Felix Salmon

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Magazines vs digital startups
Felix Salmon
OCT 22, 2012 06:01 UTC
Simon Dumenco has a question: would you rather own a magazine, or a digital startup? He notes that some magazines are making real money these days, including Marie Claire, even as most digital startups fail. Old Media isn’t sexy, he says, but “a lot of magazines continue to be not only damn good businesses, but are doing better than ever.”
I don’t know about the better-than-ever thing: I’d need to see some numbers before I was persuaded on that front. At any given point in time, statistically speaking, some small set of magazines is going to be having a record year. But in aggregate, ad-supported magazines — which are the magazines Dumenco’s talking about — are ultimately in the business of attracting the attention of readers, and then selling that attention to advertisers. These days, there are more demands on our attention than ever, and they are more convenient than ever. If you have some time to while away , you can still read a magazine. Or, you can pick up your phone, and play Angry Birds, or check your email, or Twitter, or Facebook, or, well, I’m not telling you anything new here.
As a long-term investment, then, I’d be worried about owning a magazine, no matter how profitable it might be today. The fashion books will probably last longer than most, although as their audience spends less time with magazines and more time on Pinterest, inevitably they won’t be able to charge quite as much as they used to for that audience’s attention.
In terms of short-term cashflow, on the other hand, it’s no contest. Digital startups are designed to burn all of their revenues and then some: if you’re making money every quarter, you’re doing something wrong. So if, like Dumenco, you’re looking primarily at current profitability, the choice is clear: magazines will always win that fight, even unto their dying day.
If you’re the kind of owner who likes old-fashioned things like owning a profitable enterprise, then, there’s a decent case for sticking with ink on paper. If you own a digital startup, the chances are that it will lose money either until it goes bust, or until you sell it. But at that point, of course, you could make a fortune.
There are a handful of people who have turned digital media properties into steady money-spinners; Nick Denton springs to mind, and the reason that the Bleacher Report sold for $180 million is just that it was extremely profitable. But Dumenco’s talking about how the press likes to “treat venture capitalists like rock stars”, and venture capitalists aren’t in the business of cashing quarterly dividend checks. The big difference between VC owners and the rest of us is that VC owners expect their companies to lose money. That, in many ways, is their big competitive advantage: they’re sitting on enormous amounts of money entrusted to them by their investors, and it’s their job to spend that money in a no-holds-barred attempt to build the most valuable companies they can. Until, after five or ten years, they have that glorious exit.
What happens after the exit? Well, the company isn’t a startup any more, that’s for sure. And by that point the VC owners are on to their next thing. It’s not their job to build some great eternal franchise like, say, Vogue: they don’t have that kind of time horizon. In any case, the digital world moves so fast that there’s really no such thing as an eternal franchise any more.
The simple answer to Dumenco’s question, then, is this: what kind of owner are you? Do you mark your holdings to market, and reckon that you’ve made money if your company is worth more this year than it was worth last year? Or do you instead want to own a property which makes a lot of money, and which can continue to support your lavish lifestyle indefinitely, just by dint of the profits it makes? Similarly, do you like to take risks, or is it more important to you that the assets you own preserve their value over time?
But of course things aren’t as simple as that. Just look at Variety, which Reed Elsevier recently sold for $25 million, after previously turning down offers as high as $350 million. Or look at TV Guide, which went from being worth billions to being worth nothing at all over the course of two tumultuous decades. Newsweek is not alone in “going to zero”, as the financial types have it: Dumenco might be happily handing out awards to Food Network Magazine, but he sure isn’t giving out any gongs to Gourmet, which was unceremoniously shuttered in 2009, along with a magazine — Modern Bride — which was pretty much nothing but ads. And I myself worked for Condé Nast Portfolio for nearly all its two-year existence, during which time it managed to burn through something on the order of $100 million. Even digital startups don’t generally lose money that quickly.
The fact is that owning a magazine is a risky proposition. It might not be as risky as owning a single digital startup, but by the same token owning a stable of magazines could well be riskier than owning a portfolio of startups. Silicon Valley types love to moan about how difficult and expensive it is to hire good engineers these days, but the cost of running, printing, and distributing a national magazine dwarfs the costs of any startup not called Color. And what’s more, most of those costs are fixed, not variable. The economics of magazine publishing are ruthless: if your revenues exceed your costs, then any marginal money you bring in is almost pure profit. Which is why profitable magazines tend to be very profitable. But if your revenues are lower than your costs, it’s incredibly difficult to cut back, and you’re probably doomed.
My answer to Dumenco, then, is that given the choice, I’ll choose the startup. Just look at his winners, this year: they’re all worthy awardees, I’m sure, but there’s no one on the planet who could have predicted even a few years ago that Harper’s Bazaar, Allure, and Traditional Home were particularly well positioned for this kind of glory. There’s something scary and random about the magazine industry — and in the world of magazines, failure hurts, much more than it does in Silicon Valley, where it’s a veritable badge of pride.
I’m not saying that print is dead: it isn’t. That said, it’s definitely showing symptoms of old age and decline — and all those high-tech pill bottles labeled “mobile strategy” or “native advertising” aren’t going to change the underlying diagnosis. Venture capitalists don’t mind pouring money into digital startups, because the value of those startups, if things go well, will rise ten dollars for every dollar the VC spends. That’s an attractive business to chase. In the magazine industry, by contrast, it’s still very much possible to make profits. But how much is your magazine worth? If you make $10 million a year, but the value of your magazine is $40 million lower each year than it was the previous year, you’re not in a good position.
Moreover, what happens if you do fail? The failed magazine publisher has a dim future indeed; the failed digital-startup visionary is immediately showered with new opportunities.
I’m no great fan of VCs, while I’ve been a lover of magazines all my life. But the overwhelming majority of my media consumption these days is digital, and magazines in general are beginning to seem a bit slow and uninspired. I go to the airport newsstand because I know I’ll be asked to turn my electronic devices off — and even then, more often than not, I end up buying nothing.
All the magazines I’ve had over the years have had some kind of “wow” factor — something which made them seem a few steps ahead of wherever I happened to be. I still get that “wow” factor today — but I get it almost entirely online. The age of the magazine is coming to an end, slowly; the age of digital is only in its infancy. And that is why, Simon, the uncertainties of digital ultimately trump the storied legacy of print.
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When Taleb met Davies
Felix Salmon
OCT 19, 2012 21:59 UTC
This morning, Nassim Taleb returned to Twitter, posting one of the technical appendices to his new book. And immediately he got into a wonderfully wonky twitterfight/conversation with Daniel Davies.
I don’t pretend to understand all the subtleties of the conversation between the two, but, for Tom Foster, here’s an attempt. Davies has promised a Crooked Timber post on other parts of the appendix; I’m really looking forward to that.
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Counterparties: The Jetsons were Keynesians
Ben Walsh
OCT 19, 2012 21:53 UTC
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com
In the future, we’ll only work 15 hours a week. So said John Maynard Keynes in 1930. Keynes’s utopianism is nothing new – it’s been a common refrain since the Enlightenment, when French philosopher Condorcet pushed it to absurdity by suggesting that an infinite expansion in human height was just around the corner.
