Barack Obama Gets it Right on Cap-and-Trade

Posted on October 9, 2007 by Felix

It’s great news that the centerpiece of Barack

Obama’s energy plan is a 100% auction cap-and-trade mechanism. Ryan

Avent and Peter

Dorman have some niggles, which are on point, but the big picture –

that a cap-and-trade system should be based on auctioning permits rather than

allocating them – is the main thing, and I look forward to the presidential

candidates from both parties following Obama’s lead on this one.

It would be interesting to see what Mark Gimein thinks. Gimein, guest-blogging

at Time.com, describes

a carbon tax as "one bad way to fight global warming that both Democrats

and Republicans love". I’m not at all sure that a carbon tax is loved by

either side of the aisle, and I’m not sure that it’s a bad way to fight global

warming, either. But if you ask someone like Greg Mankiw, he’ll tell you that

the differences between a carbon tax and a 100% auction cap-and-trade system

are really pretty small. So if the former is a bad idea, does that make the

latter a bad idea as well?

Posted in climate change | Comments Off on Barack Obama Gets it Right on Cap-and-Trade

Structural Complexity in the Banking System

Posted on October 9, 2007 by Felix

When Northern Rock started falling apart, it prompted people like accountant

Richard Murphy to start taking a

detailed look at its borrowing structure. Like all banks, Northern Rock

structured a very complex series of bankruptcy-remote special-purpose vehicles

to do its borrowing for it. And it turns out that the beneficial owner of one

of those SPVs, Granite Master Issuer PLC, is

a charity, the Down’s Syndrome Association North East (UK). Not that

the charity knows

anything about it:

In connection with the current problems of Northern Rock, we would like to

assure our members and supporters that Down’s Syndrome North East (DSNE)

has not been knowingly involved in any misuse of money. We are investigating

why our charity appears to have been named as a beneficiary of a Trust without

our consent. We have definitely not received any money from Northern Rock

or affiliated companies, except for a one-off donation from a staff collection

in 2001.

The disussion on Murphy’s website is fascinating, pitting finance-world sophisticates

against people who are shocked at the opacity and complexity underlying something

as fundamental as banking and mortgages. Not to mention the fact that a charity

was used, without its consent and for no consideration, so that the bank’s funding

vehicle could have tax-free status.

It does seem clear that in this case a relatively normal bank with a relatively

normal set of funding vehicles turned out, on close examination, to be fiendishly

complex and opaque; it would be naive to assume that any other financial institution

was very different. There is a regulatory lesson here, elucidated in Murphy’s

comments by jck of the Alea blog:

Regulations like Basel II were supposed to address the problem [of risk capital

arbitrage] and the explosion in structured products, SPVs, SIVs and the like

shows that the regulators failed…

The regulators should concentrate on the broad issue of liquidity and solvency

and not get involved into micro-managing risk for banks…Simply put we

need “decomplexification” of regulation and that should lead to

“decomplexification” of financial markets.

I’m not convinced that any regulatory action will ever make financial markets

less complex, but he’s right that it’s hopeless to expect regulators

to stay on top of the complexity which is endemic to the global financial system.

Basel II was a long time in the making, and when it was first mooted it might

have made sense to think that regulators could actually understand everything

they were regulating. Now, however, they can’t, and Basel II is likely to turn

into a license for unscrupulous banks to structure their way into difficulties

which might have very nasty systemic consequences indeed.

Posted in banking | Comments Off on Structural Complexity in the Banking System

Unpredictable Bernanke

Posted on October 9, 2007 by Felix

One of the reasons that the markets loved the Greenspan Fed was that it was

generally very predictable: for all that Greenspan was an expert at mumbling

incomprehensibly, the markets never seemed to be in much doubt what he would

do at any given meeting. Bernanke, by contrast, is full of surprises: first

the discount-rate cut, then the 50bp Fed funds rate cut, and now no

one has a clue whether he’ll cut again in October or not.

