondly, how profitable is it, in aggregate.

It would be most convenient if the HFT algorithms were split nicely into a “trading” bucket and a “quant arbitrage” bucket, so that Hempton could complain mildly about the “trading” algos while saying at the same time that they’re not all that big of a problem, while ignoring the stat-arb shops and other high-frequency, low-latency traders. But in reality there’s very little difference: the traders all have strategies, and the stat-arb strategies are all implemented so as to maximize trading profits.

To put it another way, I don’t think people are making billions of dollars in profit just by being fast. But there are definitely people making billions of dollars in profits through strategies for which being fast is a necessary precondition.

Which leads us to the second question: if you tot up all the profits from high-frequency, low-latency traders, including big shops like Citadel, Renaissance, and Goldman, can you get to $20 billion? My gut feeling is that you can, and that the TABB estimate is not obviously unreasonable.

I also got a note from Jon Stokes yesterday which is worth disseminating more widely:

It’s quite remarkable to me that many of the econ and finance folks who insist that “HFT is the same thing we always did, just way faster” don’t seem to realize that frequency and amplitude matter a whole lot, and that for any given phenomenon when you suddenly increase those two factors by an order of magnitude you typically end up with something very different than what you started with. This is true for isolated phenomena, and it’s doubly true for complex systems, where you have to deal with systemic effects like feedback loops and synchronization/resonance.

What I’ve noticed anecdotally is that engineers and IT pros are more concerned about HFT than people who just handle money for a living. These guys have a keen sense for just how fragile and unpredictable these systems-of-systems are even under the best of conditions, and how when things go wrong they do so spectacularly and at very inconvenient moments (they get paid a lot of money to rush into the office to put out fires at 4am).

There’s an analogy here with e-voting, which I did quite a bit of work on. In the e-voting fiasco, you had people who were specialists in elections but who had little IT experience greenlighting what they thought was an elections systems rollout, but in actuality they had signed on for a large IT deployment and they had no idea what they were getting into. To them, it was just voting, but with computers, y’know? They found out the hard way that networked computer systems are a force multiplier not just for human capabilities, but for human limitations, as well.

This is why I’m sympathetic to Paul Wilmott’s view of all this: there’s simply too much complexity here for comfort, and too many things which can go wrong. When the stat-arb shops imploded in the summer of 2007, the systemic consequences were mild-to-nonexistent, and that does provide a certain amount of reassurance. But we can’t be sure that if and when such a thing happens again, the consequences won’t be much worse.

2002 was a bad year for Banco Santander: in the wake of economic crises in Argentina, Uruguay, and Brazil, the bank found itself with large Latin American losses and a desperate need for capital. So it ended up selling 25% of its Mexican subsidiary, Santander Serfin, to Bank of America. Now history is repeating itself, this time in Brazil.

Santander was the big winner in the acquisition of ABN Amro, largely because of Brazil. It’s now cashing in those winnings, saying that it intends to float 15% of its Brazilian subsidiary on the Brazilian stock exchange — but isn’t really making a profit on the deal. Santander paid $15.6 billion for ABN Amro’s Banco Real, which was roughly the same size as Santander’s own Banespa in Brazil. If the combination is now worth $30 billion, there hasn’t been much in the way of appreciation. Of course, in the world of emerging market banking, staying flat over the course of the past two years is no mean achievement.

By all accounts, Emilio Botin, Santander’s chairman, has been ruing the Mexico deal pretty much since the day the ink dried on the sale. It’s not just that he sold the stake cheap, it’s also that it’s always nice to have 100% control of your subsidiaries, especially when you have a pan-regional presence. Santander is by far the largest bank in Latin America, and many of its corporate clients have operations in more than one Latin country. When dealing with those clients, it’s a bureaucratic nightmare to have to attribute a certain percentage of all transactions to the Mexican subsidiary so that Bank of America can get its fair share of the profits. What’s more, there’s always a risk in Latin America of governments imposing high new taxes on their banks — and when that happens, the big multinationals love having the ability to book profits in some other country. Again, that ability is severely constrained when you have to share one country’s profits with outside investors.
The news out of Brazil, then, is odd, since it would seem to create all those problems all over again.