John Quiggin has a great, nuanced re-evaluation of Keynes’ prediction. He writes that “for the first time in history, our productive capacity is such that no one need be poor” and that it is possible to achieve Keynes’s vision by 2060. The biggest obstacle won’t be productivity, but social norms:
What is needed most is a change in attitudes to work that would make a guaranteed minimum income socially sustainable. The first is that the production of market goods and services needs to become pleasant enough that those doing it don’t mind supporting others who choose not to. The second is that the option of receiving a guaranteed minimum income does not become a trap, leading into the kind of idleness that produces despair.
According to Gary Becker and Robert Frank, there are two reasons why Keynes’ prediction won’t fully materialize. Per Becker, Keynes was too influenced by the economic model of the landed British gentry, whose wealth was based on land values uncorrelated to their own labor. Frank, meanwhile, thinks Keynes didn’t anticipate the ability of technology to create new goods that would attract our buying desire.
When Quiggin writes that “the culture of conspicuous consumption… is on the wane”, he misses how quickly what is coveted can be rebranded to appear inconspicious (see “artisanal”) and how rapidly what he views as outmoded consumption is being adopted in emerging markets. We have also created a new elite with asset-based wealth, and their stress levels, if not work hours, are low compared to their financial inferiors.
We may be closer to Keynes’ prediction than we’re willing to admit. Catherine Rampell writes that we have an inflation problem, and that the more we work, the worse it gets:  ”Americans overestimate how many hours they work in a typical week by about 5 to 10 percent, according to a Labor Department study, with the biggest exaggerators being people who work longer weeks.” Productivity can reach cult-like levels of devotion for some, but its benefits can be distributed unequally. There’s strong evidence that the productivity revolution of the last two decades hasn’t benefited workers much.
There are also many ways of thinking about productivity, and how to improve it. Bike commuting provides a good example:
Motorists may think they are saving time with their cars when it takes 20 minutes to drive to work, compared to 30 or 40 minutes on a bicycle. However, motorists might be spending one or two hours per day (or more) earning the money to cover the cost of their cars, while cyclists spend only a few minutes per day earning the money to pay for their bicycles.
Another way to think about productivity is to concentrate on unlocking the value of your own ideleness. Start viewing vacation as a patriotic duty: not only does it increase national national and personal productivity, it can help prevent fraud. — Ben Walsh
On to today’s links:
The day where the market fell by 22% – a firsthand account of 1987′s Black Monday – Art Cashin
Popular Myths
Who makes up the 47%? Mostly working Americans and the elderly – Timothy Noah
JPMorgan says the payroll tax cut is a goner, which could kill growth next year – WaPo
The Greg Smith Files
Greg Smith says he saw Lloyd Blankfein naked in the Goldman locker room – WSJ
Greg Smith “conned” the New York Times, says the New York Times’ Andrew Ross Sorkin – Zach Seward
“I gave Ted a look – he was smiling – and took my Donic out of its case.” – Dealbreaker
Central banks are the “only game in town”, may be doing more harm than good – Raghuram Rajan
Private equity firms are once again loading companies up with debt to pay themselves – WSJ
Why dividend recaps are private equity’s most inexcusable technique – Fortune
Gender income inequality by state – Slate
If you’re a private banker, business is only getting tougher – All About Alpha
Does the IMF ignore its own research on inequality? – Oxfam
New Normal
“Markets that rise on both good and bad news are not stable markets” – Nouriel Roubini
Now veterans are stuggling with student loans – Reuters
Seattle Times starts buying its own ads to promote candidates, gay marriage – Seattle Times
Financial Arcana
Morgan Stanley and a tale of two VaRs – Tracy Alloway
There’s a lot less “dark social” traffic than we think – Buzzfeed
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Eric Clapton, Greg Smith, and the art of constructing narratives
Felix Salmon
OCT 19, 2012 17:40 UTC
After a Gerhard Richter painting owned by Eric Clapton sold for an astonishing $34 million last week, Bloomberg’s Scott Reyburn called around for some expert reaction.
“People are still ready to pay top prices for great paintings,” Christophe Van de Weghe, a New York dealer, said in an interview. “While the market is selective, the Clapton provenance made a difference. It could have added as much as 20 percent to the price.”
The first part of the quote is something which should be banned from all reporting on the art market; it says nothing at all, in a market where the quality of a painting is determined, first and foremost, by how much money it sells for.
The second part of the quote, by contrast, just sets up the obvious “who’s the idiot?” question. It’s conceivable that the buyer is an idiot, for paying an extra $5 million just because the painting used to be owned by a rockstar. It’s also conceivable that Christophe Van de Weghe is an idiot, for thinking that Clapton provenance could be worth anything like that much. It couldn’t: the absolute maximum that Clapton provenance can be worth is $959,500 — the value, also set at auction, of his “Blackie” guitar. “This painting once hung on Eric Clapton’s wall” is never going to be worth more than “This guitar was played with every guitar great, at legendary concerts, and on multiple timeless albums.”
But taken as a whole, the quote is actually quite revealing — not of any particular idiocy, but rather of the incredibly strong human drive to turn any event, or sequence of events, into a narrative. Any time something surprising happens, the first question we ask is “why?” — and the way we try to answer that question is by telling stories. Stories are the way we make sense of the world, the lens through which we see it. And so if “Abstraktes Bild (809-4)” sold for more than Christophe Van de Weghe thought it was worth, then Christophe Van de Weghe is likely to come up with some kind of ex-post explanation of why that might be the case. Eventually, if he tells that story often enough, and builds a whole world-view around it, then it will become incredibly difficult to disabuse him of his notion.
Which brings me, naturally enough, to Greg Smith, and whether he’s a con man. Bill Cohan says that he is:
He conned the Times into thinking he was resigning from Goldman Sachs on principle, when he was really nothing more than a disgruntled and ambitious former employee who wanted a bigger bonus and a bigger title and got, and merited, neither.
Cohan says that Grand Central Publishing was conned, too, along with CBS’s “60 Minutes”. And Andrew Ross Sorkin agrees.
The question is not a new one — the day that the op-ed appeared, I said that “it’s much easier to see the disgruntled ex-employee here, quitting in a huff, than it is to see someone genuinely trying to do his part to reconstitute the Goldman Sachs of Gus Levy and John Whitehead.” But the accusation of conning the NYT is a serious one, and implies more than mere disgruntlement — it implies bad faith on the part of Smith. We now know that Smith was angling for a huge bonus and was underperforming at Goldman; his days there were numbered in any case, and it seems pretty obvious that his attack of the ethics was in large part Smith coming up with a way of feeling good about himself as he tore up his golden ticket.
Smith’s op-ed didn’t come out of thin air: it was the culmination of months of writing, “on airplanes, in airport lounges, in hotel rooms, and in my flat late at night”. Smith was literally constructing a narrative, in these writing sessions: he was building a new, non-squidian way of looking at the world, in large part because he surely knew that, one way or another, his days at Goldman were numbered. (He was already, at that point, the lowest-paid employee of the VPs in his training class.)
After Smith’s op-ed appeared and went viral, Smith was forced to own the narrative he had been constructing for a while; naturally, given a $1.5 million offer from Grand Central, he then turned that narrative into a book. Goldman is doing a good job of presenting a counter-narrative, and now those of us on the outside are being asked, essentially, to choose between two very different stories.