Predictability is not a bad thing in a Fed board: if you know what you’re going

to do, there’s really no harm in signalling that to the markets. Maybe as Bernanke

gets more settled in, his actions will be more predictable. But for the time

being, it seems that the markets will get a little bit nervous in the run-up

to any Fed meeting. Which might make Bernanke look good, ironically enough:

the markets might well rise whatever he does, just because he will have lifted

the cloud of uncertainty.

(HT: Mark

Thoma)

Posted in fiscal and monetary policy | Comments Off on Unpredictable Bernanke

Why Bank Shares Rise on Write-Downs

Posted on October 9, 2007 by Felix

Dan Gross tackles the write-down paradox today: how come the share price of

[Citigroup/Merrill Lynch/Bear Stearns/Whoever] rises when the bank announces

massive losses? After all, he

writes,

Write-downs should be especially worrisome when taken by banks, since they

are in the business of valuing financial instruments.

Gross’s response is, basically, "investors are idiots".

Egged on by bank executives, investors have come to believe this is the extent

of the damage. We’ll take these write-downs and no more! The credit problems

are over! Let’s move on!

Investment bank CEOs and their shareholders clearly believe that the worst

is over. But a fine line separates belief from credulity, and the large investment

banks are blurring it.

I don’t believe that investors are idiots. In fact, I don’t believe that investors

are bidding up the stocks of the banks declaring large write-downs. Citi is

down 17% from its highs, while Merrill and Bear are both down more than 25%

– even as the stock market more generally is hitting new highs. If a share

price reflects expectations of future earnings, then clearly investors are much

less bullish on these banks than they were a few months ago.

What’s more, investors are perfectly cognisant of the amount of turmoil in

the credit markets. It’s worth remembering that a write-down does not actually

change the value of a bank, which is the thing measured by the share price.

If a bank’s assets are impaired, then the value of the bank has gone down whether

or not it takes a charge to earnings this quarter.

So the way I see it, the stock price of these banks started falling dramatically

as their balance sheets declined in value. In fact, the stocks fell particularly

hard and fast because at the time there was relatively little indication that

senior management at the banks was taking the turmoil in the credit markets

seriously, preferring instead to simply keep on dancing.

Now, however, fixed-income executives have been fired, charges have been taken,

and the banks are clearly aware that there has been a fundamental change in

the way that credit markets operate. Given that a clear-eyed bank is worth more

than one in denial, it makes sense to bid the shares up a little bit –

although not to anywhere near their old highs.

There are degrees of denial, of course. Gross might well be right that there

are more write-downs in these banks’ futures, which investors may or may not

be pricing in to the share price. But I think he’d be hard-pressed to find a

real, flesh-and-blood institutional invetor who really believes that the credit

problems are over. Rather, those investors think that the people who were digging

the banks into big holes have largely been fired, and that the attitude of the

banks to the credit markets more generally is one of sensible caution rather

than reckless abandon.

In other words, a write-down means a chastened executive, and investors, right

now, like their executives to be chastened. Investors might be delusional, but,

on the other hand, they might not. I prefer to give them the benefit of the

doubt, since the market generally is more reliable than any one pundit.

Posted in banking, stocks | Comments Off on Why Bank Shares Rise on Write-Downs

eBay Should Sell Skype to News Corp

Posted on October 9, 2007 by Felix

Further proof, if proof be needed, that eBay

should never have bought Skype: the fracas currently underway between eBay

and Jajah. Jajah is an internet telephony company which has developed "buttons"

that eBay sellers, and others, can embed on their sale pages. Using the buttons,

a prospective buyer can talk for free directly to the seller without the seller

having to give out a phone number or pay exorbitant fees for a toll-free number.

eBay, however, doesn’t like the idea of Jajah buttons on its website, and has

decided to block

them. The ostensible reason is that the buttons violate eBay rules about

linking away from the website; surely it’s also relevant, though, that Jajah

is a competitor of Skype, and that eBay owns Skype. Since eBay is only very

slowly rolling out Skype buttons, and still doesn’t

allow them on its listing pages, it makes sense that eBay wouldn’t want

to allow Jajah to have a headstart in that market.