My colleague Alex Smith likes the deal — it “could raise $4.5 billion of scarce capital while giving Botin another currency for shopping in South America”, he says. But Santander already has a monopoly in Chile, has a dominant position in Argentina, Uruguay, Venezuela, and Brazil, and it has no real chance of gaining market share in Mexico, where the top two players are deeply entrenched. Might there be an Andean bank or two that Botin is interested in? Maybe, but nothing nearly as important as 15% of his hugely valuable Brazilian franchise.

One can only conclude that Santander needs this money to shore up its own capital base, and that, much like the Mexican sale, it’s being done more out of desperation than out of any kind of strategic vision. And if Santander — one of the world’s strongest banks — is desperate for capital, one can only imagine what kind of state our weaker banks are in.

Update: Santander spokesman Peter Greiff responds:

“Starts selling”? What makes you think Santander would continue?

Just to be clear, CEO Alfredo Sáenz yesterday said the bank is weighing floating up to 15% of the bank in Brazil through the issue of new shares, not existing ones. So it isn’t really “cashing in” anything. The capital would be used to strengthen the bank in Brazil, he said.

As for the accounting issues involving Mexico, I vaguely remembering you mentioning those once before and, frankly, have never heard them mentioned in-house. If there are questions about how to attribute revenue, they would be normal ones among subsidiaries, not complicated by the BofA stake in Mexico. Keep in mind that 22% of Chile is in free float and Puerto Rico is listed too, not to mention Banesto in Spain. The banks are organized as independent subsidiaries, with their own accounts, regulated and supervised locally. So a floatation wouldn’t necessarily add that much bureaucratic hassle.

Bespoke Investment Group serves up this chart:

It seems as though while the high-grade bond market has responded to increased demand with massive amounts of new issuance, the high-yield market — which is still pretty much closed to new issuance — has responded with lower spreads. That’s a much healthier response: it means that writers of credit protection might have now emerged from technical insolvency, while total leverage continues to fall as debts are paid down and little new debt is issued.

High-yield markets were always going to take a while to come back in vogue, after blowing up twice (the first blow-up was the implosion of Drexel in the late 1980s). But the fact that there’s still demand for these instruments, as indicated by the chart, just goes to show how short memories are in this market.

Alex Veiga has lots of good datapoints on renting vs buying across the country. The main result is that buying is still more expensive than renting, but that the gap is narrowing sharply:

An Associated Press analysis of 45 metro areas finds the gap between the monthly mortgage payment on a median-priced home and the median rent has shrunk from $777 a month to just $221 in the past three years.

My feeling is that the gap is going to continue to narrow, until it becomes negative. And then I’m not sure what happens: if a large number of renters start buying, that of necessity is going to mean rents falling further.
But already, for the right people in the right place, some sales work out significantly cheaper than renting:

Jere Ross, an Air Force vehicle operator, and his wife recently bought a four-bedroom, 1 1/2-bath house in Zephyrhills, Fla., a Tampa suburb, for $86,500 rather than jump into another yearlong apartment lease.

Ross, 23, used a Veterans Administration loan, which doesn’t require a down payment, and got a 30-year mortgage at a fixed rate of 5.5 percent. His monthly payment comes to $700 a month, including property taxes and insurance — $110 less than he paid to rent an apartment nearly half the size.

The most interesting news from a blogger perspective, however, is that Dean Baker, one of the earliest and most vehement housing bears, has just shelled out $650,000 on a 5-bedroom house. Sounds like a good deal to me, but then again I live in Manhattan.

There’s an interesting debate in the comments to my post on high frequency trading about the widely-cited $20 billion figure for the profits attributable to HFT. In Jon Stokes’s Ars Technica article on the subject, he writes this:

At least two different groups, the TABB Group and FIXProtocol, estimate that high-frequency trading generated around $20 billion in profits for the financial sector last year. Goldman Sachs accounts for some 20 percent of global high-frequency trading activity, and the bank recently had a blow-out quarter in which its HFT-heavy trading operation racked up a record number of days where profits topped $100 million.

If Goldman Sachs alone can make $100 million a day from HFT, then $20 billion globally seems reasonable. But that’s a very big if, and I’d love to see how TABB Group and FIXProtocol arrived at their figures. (It would also be nice if HFT was clearly defined, which it isn’t, although I think most people agree that it’s a superset of flash trading.)