The con-man accusation, however, goes one further. It doesn’t just accept Goldman’s narrative and reject Smith’s; it says that even Smith believes the Goldman narrative, and is presenting himself as some kind of natural occupant of the moral high ground, despite the fact that he knows full well that in reality he’s little more than an underperforming money-grubber who never got the seven-figure bonus he desired.
I have very little time for Smith’s tale of being shocked that the equity derivatives desk was selling equity derivatives to clients, regardless of what the in-house view on European banks might be, or whether Goldman was advising European sovereigns at the time. Smith was part of the problem much more than he is part of any possible solution. But I don’t think he’s a con man, either. When you’ve devoted your entire career to Goldman Sachs and then you suddenly leave in a blaze of publicity, you tend to be carried along by events much more than you are controlling them.
Accusing Smith of being a con man gives him too much credit: it implies that he cynically orchestrated this whole thing, rather than simply striking a lucky chord on the NYT op-ed page one day. Smith wasn’t very good as a Goldman banker, and he didn’t suddenly find some secret reserve of Machiavellian cunning upon his departure from the bank. He’s just a human, like the rest of us, constructing a narrative lens through which he can view the world, and his career, in a non-self-loathing manner. That’s a perfectly natural thing to do, from his perspective — and it’s so normal and boring that there’s really no reason for the rest of us to read his book. Sorkin says it’s boring; I believe him on that front. I just don’t think it’s a con.
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Counterparties: Fragile China
Ben Walsh
OCT 18, 2012 22:16 UTC
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com
As goes China’s growth rate, so goes the world economy — slowly. In the third quarter, Chinese growth dropped to 7.4% from 7.6% in the third quarter, the NYT’s Bettina Wassener reports. That’s the slowest growth rate since 2009 and below the government’s target of 8%.
Despite companies like Nestlé and Nokia saying that China’s slowing demand hit their profitability, indicators like industrial production and retail sales did increase. It’s also worth remembering that the Chinese economy has the wind of a $157 billion infrastructure program at its back.
China’s official economic data is notoriously difficult to interpret. Kate MacKenzie offers a guide to help you sort through its intricacies. Just as we’ve seen recently in the US, some are quick to say that the fix is in. In this case, electricity consumption, railway freight, and loan volume suggest that growth is lower than officially reported.
China isn’t just an economic bellwether; it’s also a political football. Josh Barro labels the idea that the US should “get tough on China” one of the five worst ideas that both Barack Obama and Mitt Romney agree on. The value of China’s currency has risen 11% since 2009, and Paula Dwyer argues that calling China a currency manipulator decreases any leverage Washington might have over Beijing. Beyond that, labeling a country a currency manipulator is largely an empty gesture: “you ask them to stop it“, the Treasury Department investigates, and then there are negotiations over the exchange rate. But since the US and China are already engaged in these discussions, it’s unclear what the label itself adds.
Shen Dingli notes in Foreign Policy that “China won’t have as much to worry about with a President Romney… he and presumably Xi Jinping will likely shake hands and forget” the rhetoric of the campaign — much as Obama and Hu Jintao have largely done since 2008. Still, Mohamed El-Erian thinks Romney should mute his rhetoric before his potential inaguaration. — Ben Walsh
On to today’s links:
“PENDING LARRY QUOTE”: Google blame’s midday earnings release on financial printer – WSJ
Strangely Existential
The profound pessimism of America’s corporate executives – WSJ
Inside the rift between Vikram Pandit and Citi’s new board chairman – Dealbook
Newsweek is ending its print edition in 2013 – Huffington Post
When Newsweek dies, who will tell us if our babies are racist? – Vanity Fair
“The government has criminalized whistle-blowing” – Bloomberg
Why “we must deliberately set financial forest fires” at random – Interfluidity
White Collar Punishment
Rajat Gupta would prefer to join the Peace Corps instead of going to prison for insider trading – Dealbook
The Greg Smith Files
Goldman: Greg Smith quit after he was denied a raise to a salary of more than $1 million – Bloomberg
Good Timing
Mega Millions Jackpot winner: My girlfriend just dumped me – Boston Globe
Possibly Useless Data
How much time do you spend online? The failures of self-reporting – Noah Brier
Equity is the new cash (again) – PandoDaily
The moral hazard of too big to fail, pension edition – Asset International CIO
Big Numbers
Italian corruption, the 76th largest economy in the world – WaPo
True Truisms
Breaking: “The banking industry must work much harder” to restore its reputation – American Banker
TOP 10-Q
Morgan Stanley catching on to this whole fixed income trading thing – Reuters

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Why keep Newsweek on life support?
Felix Salmon
OCT 18, 2012 14:28 UTC
It’s hard to make money in journalism, and even harder to make money in print journalism. But here’s what I don’t understand: invariably, every time a print publication fails, it announces that it’s not going to die, it’s just going to “transition to an all-digital format”. Newsweek, of course, is no exception. But this is supposed to be the clear-eyed, hard-hearted world of Barry Diller:
If doesn’t work out? Move on! “Sell it, write it off, go on to the next thing,” he says.
Once upon a time, Newsweek was a license to print money; from here on in, it will be a drain and a distraction. Merging it into the Daily Beast never made a huge amount of sense, and now it’s being de-merged: instead, its journalism “will be supported by paid subscription and will be available through e-readers for both tablet and the Web”. Some of it, I guess, will be syndicated to the Daily Beast.
The chances that Newsweek will succeed as a digital-only subscription-based publication are exactly zero. If you had a team of first-rate technologists and start from scratch trying to create such a beast, you’d end up with something pretty much like Huffington — which lasted exactly five issues before bowing to the inevitable and going free. There’s no demand for a digital Newsweek, and there’s no reason, either, to carve off some chunk of the NewsBeast newsroom, call it “Newsweek”, and put its journalism onto a platform where almost nobody is going to read it.
What you’re seeing here is, basically, path-dependency. If Barry Diller were given the Newsweek brand on a plate, he would never invest in turning it into some kind of subscription-based digital-only operation. The opportunity costs alone are too big: the same money, invested in the Daily Beast or in some other property with a chance of succeeding in an increasingly social world, would surely have a much higher probability of generating positive returns.
Instead, Newsweek is hitching its fortunes to a motley group of e-readers (Zinio!), all of which are based on pretty clunky old publishing technology, and none of which have any ability to take advantage of the social web. Magazines are dying, and millions of people are buying tablets and e-readers: that much is true. But I simply don’t believe that Barry Diller and Tina Brown really think, in their heart of hearts, that they have the unique ability to build the world’s first successful subscription-based tablet-first publication where so many before them have failed. Especially not when that publication is forced to bear the legacy “Newsweek” name.
Brown, remember, killed off Newsweek.com as soon as she took control of the magazine: she decided that while the brand had some kind of meaning in print, the digital future belonged to the Daily Beast. With today’s announcement, she seems to be attempting some kind of freemium strategy: give away the Beast for free, and then charge for the, er, premium content in Newsweek. The problem being, of course, that the whole point of merging Newsweek with the Daily Beast was that in an online world where nothing is more than a click away, Newsweek content isn’t more valuable than anything else. That’s certainly not going to change after today’s layoffs.