Are eBay’s worries about fraud realistic? Maybe. eBay has reason to want to

keep all communication between buyer and seller on the record: a seller can

say whatever he likes on a phone call, if it isn’t recorded by the buyer, and

the buyer can’t prove it. But if this is such a problem, it’s not clear why

eBay bought Skype in the first place.

I think that Rupert Murdoch should take Skype off eBay’s hands, and fold it

into MySpace. Talking on the phone is something much more naturally suited to

a social network than to an auction site with control issues.

Posted in technology | Comments Off on eBay Should Sell Skype to News Corp

Blogonomics: How Big Media Will Sell Ads on Blogs

Posted on October 9, 2007 by Felix

Blogger Barry

Ritholtz has looked at the existing mechanisms for monetizing blog readers,

and he’s not impressed. Here’s the problem: blogs get a lot of readers in aggregate,

and advertisers are, in principle, very interested in advertising on blogs.

But any given blog is going to be too small to be able to hire a very

expensive ad-sales team. So blog aggregators have emerged, like Blogads

and Federated Media, which try to use a single sales team to sell ads across

a wide spectrum of blogs. When Ritholtz, however, gave them a once-over, he

didn’t want to go down that route:

Many of the players are poorly organized, underfunded. They are trying to

build from the ground up the structures that already exist in the advertising

universe — only without the experience, capital and expertise needed to perform

adequately. Even the best indie ad firms had abysmal customer service — at

least from the blogger perspective.

Ritholtz’s idea was different. Instead of hiring a brand-new sales team dedicated

to blogs, he could piggyback on the existing salesforce of a big-media giant.

When the giant sold online ads, it would place those ads on its own website

and also on certain carefully-chosen blogs, such as Ritholtz’s. The revenue

from the blog ads would be split (50-50, I think) between the giant and the

blogger.

When Ritholtz took this idea to one big-media giant, he got a brush-off. Giants

don’t like to respond to the ideas of bloggers: they like to have the ideas

themselves. But interestingly, a giant then approached

him – and Howard Lindzon,

too – with much the same pitch. The giant in question is Reuters, which

has historically been very bad at generating traffic to its own website: you’re

much more likely to read a Reuters story at Yahoo News or Forbes.com than you

are at reuters.com. Reuters now, however, wants to embrace the blogosphere,

with a similar plan to what Ritholtz had in mind (but with the bloggers getting

only 30%, not 50%, of the ad revenue).

Oh, and there was another catch, too: the bloggers would have to sign a piece

of paper which told comScore and Nielsen that their traffic should be counted

as part of the total traffic to reuters.com.

Ritholtz and Lindzon didn’t exacty jump at this opportunity. But it’s clear

that sooner or later, Big Media’s online salesforces are going to be selling

ad inventory on third-party blogs.

Posted in blogonomics, economics, Media | Comments Off on Blogonomics: How Big Media Will Sell Ads on Blogs

Give Anti-Malarial Bed Nets Away for Free

Posted on October 9, 2007 by Felix

The NYT covers the bed-net debate today, if debate it can reasonably be called.

The article itself is good; the main problem is the headline, which says that

"Distribution

of Nets Splits Malaria Fighters". Er, no, it doesn’t. Once upon a time,

there were some "malaria fighters" who thought that "social marketing"

was the best way to distribute anti-malarial bed nets in sub-Saharan Africa:

use the market to get nets to hard-to-reach places, and, by forcing the poor

to pay for their bed nets, ensure that they really value those nets, rather

than using them for, say, wedding dresses.

But the empirical data are in, and social marketing doesn’t work. It’s more

expensive than giving the bed nets away, and it results in many fewer bed nets

being used. The wedding-dress thing was completely overblown and has come to

an end, and now there’s pretty much unanimous agreement that the best way to

distribute anti-malarial bed nets is to give them away for free. Here’s a paper

showing just that:

Over several years questionnaires and surveys of usage and condition of

nets were carried out throughout a town and 15 villages in north-east Tanzania,

where nets and insecticide have to be purchased and in 24 other villages where

over 15000 nets had been donated and annual re-treatment is provided free-of-charge.