Elsewhere, Paul Wilmott (con) and Tyler Cowen (pro) join the debate. I’m more convinced by Wilmott than Cowen, although both make good points: Wilmott says that the complex algorithms driving HFT are prone to spectacular failure, while Cowen notes that “the correct judgment of efficiency occurs at the system-wide level, not at the level of the individual trading strategy”.

To that point, I’d be inclined to think that the massive volatility we’ve seen in the stock market of late is an indication that it’s not getting any more efficient, and therefore that it’s entirely plausible that HFT is hurting efficiency. Zero Hedge (now with its own domain name) puts the case in its strongest form:

Long-term buy and hold investors have already departed the market, as they have realized the traditional methods of approaching stock valuation such as fundamental and technical analysis have gone out of the window and been replaced by such arcane concepts as quant factors.

I think that’s overstating things, but even if it’s only true at the margin, it’s still a negative development.

At heart, the debate comes down to liquidity: is HFT a good thing or a bad thing, from a liquidity perspective? Cowen thinks it’s a good thing:

High-frequency trading brings more liquidity into the market. Call it “low quality liquidity” if you wish, but it still looks like net liquidity to me.

I don’t think that case is proven, although again the term “liquidity” is vague enough that it’s important to be able to define terms here. I think the important sense of liquidity is not narrow bid-offer spreads, but rather the ease of doing big deals at the market price, and/or the ability to buy or sell stock without moving the market. In that sense, HFT hurts, rather than helps: every time anybody tries to buy anything, the predatory algos try to pick them off. If that makespeople more reluctant to trade (“if you don’t like it, you can trade yourself at much lower frequencies”, says Cowen) then that ultimately hurts price discovery and transparency.

My bottom line is that HFT is a black box which very few people understand, and that one thing we’ve learned over the course of the crisis is that if there’s a financial innovation which doesn’t make a lot of sense and which is hard to understand, there’s a good chance there’s systemic risk there. Is it possible that HFT is entirely benign and just provides liquidity to the market? Yes. But that seems improbable to me.

The chart comes from the Center for Responsible Lending:

According to Congressional testimony from CRL director Keith Ernst, the 1.5 million homes which have already been lost to foreclosure are just the tip of the iceberg compared to the 13 million total foreclosures expected over the five years from end-08 to 2014. He adds:

Many industry interests object to any rules governing lending, threatening that they won’t make loans if the rules are too strong from their perspective. Yet it is the absence of substantive and effective regulation that has managed to lock down the flow of credit beyond anyone’s wildest dreams. For years, mortgage bankers told Congress that their subprime and exotic mortgages were not dangerous and regulators not only turned a blind eye, but aggressively preempted state laws that sought to rein in some of the worst subprime lending. Then, after the mortgages started to go bad, lenders advised that the damage would be easily contained. As the global economy lies battered today with credit markets flagging, any new request to operate without basic rules of the road is more than indefensible; it’s appalling.

He also has a relatively simple idea which I think would help a lot in getting servicers to actually implement the loan modifications they say they’re committed to doing:

One way to help with the various concerns just listed is to create a mediation program that would require servicers to sit down face-to-face with borrowers to evaluate them for loan modification eligibility. Similar programs are at work in several jurisdictions across the country, and they can be very helpful to ensure that homeowners get a fair hearing and that all decisions are made in a fair and transparent way.

I fear that Congress is beginning to get reform fatigue, after so many attempted solutions have failed. But that’s no reason to stop trying new things — in fact, it’s a good reason to try even harder.

Firefighter shoots a gun at a cyclist’s head to teach him a lesson about riding on the street in daylight?!

Does Rupert know he owns something called Dow Jones PR & Corporate Communications Solutions?

Great moments in democracy, California edition

How PNC credited Solomon Dwek with $25 million just on his own say-so

Sometimes, IT blackmail works on big investment banks

The upgrade is silly given yesterday’s price rise. But on the other hand, Barclays couldn’t keep it underweight.

Rose Art Museum overseers file lawsuit in effort to stop Brandeis/in-house looting