All of which is to say that today’s announcement (the “all-digital” bit, that is, not the killing-off-print bit, which was simply inevitable) is basically an exercise in face-saving. When it comes to the optics, it’s always more respectable, more techno-visionary, to do something new and digital than it is to simply close down and write off a failed acquisition. Newsweek’s journalists have already been incorporated into the Daily Beast newsroom: shutting down the printing presses and moving on would simply be recognizing the reality of a world where neither Sidney Harmon nor his family wants to subsidize the magazine any more.
Instead, Newsweek is going to have to suffer a painful and lingering death. There’s no way that first-rate journalists are going to have any particular desire to write for this doomed and little-read publication, especially if their work is stuck behind a paywall. At the margin, it will certainly be better to work for the Beast than for Newsweek: the supposedly “premium” arm will in reality be the bit which smells like old age and irrelevance. It’s not going to work. So, really. Why even bother?
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Felix Salmon smackdown watch, corporate-governance edition
Felix Salmon
OCT 18, 2012 06:10 UTC
Justin Fox is not a fan of the video where I take the Goldman Sachs board to task. Yes, he says, the Goldman board is packed with insiders and fails just about every rule of corporate governance — but so what?
There’s little or no evidence that the modern criteria for good corporate governance actually lead to better-governed corporations. What’s generally seen as the most important good-governance move of them all, pushing insiders off boards in favor of independent directors, may actually hurt performance. At least, that’s my reading of the voluminous academic research on the topic.
What’s more, says Justin, I’m wrong about the idea that the job of the board is to represent shareholders and to keep management under control.
As Cornell Law School professor Lynn Stout explains here, the board is actually responsible to the corporation, not its shareholders. And no, the shareholders don’t own the corporation — they own securities that give them a not very well-defined stake in its earnings, and the freedom to flee with no responsibility for the corporation’s liabilities if things go pear-shaped…
In the case of financial firms like Goldman Sachs, shareholders contribute only a small portion of the balance sheet and lenders (and taxpayers) are in many ways truer owners. Multiple studies have shown that it was financial firms with the most shareholder-friendly governance and executive compensation schemes that got into the most trouble during the financial crisis. That only makes sense — shareholders pocket the gains if big risk-taking pays off, but they aren’t on the hook when a bank collapses. Goldman’s relatively smooth sail through the crisis was in part the product of a governance culture that doesn’t put the short-term interests of shareholders first.
So who’s right, me or Justin? Easy: it’s Justin, completely, on this one. My video was a lazy recapitulation of this article by Eleanor Bloxham, and the opportunity to indulge in a bit of squid-bashing was just too juicy to resist. If Goldman Sachs fired its current bunch of muppets and replaced them with, say, the Citi board, or in any case a group of vertebrates, it’s not entirely obvious whether or how the bank would be improved.
Justin says that “a truly effective board” is “one full of committed, expert members who generally have a constructive, supportive relationship with management but are curious enough to keep digging into the company’s business and tough enough to take a stand when management begins to lose the plot”. Which sounds great, but risks being tautological: as he says, on paper, the HP board should fit the bill, and it’s been a complete and utter disaster. And in general, while it’s easy to spot bad boards, like HP’s, and utterly ineffective boards, like Goldman’s, it’s hard to point to boards which are particularly good. Often, good boards are like a good movie soundtrack: if the job is done well, it’s not noticed at all.
What’s more, great leaders neither want nor need great boards: they just want people who’ll get out of the way. After all, when boards do take matters into their own hands, they end up doing things like firing Steve Jobs from Apple. More generally, we’ve reached a level of CEO turnover these days which is clearly excessive: boards seem to be making up for their day-to-day spinelessness by panicking every so often and overreacting by firing the boss. Which rarely does much good.
One of the problems is that the job of directors is not well defined. Many of them think it has something to do with increasing the share price as fast as possible; almost none of them have clear roles like representing unions. In general, it seems, directorships are a nice prize you get for being Important; they can pay very well, but most of the time they end up going to people who don’t need the money. The real problem is not with any individual board but rather with the whole lot of them, as a group: they’re an insular group, made up largely of CEOs and former CEOs, and as such they tend to sympathize with senior management and pay those executives much more than they’re worth.
In the judicial system, juries are made up of randomly-picked members of the general public — and the jury system tends to work surprisingly well. I’m not saying that corporate boards should be chosen the same way. But I do think that the universe of potential board members is, as a rule, far too small. You want real diversity? Don’t put Dambisa Moyo on the board of Barclays. Put Cathy O’Neil on the board of Goldman. That would be awesome.
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Counterparties: This time is entirely normal
Ryan McCarthy
OCT 17, 2012 21:49 UTC
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com
How you feel about the American economy right now depends on your answer to one question: are we recovering from a recession or from a financial crisis?
Renowned academics Kenneth Rogoff and Carmen Reinhart aren’t happy with the way a group of economists associated with the Romney campaign are answering this question. “We we have to take issue with gross misinterpretations of the facts,” they write in a Bloomberg op-ed, which summarizes their new white paper (PDF here).
At issue is just how strong America’s recovery has been since 2007. That answer, as Ezra Klein put it, begs the question “compared to what?” Reinhart and Rogoff take aim at Romney advisers Kevin Hassett, Glenn Hubbard and John Taylor, who claim that America’s recovery has been subpar compared those following typical recessions. In a campaign white paper, Hubbard, Taylor and Hassett write: “The historical record is clear: our economy usually recovers quickly from recessions, and the more severe the recession, the faster the catch-up growth”.  
A recession, however, is not the same as a crisis. Reinhart and Rogoff differentiate between a systemic crisis, which is centered on a country’s financial system, and the general ups and downs of the business cycle. (Economies generally recover  relatively quickly from the latter). Nine months before Lehman collapsed, Reinhart and Rogoff write, the US was already displaying signs of a systemic financial crisis, including “a real estate bubble, high levels of debt, chronically large current-account deficits and signs of slowing economic activity”.   
So how does the US recovery compare to other recoveries from big, systemic crises? First, Reinhart and Rogoff argue that recoveries from financial crises are characteristically slow — this was covered in their seminal 2009 book “This Time is Different“. Real per capita GDP took 11 years to recover after the Great Depression; it took five years to recover after the Panic of 1907 and the crises in the late 19th century. We’re four years into the recovery right now, which means that although we still aren’t back to pre-crisis levels, we’re not doing worse than we did before.
Second, they add that US output per capita and employment are doing better than average compared to other countries that suffered recent financial crises. Compared to the periods after other US financial crises, they write, “the recent recovery looks positively brisk”. Paul Krugman agrees with Reinhart and Rogoff’s complaints, saying that the “proposition that financial crises change macroeconomic outcomes is surely one of the big things we’ve learned in recent years”.
A recent study expands on Reinhart and Rogoff’s argument. “This time actually is different – and worse – in one very clear and measurable dimension”, Mortiz Schularick and Alan Taylor write. Excess credit, it turns out, has slowed our economic recovery considerably. Compared to other historical credit busts, they argue, “the US has done quite well.”   