There was very high population coverage in the town but, in the villages where

nets have to be purchased, only 9.3% of people used nets which were intact

and/or had been insecticide-treated and could, therefore, provide protection.

However, where nets had been provided free, over 90% of the nets were still

present and were brought for re-treatment several years later.

In the NYT story, no one is quoted defending the social-marketing approach.

And the evidence against it only continues to grow:

With consultant fees, transportation, advertising and shipping, social marketing

added about $10 to the cost of each net beyond the $5 to $7 that Danish or

Japanese makers charged. But even with payments to volunteers, the added cost

of free distribution was only about $1.25 per net.

“There has been a paradigm shift,” Dr. Olumese said.

One of the good things about trying to eradicate malaria is that no one likes

getting bitten by mosquitoes, and that if you offer people a way to avoid mosquito

bites, they’re likely to jump at the opportunity, regardless of whether they

are trying to avoid getting malaria. And if that freedom from bites comes free,

so much the better.

(Via Cowen)

Posted in development | Comments Off on Give Anti-Malarial Bed Nets Away for Free

The Death of the Incandescent Bulb

Posted on October 8, 2007 by Felix

Dan Gross gives us the incandescent

light bulb’s obituary, mentioning only one problem with its replacement,

the compact fluorescent: that CFLs aren’t bright enough to help German chancellor

Angela Merkel find things she’s dropped on her carpet. He neglects to mention

the color issue (for some reason CFLs always seem to tend to the blue) or a

bigger problem: the lack of dimmability. When someone starts making warm, dimmable

CFLs, then I’ll buy the death of the incadescent. But not until. Frankly,

I suspect that the real incandescent-killer will be LED bulbs, not CFLs at all.

Posted in climate change | Comments Off on The Death of the Incandescent Bulb

Why Louis Vuitton Needs Richard Prince

Posted on October 8, 2007 by Felix

Lauren Goldstein Crowe is unimpressed

with my defense of Richard Prince’s new handbag line for Louis Vuitton, claiming

that "Vuitton is going too far from its roots" and wondering whether

this handbag line might not be financially disastrous for the fashion house.

The answer, I think, is that it won’t be – and that the criterion of financial

success, here, is not necessarily the obvious one (sales).

Remember that the most valuable thing that any luxury-goods house owns is its

brand. The success of the Marc Jacobs – Richard Prince collaboration should

be measured not by the number of genuine Richard Prince handbags sold, but rather

by the degree to which the existence of those handbags has increased the value

of the Louis Vuitton brand.

Think back to Gucci in the 1970s, when the erstwhile luxury brand licensed

itself out to dozens of ill-advised mass-market ventures in an attempt to boost

sales; the result, inevitably, was bankruptcy. Sometimes, increasing sales can

devalue a brand so much that it becomes worthless. And the converse is also

true: launching an avant-garde handbag line which nobody wants to buy can actually

bolster the reputation, and therefore the value, of the brand.

Lauren should know this better than anyone, since she’s been covering the couture

industry for years. Couture, of course, has never been profitable: it’s a way

of building a valuable brand, which can then be slapped onto the real money-makers:

perfumes and handbags and sunglasses and the like.

For years, it has been perfectly acceptable to send unwearably improbable clothes

down the catwalk. If Jean-Paul Gaultier, say, shows something weird and gets

lots of press for it, then that only serves to boost the sales of his perfumes

and his jeans line. The interesting thing about the Richard Prince handbags

is that until now, fashion houses have jealously prevented their cash cows –

the handbag lines – from venturing too far into the realm of the outré.

After all, if no one buys an unwearable dress, that’s fine, it wasn’t designed

to make money. But if no one buys an ugly handbag, then that’s real potential

profits down the drain.

But here’s the thing: Louis Vuitton already has an extremely well-established

and very profitable handbag line. The Richard Prince bags won’t replace

the extant Vuitton bags. Rather, they’ll give an edgy glamour to the Vuitton

brand which it does rather need.

Lauren asks me whether I would by a Richard Prince bag: no, of course I wouldn’t.

And she asks whether "management shouldn’t be taking more care with its

cash cow" – by which I assume she means the Louis Vuitton handbag

line. Maybe that’s exactly what they are doing. Vuitton is in a difficult

position: it’s on every street corner in Japan, which means that it’s the dominant

behemoth whose market share all the other brands want to eat into. The worst

thing it can do, in such a context, is allow itself to get stale: it has

to be ahead of the curve, in order to keep its entire inventory desirable. The

Prince bags serve that purpose: so long as Vuitton is putting out stuff like

that, no one is going to consider the brand to be passé.

In fashion, complacency is death. Vuitton can’t stay close to its roots and

maintain its present level of sales: if the brand isn’t changing, then it’s

dying. A strategy of "we do certain things incredibly well" might

work for a niche house; it can’t work for a brand the size of Louis Vuitton.

Mark Jacobs, in bringing in Richard Prince, is trying to keep the Vuitton brand

vibrant and relevant. The measure of his success will not be the sales of Richard

Prince bags in Vuitton stores: the true measure of his success will be the sales

of fake Richard Prince bags on Canal Street.

Posted in art, fashion | Comments Off on Why Louis Vuitton Needs Richard Prince

The Third Fall of Victor Niederhoffer

Posted on October 8, 2007 by Felix

There are a few real characters in finance, and Victor Niederhoffer is one

of the most compelling. An inveterate and compulsive speculator, he does fabulously

well until he blows up – again and again and again. John Cassidy started

profiling him this summer, before the latest bout of market volatility, and

he now serves up a pretty definitive 11,000-word

profile in this week’s New Yorker.

It’s worth noting that Niederhoffer is not important, from a capital-markets

point of view. While he was being profiled by Cassidy, his hedge funds managed

at most a few hundred million dollars, most of them his own. But what he lacks

in size he makes up for in ego and in sheer color: Cassidy doesn’t neglect to

delve into Niederhoffer’s personal life, which includes weekly commutes between

his wife, in Connecticut, and his mistress, in New York.

Cassidy’s timing was perfect: he had front-row seats for the transformation

of Niederhoffer’s hubris into nemesis. He was there for the this-time-it’s-different:

As Niederhoffer and his funds prospered, it appeared to many of his old friends

and colleagues that he had finally become a master speculator. “It is

impossible to go through what Victor went through without it altering what

you do,” Paul DeRosa told me in July. “It made him more conscious

of risk, more attuned to it. It was an expensive education, but the important

thing is that it wasn’t wasted.” Irving Redel, a former gold and

silver trader and chairman of the New York Commodities Exchange, who was a

mentor to Niederhoffer in his Wall Street days, said, “To be a great

trader you need discipline. You have to have certain strategies that you follow,

but you also have to have the flexibility to know when it is going wrong.

And you have to know to never go beyond what you can afford to lose.”

I asked Redel whether Niederhoffer has these qualities. He replied, “He

does now.”

And he was there at the bitter end:

In September, he was forced to close two of his funds, including his flagship,

Matador, which had declined in value by more than seventy-five per cent. After

cashing out many of his investments, Niederhoffer repaid his lenders and returned

what money was leftover to his clients. He laid off several employees and

consulted with his lawyers. Meanwhile, rumors circulated on the Internet that,

for the second time in a decade, his funds had “blown up.”

Cashing out investors in your flagship fund after it plunges by more than 75%?

Yes, I’d say that counts as a blow-up.

Niederhoffer will always trade, of course: it’s in his blood. But if Niederhoffer

can’t successfully predict short-term market moves, then I think it’s fair to

say that nobody can. It’s a pity, though: I like the idea of stock-market speculation

as a subset of musicology.