But, could the US recovery have been even quicker? Ezra Klein spoke to Carmen Reinhart, who said: ““I have to wonder whether nationalizing banks during a crisis is the cleanest and swiftest way out. Anything that delays the adjustment, that delays taking the hit, delays the recovery”.  Ryan McCarthy
On to today’s links:
Housing permits and starts are surging — thank Ben Bernanke – Matt Yglesias
Why neither candidate wants to talk about the housing market – WSJ
A look at the new headquarters for the world’s largest hedge fund – Stamford Advocate
High-speed traders are now outracing profits – Businessweek
Why there’s less high frequency trading – Felix
Citigroup’s new CEO likes to quote Spiderman – Bloomberg
What Could Possibly Go Wrong
It’s like “Mint.com for kindergartners” – Marketwatch
Negative correlation of the day: stock prices and food stamps – Tim Fernholz
New Normal
The great American middle class paycut – WaPo
A growing body of research suggests inequality hurts economic growth – Annie Lowrey
Big Ideas
Mapping the potential for solar panels on every roof – Atlantic Cities
Throwing out insiders won’t fix corporate boards – Justin Fox

Social Security keeps 21 million Americans out of poverty – Center on Budget and Policy Priorities
How to (almost) understand Chinese economic data – FT Alpaville
It’s Academic
Richard Posner on taxation, wealth and luck – Becker-Posner Blog
Small Victories
BofA ekes out a profit after $1.6 billion in litigation expenses – Dealbook
France’s president is pushing for a ban on homework – WaPo
Why more disclosure has led to less information – Aswath Damodaran
In Case You’re Wondering
The world economy is getting sicker, and the political class is to blame – Clive Crook
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The problems with measuring traffic congestion
Felix Salmon
OCT 17, 2012 18:25 UTC
Back in July, I gave a cautious welcome to TomTom’s congestion indices. The amount of congestion in any given city at any given time does have a certain randomness to it, but more data, and more public data, is always a good thing.
Or so I thought. I never did end up having the conversation with TomTom that I expected back in July, but I did finally speak to TomTom’s Nick Cohn last week, after they released their data for the second quarter of 2012.
In the first quarter, Edmonton saw a surprisingly large drop in congestion; in the second quarter it was New York which saw a surprisingly large rise in congestion. During the evening peak, the New York congestion index was 41% in the first quarter; that rose to 54% in the second quarter, helping the overall New York index rise from 17% to 25%. (The percentages are meant to give an indication of how much longer a journey will take, compared to the same journey in free-flowing traffic.) As a result, New York is now in 8th place on the league table of the most congested North American cities; it was only in 15th place last quarter, out of 26 cities overall.
So what’s going on here? A congestion index like this one serves two purposes. The first is to compare a city to itself, over time: is congestion getting better, or is it getting worse? The second is to compare cities to each other: is congestion worse in Washington than it is in Boston?
And it turns out that this congestion index, at least, is pretty useless on both fronts. First of all there are measurement issues, of course. Cohn explained that when putting together the index, TomTom only looks at road segments where they have a large sample size of traffic speeds — big enough to give “statistically sound results”. And later on a spokeswoman explained that TomTom’s speed measurements turn out to validate quite nicely with other speed measures, from things like induction loop systems.
But measuring speed on individual road segments is only the first step in measuring congestion. The next step is weighting the different road segments, giving most weight to the most-travelled bits of road. And that’s where TomTom data is much less reliable. After all, on any given stretch of road, cars generally travel at pretty much the same speed. You can take a relatively small sample of all cars, and get a very accurate number for what speeds are in that place. But if you want to work out where a city’s drivers drive the most and drive the least, then you need a much larger and much more representative sample.
And this is where TomTom faces its first problem: its sample is far from representative. Most of it comes from people who have installed TomTom navigation devices in their cars, and there’s no reason to believe those people drive in the same way that a city’s drivers as a whole do. Worse, most of the time TomTom only gets data when the devices are turned on and being used. Which means that if you have a standard school run, say, and occasionally have to make a long journey to the other side of town, then there’s a good chance that TomTom will ignore all your school runs and think that most of your driving is those long journeys. (TomTom is trying to encourage people to have their devices on all the time they drive, but I don’t think it’s had much success on that front.)
In general, TomTom is always going to get data weighted heavily towards people who don’t know where they’re going — out-of-towners, or drivers headed to unfamiliar destinations. That’s in stark contrast to the majority of city traffic, which is people who know exactly where they’re going, and what the best ways of getting there are. There might in theory be better routes for those people, and TomTom might even be able to identify those routes. But for the time being, I don’t think we can really trust TomTom to know where a city as a whole is driving the most.
I asked Cohn about the kind of large intra-city moves that we’ve seen in cities like Edmonton and New York. Did they reflect genuine changes in congestion, I asked, or were they just the natural variation that one sees in many datasets? Specifically, when TomTom comes out with a specific-sounding number like 25% for New York’s congestion rate, how accurate is that number? What are the error bars on it?
Cohn promised me that he’d get back to me on that, and today I got an email, saying that “unfortunately, we cannot provide you with a specific number”:
The Congestion Index is calculated at the road segment level, using the TomTom GPS speed measurements available for each road segment within each given time frame. As the sample size varies by road segment, time period and geography, it would be impossible to calculate overarching confidence levels for the Congestion Index as a whole.
It seems to me that if you don’t know what your confidence levels are, your index is pretty much useless. All of the cities on the list are in a pretty narrow range: the worst congestion is in Los Angeles, on 34%, while the least is in Phoenix, on 12%. If the error bars on those numbers were, say, plus-or-minus 10 percentage points, then the whole list becomes largely meaningless.
And trying to compare congestion between cities is even more pointless than trying to measure changes in congestion within a single city, over time. As JCortright noted in my comments in July, measuring congestion on a percentage basis tends to make smaller, denser cities seem worse than they actually are. If you have a 45-minute commute in Atlanta, for instance, as measured on a congestion-free basis, and you’re stuck in traffic for an extra half an hour, then that’s 67% congestion. Whereas if you’re stuck in traffic for 15 minutes on a drive that would take you 15 minutes without traffic, that’s 100% congestion.
Cohn told me that TomTom has no measure of average trip length, so he can’t adjust for that effect. And even he admitted that “comparing Istanbul to Stuttgart is a little strange”, even though that’s exactly what TomTom does, in its European league table. (Istanbul, apparently, has congestion of 57%, with an evening peak of 125%, while Stuttgart has congestion of 33%, with an evening peak of 70%.)
All of which says to me that the whole idea of congestion charging has a very big problem at its core. There’s no point in implementing a congestion charge unless you think it’s going to do some good — unless, that is, you think that it’s going to decrease congestion. But measuring congestion turns out to be incredibly difficult — and it’s far from clear that anybody can actually do it in a way that random natural fluctuations and errors won’t dwarf the real-world effects of a charge.
When London increases its congestion charge, then, or when New York pedestrianizes Broadway in Times Square, or when any city does anything with the stated aim of helping traffic flow, don’t be disappointed if the city can’t come out and say with specificity whether the plan worked or not. Congestion is a tough animal to pin down and measure, and while it’s possible to be reasonably accurate if you’re just looking at a single intersection or stretch of road, it’s basically impossible to be accurate — or even particularly useful — if you’re looking at a city as a whole.