Niederhoffer doesn’t claim to be able to say what the Dow or the S.

& P. 500 will do next week or next month, but he believes that over shorter

periods—hours or days—there are sometimes predictable patterns

that can be exploited. In “The Education of a Speculator,” he

devotes an entire chapter to this notion, comparing the market’s movements

to some of his favorite pieces of classical music, and juxtaposing pages of

sheet music with stock charts. “When the markets are moving in my favor

in a nice, gentle way—never below my initial price—I often think

of the ‘Trout Quintet,’ ” he writes. “Another frequent

work I hear in the market is Haydn’s Symphony No. 94. . . . Right after

lunch, or before a holiday, the markets have a tendency to meander up and

down in a five-point range above and below the opening. The pattern is similar

to the twinkling C-major fifths of Haydn’s symphony.”

Update: A correspondent tells me, quite rightly,

that this blog entry should be called "The Second Fall of Victor Niederhoffer",

not the third. His really spectacular blowups were in 1997 and 2007; there was

no other.

Posted in hedge funds | Comments Off on The Third Fall of Victor Niederhoffer

Numeracy in the White House

Posted on October 8, 2007 by Felix

Why is it that Saturday Night Live applies more critical

judgment to Fred Thompson’s statements than the Wall Street Journal does?

The WSJ’s Amy Schatz lapses into full-on stenographer

mode today:

Mr. Thompson has advocated reining in discretionary spending and has been

particularly critical of the Medicare drug-benefits program that Congress

passed four years ago. He said he wouldn’t have voted for it.

"I know this probably isn’t a real popular thing to say, but we couldn’t

afford this prescription-drug bill," Mr. Thompson said last week on a

swing through Iowa, home of Republican Sen. Charles Grassley, who helped push

the program through Congress. "We basically put a $72 trillion commitment

on top of an already-broken entitlement system. Not a responsible thing to

do."

Yep, $72 trillion. He said that. It’s utter

bollocks, but he said it all the same, and he meant it.

It would be great if the next president of the United States had a basic level

of numeracy. I think we can rule Fred Thompson out, but if we start down this

path, will there be any candidates left? Indeed, has there been a president

since Nixon with a real intuitive grasp of numbers?

Posted in Politics | Comments Off on Numeracy in the White House

Debit Cards vs Cash

Posted on October 8, 2007 by Felix

If you want to read Andrew

Leonard’s blog entry about Visa’s ad campaign today, and you’re not a subscriber

to Salon, then you’ll have to sit through an ad for Visa to get there. It’s

possible that the ad will be so attractive to you that you’ll decide to click

on it rather than click through to Leonard’s blog entry, in which case you’ll

never get to his criticism of the campaign:

Theoretically, using your debit card shouldn’t be any different than using

cash, at least insofar as the path to bankruptcy is paved. But one could also

argue that acculturating consumers to using any kind of plastic in lieu of

cash helps create a general atmosphere in which the act of purchasing something

is too easy not to engage in.

Now there are any number grounds on which to attack a Visa ad campaign. But

it seems to me that Visa really can’t be blamed for creating "a general

atmosphere" in which it’s easy to spend money. That’s part of the broader

culture. Visa’s just trying to say that if you’re going to spend money,

you might as well do it with a Visa debit card, rather than with cash. But Leonard

doesn’t like that message either:

Isn’t cash also for people who might be striving for financial self-discipline?

Couldn’t cash be the tender of choice for the frugal avoider of finance charges

and late fees?

He’s answered, in the comments,

by Shannon:

Debit cards, used in conjunction with digital balances from my bank (downloaded

off the website and uploaded into a spreadsheet) made me far more financially

responsible than I am now that I’m "cash only".

Example: how much did you spend on lunches at work last week? Last month?

Last year?

With cash, or a combination of cash’n’cards, is there any way you would ever

know beyond a guesstimate?