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Give Corbat some time
Felix Salmon
OCT 17, 2012 15:08 UTC
Peter Eavis has the most dramatic of the second-day pieces on the shake-up at the top of Citigroup:
Some analysts believe Mr. Corbat could open the door to more radical moves at Citigroup…
The burning question is whether he has the resolve to get out of businesses that the bank doesn’t excel in, even if the near-term costs are high… In particular, some investors would like Citigroup to be quicker about selling assets in Citi Holdings, the bad bank that Citigroup set up for its unwanted and loss-making assets. Mr. Corbat ran Citi Holdings until the end of last year. Faster sales might mean Citigroup would not get the best price possible for the $171 billion in assets in Citi Holdings. That could lead to higher losses when sales took place. But selling assets more quickly could free up the capital the bank holds there…
Citigroup’s investment bank is the other obvious target for shrinkage. Right now, it is enormous… The unit is also seen as a black box, something Mr. Corbat will have to tackle if he wants to regain investors’ confidence, analysts say.
The quandary for Mr. Corbat may be that, if he increases disclosure, investors may balk at any alarming numbers and dump the stock. Even so, he may have to risk that outcome.
This is an intriguing idea, but it’s not going to happen, for various reasons. Firstly, if the board wanted a radical slash-and-burn artist, they would never have hired Corbat, a hugely competent Citi lifer. Corbat has shown very clearly how he likes to deal with the unwanted legacy assets at Citi Holdings: after all, he ran it for most of its existence. And he’s treating those assets much like Treasury has treated its stakes in Citi or AIG or General Motors: he’d love to sell them, but only if he can get a good price.
Secondly, it’s very hard to free up capital when you’re selling assets at a loss. It’s possible, if you sell at only a small discount. But any loss on the deal has to come straight out of the capital you’re supposedly freeing up — and it can easily eat up all of that capital entirely, and then some.
As for Citi’s investment bank, Eavis is absolutely right that with $900 billion in assets, it’s far too big. He’s also right that one reason Citi’s stock trades at such a large discount is that investors really have no idea what those assets comprise, or why the investment bank’s balance sheet needs to be so bloated. And in fact there’s a good chance that if Corbat reckons that Citi needs to get smaller, the investment bank is where he’ll start. He’s already done a good job at shrinking Citi Holdings, and Citi’s global commercial bank is the one core asset that should be encouraged to grow, rather get smaller. Which leaves all those traders and derivatives dealers and the like: Corbat knows how dangerous they are, having had a front-row seat for the Salomon Brothers bond-trading scandal.
What’s more, it’s pretty clear who’s really in charge of setting the strategy at Citigroup these days, and it’s not Mike Corbat, the man hired to implement it. Rather, it’s the chairman, Michael O’Neill, a commercial banker who would surely be much happier seeing traders getting axed than he would with branch closures or the like. In choosing Corbat, he’s chosen someone who can execute on the strategy which already exists, rather than some charismatic leader who promises to lead Citi to a land of high ROE and much-reduced balance sheet.
That makes sense: there’s a lot more competition in the lean-and-mean space than there is in the too-big-to-fail space. Investors don’t particularly like big banks these days, but Citi would be a miserable failure if it were to shrink: it doesn’t have a scrappy mindset, and it never will. Corbat has been on hundreds of sales calls, all over the world, talking about the strength of Citi’s franchise, how it has been committed to [insert country name here] for over a hundred years, etc, etc. Citi needs to stay big for much the same reason that banks used to build their branches out of heavy stone: the perception of weightiness and permanence is exactly what its clients are looking for — especially in the turbulent world of emerging markets, where most of Citi’s future growth is going to come from.
It seems to me that O’Neill knows exactly what he wants, that Pandit tried to deliver but wasn’t actually a very good manager, and that therefore O’Neill fired Pandit and replaced him with Corbat, in the hopes that Corbat can succeed where Pandit never really got traction.
All of which boils down to a very simple question: is Citigroup small enough to manage? The last time that the Citigroup’s senior executives were clearly in control of the company was during the Sandy-and-Jamie years. Ever since Sandy Weil fired Jamie Dimon in 1998, the top brass at 399 Park Avenue have had relatively little ability to steer this particular supertanker. Sometimes they manage to avoid a huge obstacle; sometimes they don’t. But in general, the best they have been able to hope for has been not-going-bust.
O’Neill thinks that he sees a route through the obstacles, at the end of which is a bright open ocean of prosperity and profitability. But he’s well aware that steering Citigroup is orders of magnitude more difficult than slicing off bits and pieces of Bank of Hawaii. And so he’s promoted the best skipper he knows, Mike Corbat, to take the helm.
Corbat isn’t viewed within Citi with the same mistrust that greeted Pandit — or even Chuck Prince, for that matter. For one thing, he has a proven history of actually getting things done at the bank, which is more than either of his predecessors had. That takes no little skill, given that Citigroup is one of the banking world’s most labyrinthine bureaucracies, complete with quarreling dukedoms in various different countries, regions, and asset classes. For instance, Eavis suggests that Corbat might take a leaf out of Santander’s book, and sell a minority stake in its very successful Mexican subsidiary. Corbat’s on-the-record response to that suggestion, on the call yesterday, was “I’ll look at those things and see what the numbers say”. But in reality, there’s no way that Corbat is messing around with Banamex unless and until he can get Manuel Medina-Mora on board — and that’s not going to happen for a while, given that Medina-Mora is probably a little bit sore that he didn’t get the CEO job himself.
As a result, if Corbat is going to succeed in executing on O’Neill’s vision, he’s not going to be able to rush things. The trick is to move with vision and purpose in the right direction, rather than trying to pursue some kind of magical overnight transformation. You can’t transform a company as large and old as Citigroup in a short amount of time: it’s simply not possible, and Corbat would be foolish to try.
Eavis says that “Corbat may have to impress quickly, given the pent-up frustrations among shareholders”. But the fact is that if he tries, he’ll fall flat on his face — and he knows it. Shareholders, and O’Neill, are going to have to be patient here. Given time, Corbat may (or may not) be able to turn Citigroup into a coherent and efficient global banking franchise. But if he feels the need “to impress quickly”, then failure is certain.
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Counterparties: Pandefenestration
Ben Walsh
OCT 16, 2012 21:47 UTC
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Just one day after his company reported third quarter earnings, Vikram Pandit is unexpectedly out as Citigroup’s CEO. Pandit and the board don’t agree on why. Pandit claims that resigning was his decision and that he “been thinking about this for a long time”. The board sees things differently. It reportedly ousted Pandit due to Citi’s subpar financial performance and his “poor execution”.
Pandit is being replaced, effective immediately, by Michael Corbat, the man who until yesterday was responsible for Citi’s business in Europe, the Middle East, and Africa. As recently as August, such a change seemed unlikely. Pandit “told colleagues that he intends to stay [on as CEO] for several years”, according to Suzanne Kapner at the WSJ. Even then, however, there was increasing pressure from the board of directors to outline succession plans and groom his potential replacements.
Citi’s stock is down 90% since Pandit took over as CEO in late 2007, and has lagged all its rivals. More broadly, as the FT’s Tracy Alloway points out, Citi’s share price over Pandit’s tenure is worse than every other financial company in the S&P 500, save AIG. And beyond financial failings, Pandit also had the issue of “regulatory baggage” that he could never seem to shake.
In the past few months, there have been even more setbacks. In April, Citi failed the Fed’s stress test and had its $8 billion share buyback program rejected. In September, the bank was forced to take a $3 billion loss on the sale of its Smith Barney stake to Morgan Stanley. Citi also failed to spot on the surge in housing that drove JP Morgan and Well Fargo’s results. That lead to yesterday’s earnings, which Matt Levine characterized described as an “excellent 88% decrease in profit”.
Pandit worked for $1 in 2009 and 2010, but was awarded a $15 million pay package for  2011. Shareholders, in a move Credit Agricole’s Mike Mayo called a “milestone for corporate America… a wake-up call”, rejected it. That vote, however, was non-binding and Pandit’s pay package was essentially unaltered. In total, Pandit made $261 million while at Citi, including the $165 million he was paid when Citi bought out his hedge fund in 2007 to bring him on as CEO. In 2008, Citi shut down the fund and took a $200 million loss on its acquisition. Now, it appears Pandit isn’t in line to receive any severance pay, but he might get to use the corporate jet at a discounted rate.
It’s unlikely that the board and Pandit will ever get on the same page about who dumped whom. Regardless, both Felix and Dealbook’s Steven Davidoff think Pandit’s removal is a sign that Citi’s board, led by chairman Michael O’Neill, has found its spine. Now it’s up to Corbat to show, in the wake of large missteps by Sandy Weil, Chuck Prince, and Pandit, that Citigroup can too be managed. — Ben Walsh
On to today’s links:
Mortgage lenders could be exempt from certain lawsuits for writing high-quality mortgages – WSJ
Reinhart and Rogoff would like people to stop misusing their work – Barry Ritholtz
Long Reads
Romney’s Bain helped Philip Morris find a new generation of “replacement smokers” – Huffington Post
Goldman Sachs’s revenue more than doubles in the third quarter – FT Alpaville
Goldman Sachs’s full 3Q earnings release – Goldman Sachs
Damien Hirst: butterfly-murdering monster – Telegraph
Strangely Existential
The shame and social estrangement of using a Blackberry – NYT
Vice Chairman at Deutsche Bank said he used bath salts before violent encounter with LAPD – Bloomberg
“The ladies who serve and prepare the food at Currier House all have crushes on senior Mike Corbat” – Harvard Crimson
New Normal
Japan is poised to overtake China as America’s top lender – Businessweek
If foreign policy nerds wrote the questions for tonight’s debate – Foreign Policy
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When bank boards flex their muscles
Felix Salmon
OCT 16, 2012 13:30 UTC
Vikram Pandit’s resignation might have come as a surprise to just about everybody, but the bank’s website seems to be fully updated: go to the board of directors page, and there’s Mike Corbat, CEO.
A couple of things are worth noting about that page. Firstly, Corbat is only CEO: he isn’t chairman as well. That would be Michael O’Neill, dubbed the “hands-on chairman” by the WSJ, who seems to be throwing his newfound weight around just seven months after taking on on the job. The rest of the board is reasonably impressive too: a good mix of independent thinkers from many walks of life. None of them can reasonably be considered to have been beholden to Pandit — and certainly none of them is beholden to Corbat.
That’s exactly as it should be. The CEO’s job is to run the bank, to answer to the board, and to get fired if he doesn’t perform. Which is what seems to have happened with Pandit.
Meanwhile, further downtown, the exact opposite is happening. Where Citi’s powerful board acted decisively after yet another set of weak results, Goldman’s powerless board is simply sitting back and watching their bank report a much more solid set of earnings. Just how powerless are they? Let me answer that for you:
Every day, on average, investors buy about $1.2 billion of Citigroup shares, and about $500 million of Goldman shares. Without that steady buy-side flow, the stocks — and the banks — would collapse. And while investors care about earnings first and foremost, they also want to know that they’ll ultimately receive those earnings, rather than just seeing them disappear into the pockets of management, or be wasted on silly acquisitions. Governance matters. And on that front, if on few others, Citi can credibly claim to be leagues ahead of Goldman.
As for Corbat, I have no idea how he will perform as CEO. But I can say that the choice of Corbat is clearly a vote for Citi’s global franchise. If Corbat cuts back anywhere, it will be domestically, in the US, rather than in the faster-growing regions of the world where the Citi brand remains strong. Much was made of the fact that Pandit was an Indian leading a big US bank, but in fact Corbat has more international banking experience than Pandit had. He’s also more wonk than visionary. Which is probably a good thing.
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Padraic Fallon, 1946-2012
Felix Salmon
OCT 16, 2012 01:21 UTC
Padraic Fallon died on Saturday night, age 66. The news came as a shock to me, not least because I was pretty sure that Fallon was 66 years old back in 1995, when I first met him. Euromoney, naturally, is the place to turn for a characteristically warm and spicy remembrance, but you can be sure that across London — and large swaths of Ireland, too — there are thousands more such remembrances being retold tonight, always with an alcoholic accompaniment.
It’s rare to find an English financial journalist who hasn’t intersected with Padraic at some point. (He’s one of those men known universally by their first names; one of the pleasures of working for Euromoney was listening to bankers mangle the pronunciation of “Padraic” while affecting a close friendship with the man.) Thousands of us went through the legendary Euromoney Publications graduate-trainee scheme, where the first thing we were told to do was to read his famous, and quite intimidating, style guide. And then, for those of us who worked on Euromoney magazine, there were the occasional editorial meetings chaired by the man himself in the company boardroom. The first words Padraic ever spoke to me were at one of those meetings. I remember those words to this day: “Are you wearing an earring??”
I realize now — and only now — that Padraic was still in his 40s at the time, but the cigar-chomping chairman was already a legend. Everybody who read his style guide knew that he was a fantastic writer, with a copy-editor’s eye for detail. But then he was so much more: a fantastic reporter, for one. And a fantastic editor. And an excellent publisher, who could sell and charm (or charm and sell) as well as anyone. And a highly-aggressive businessman, to boot, who always paid himself handsomely: last year alone he made about $8.5 million.
On top of that, Padraic was never a man shy about his opinions: one of the ways that he built Euromoney into a powerhouse in the first place was by being unapologetic about being a cheerleader for the then-nascent Euromarkets — basically, the market for offshore dollars, which weren’t taxed by the U.S. government. While at the same time relishing the scoop and the scandal as much as any journalist.
The opinionated founder-editor-publisher, of course, is the kind of person we see a lot of these days: think Mike Arrington, or Nick Denton, or Josh Marshall, or many others. In that sense it’s a very modern role, but it’s also as old as publishing itself, and Padraic was one of the masters. He also understood, long before the World Wide Web was even invented, the power of having multiple platforms: he was early to branch out into conferences, book publishing, and like. He also, I believe, was responsible for the Euromoney Awards: if you haven’t heard of Euromoney magazine, you’ve certainly seen the awards logo appear in the corner of hundreds of bank advertisements all over the world.
Padraic could make mistakes: his ideology and his ambition led him to the board of Allied Irish Bank, where he served from 1998 to 2007, overseeing the very years where the bank overstretched itself massively and then ultimately became insolvent. He also asked me to design a new publication he had decided to put out, called MTNWeek. But to err is human, and in many ways the most attractive thing about Padraic was just how human he was.
Every so often I’m asked how I ended up doing what I do; ultimately, the man responsible for my entire career, such as it is, was Padraic Fallon. He pretty much invented the idea that journalists could have huge success writing about bonds for a living, and he instilled in me a deep understanding of the bond market (and its corollary, a deep mistrust of the stock market) which served me very well indeed, first when I was writing about sovereign debt restructurings in the early 2000s, and then when I started blogging the financial crisis.
Padraic was very old-fashioned in many ways: the cigars, the dinners at the Savoy, the chauffeur-driven car. But he was also a great believer in modernity and change, and in particular the ability of small groups of badly-paid twenty-somethings to out-work, out-report, and generally beat much larger groups of much more well remunerated veteran reporters. Padraic gave thousands of us hugely valuable transferrable skills, as well as the idea the bond market is always the most important market, anywhere. He was surely right about that.
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Counterparties: Economists who did good
Ben Walsh
OCT 15, 2012 22:20 UTC
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com
Lloyd Shapley and Alvin Roth have won the Nobel Prize in economics “for the theory of stable allocations and the practice of market design”. To put it differently, they won the Nobel for their work on “matching markets” through investigations into marriage, or dwarf tossing, or illegal horse meat.
Alex Tabarrok of Marginal Revolution drills down into exactly why matching markets matter to our everyday lives: “Matching is a fundamental property of many markets and social institutions. Jobs are matched to workers, husbands to wives, doctors to hospitals, kidneys to patients.”
As Josh Gans explains in the best post on Shapley and Roth’s work, those are markets defined by their lack of prices. Shapley, a professor emeritus in the economics department at UCLA, is best known for creating, along with D. Gale Johnson, the Gale-Shapley algorithm that creates “stable allocations when two groups of people are to be matched with one another”.
This matching has big impact in the real world: Roth, a Harvard professor who is recently accepted a new position at Stanford, is most heralded for his development and implementation of Shapley’s theory in kidney donation waiting list policies. Roth’s key insight was figure out a practical way of expanding matching beyond pairs. Here’s Tabarrok again:
Your spouse is dying of kidney disease. You want to give her one of your kidneys but tests show that it is incompatible with her immune system. Utter anguish and frustration. Is there anything that you can do? Today the answer is yes. Transplant centers are now helping to arrange kidney swaps. You give to the spouse of another donor who gives to your spouse. Pareto would be proud. Even a few three-way swaps have been conducted.
But why stop at three? What about an n-way swap?
Catherine Rampell writes in the NYT the answer to this question is also the basis for an algorithm used by “New York, Boston, Chicago and Denver to… help assign students to schools”. This Forbes profile, and other great background on both Shapley and Roth (who blogs here), has been culled by Tyler Cowen and Tabarrok at Marginal Revolution. As you read though the quotes of adulation for both men from economists assembled by Mark Thoma, it’s hard to miss the pride they take in work with such clear social benefits. Steven Levitt offers this compliment: “When I talk about economists, one of the greatest compliments I give is to say that they changed the way people think about the world”. – Ben Walsh
Sprint announces deal to sell 70% itself to Softbank for $20.1 billion – Dealbook
Good Questions
Will central banks cancel government debt? – Gavyn Davies
The thin line between makers and takers - Tyler Cowen
Billionaire Whimsy
“If a man is not an oligarch, something is not right with him” – Chrystia Freeland
The buyback epidemic: Why corporate America is squandering its resources – Josh Brown
Get ready for the dividend cliff – WSJ
The joys of refinancing, where “everyday is Groundhog Day” – Chris Taylor
A detailed case against worrying about the housing market - Calculated Risk
A bubble we can use: mortgage refinancing – Ben Walsh
Tax Arcana
From lattes to losses: How Starbucks avoids UK taxes – Reuters
The Fed
On second thought, we should have done more to help the economy, Fed’s Dudley says – Binyamin Appelbaum
Under Armour CEO: worrying about the fiscal cliff is “loser talk” – Business Insider
Old Normal
Ag bailouts, industrialization, and the rise of finance: Downton Abbey’s economics – Somewhat Logically
Crisis Retro
Up for bidding at $4.99: “Lehman Brothers fancy paper napkin” – eBay
You can support Keynesianism without supporting big government – Stumbling and Mumbling
Pizza Hut decides it shouldn’t bribe someone to ask a pizza-related question during the presidential debates – AP
Rupert Murdoch calls phone hacking victims “scumbag campaigners” – Guardian
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Why there’s less high-frequency trading
Felix Salmon
OCT 15, 2012 16:50 UTC
Nathaniel Popper arrives today with something that looks like good news on the high-frequency trading front: there’s less of it!
Profits from high-speed trading in American stocks are on track to be, at most, $1.25 billion this year, down 35 percent from last year and 74 percent lower than the peak of about $4.9 billion in 2009, according to estimates from the brokerage firm Rosenblatt Securities…
The firms also are accounting for a declining percentage of a shrinking pool of stock trading, from 61 percent three years ago to 51 percent now, according to the Tabb Group, a data firm.
This is all true, and in fact it probably is good news, at the margin. But it’s not very good news, and it’s not as good news as it might look at first glance. Because while the number of trades is indeed going down, the number of orders is going through the roof. Here’s how I put it in my Radio 3 essay:
One reason that volumes are dropping is that the algobots are getting so sophisticated at sparring with each other that they’re not even trading with each other any more. They’re called high-frequency traders, but maybe that’s a misnomer: a better name might be high-frequency spambots. Because what they’re doing, most of the time, is putting buy or sell orders out there on the stock market, only to take those orders back a fraction of a second later, and replace them with new ones. The result is millions of orders, but almost no trades.
Call it the Stalemate of the Spambots: the HFT algos are all so sophisticated, now, that they just ping each other with order spam, rather than actually trading shares. Naturally, if you don’t trade shares, you can’t make money. But at the same time, anybody who does trade shares risks getting picked off by the very algorithms which are increasingly circling each other like prizefighters who never land a punch.
All of which is to say that just because HFT algobots aren’t trading as much any more, doesn’t mean that the waters are any safer for real-money accounts to re-enter. Indeed, the exact opposite is more likely: that the bots have poisoned the stock-trading waters so much that even the bots themselves fear to go in.
As a result, market regulators still have a huge amount of work to do, starting with a serious attempt to cut down on quote-spam. There’s no reason why regulators shouldn’t effectively ban the practice of putting in non-serious orders which disappear in the blink of an eye — although the risk, of course, is that if the algobots are banned from confusing each other with quote spam, then they’ll just revert to dominating trading instead. Which is why I still like the idea of a financial-transactions tax.
Popper says that “now that the high-speed firms are shrinking from the market, there are some indications that trading costs may again be rising.” This might be true, but it’s negligible: we’re talking here about a tiny uptick from 3.5 cents per share to 3.8 cents per share, after a long fall from a level of 7.6 cents in 2000. There’s no indication that this is either a trend or anything to be worried about.
In any case, let’s not assume that rising trading costs are always and necessarily a bad thing. Trading costs right now are incredibly low — low enough that they can, actually, rise a little bit without doing any visible harm. Fear of rising trading costs must not prevent us from continuing to prosecute the war on HFTs — especially if there are indications that we’re slowly beginning to win it.
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Felix Salmon is the finance blogger at Reuters.
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