Is it any wonder, then, that people have no idea how to budget and less idea

of how to stick to one even if they do?

The thing is, a decade ago when I worked in a society that accepts debit cards

just about everywhere (Australia) I could tell you exactly how much I was

spending on lunches at work. And movie tickets. And impulse purchases. And

everything else.

And I was able to modify my behavior to meet changing budgetary needs.

Nowadays I live and work in China, probably the closest thing to a cash-only

society married to hyper consumption that exists on earth.

And my wages (cash — nice red 100 yuan notes in a big stack) sometimes last

the month. And sometimes they don’t. And I’ve really no clue why or how or

what or when.

Give me debit cards any day of the week, and twice on Saturdays when I’m out

shopping on a budget!

Besides, if you’re going to be paying for things in cash, you should

take out $1,200 from the ATM each time you visit, according to Greg Mankiw.

And carrying an average of $600 in your wallet at any one time is not going

to impart a huge amount of financial self-discipline.

Ultimately, it comes down to costs. If you’re a cash person, and you run out

of cash, then there’s a good chance you’re going to have to refill at some bank

which will charge you a fee for your cash witdrawal. What’s more, the total

amount of time you spend waiting in line at ATMs and otherwise going out of

your way to withdraw money has some kind of value.

On the other hand, if you’re a debit-card person, there is a chance that you

will get whacked with the occasional unexpected overdraft fee if your bank balance

occasionally nears zero. And you might also end up buying the occasional item

which you would not have bought if you’d run out of cash.

Overall, for people whose checking accounts are always at least a little bit

in positive territory, I reckon that debit cards are a perfectly good idea.

Those ATM fees really do add up.

Posted in personal finance | Comments Off on Debit Cards vs Cash

The WSJ and Luxury Watches

Posted on October 8, 2007 by Felix

One of the great things about Portfolio magazine is that it has, so far, managed

to avoid any kind of feature article on the subject of high-end watches. Any

reader of high-end glossies aimed at rich businessmen is by this point intimately

familiar with the pornography of wristwear: objects which apparently transcend

their "watch" status to become "timepieces" in much the

same way as high-end apartments invariably become "residences". As

often as not these articles are written by Nick Foulkes, a man who I imagine

regularly dashing off a thousand words on different types of tourbillion before

breakfast.

Of course, these articles aren’t written to be read, they’re written to attract

advertising from watch manufacturers. And so they all have an astonishing sameness

to them: they wonder at craftmanship, they extoll technological prowess, they

explain that expensive watches are genuinely collectible and can often rise

in value over time. The one thing they never do is cast a remotely critical

eye on the industry.

And so we encounter the fact that this weekend, the Wall Street Journal ran

an 11-page

advertising section devoted to collecting and investing in luxury watches.

But it waited until Monday, after all those ads had run, to put on its front

page (not the Pursuits or Weekend sections, mind, where articles on

watches normally appear) an investigation of how Patek Philippe and other watchmakers

bid

on their own product at auction in order to create the illusion that there’s

actually a secondary market for these things.

It’ll be interesting to see whether Patek Philippe stops advertising in the

WSJ as a result of this story. On the one hand, the paper has tarnished the

brand’s reputation. But on the other hand, it was careful to do so outside the

sections where buying watches is something worthy of feature-length examination

in and of itself. So long as such articles don’t appear directly opposite ads

for luxury watches, everything should be OK, no?

Posted in Media | Comments Off on The WSJ and Luxury Watches

Northern Rock: Takeunder Candidate

Posted on October 8, 2007 by Felix

Lex

says that Christopher Flowers doesn’t seem to have sustained much reputational

damage in the UK from the fact that he’s desperately trying to unbuy Sallie

Mae. Certainly there don’t seem to be too many obstacles in his way should he

go ahead with his bid for Northern Rock. But it’s equally clear that unless

and until such a bid emerges no one’s counting any chickens.

For one thing, some lenders to Northern Rock have already formed

a committee under the direction of Houlihan Lokey Howard & Zukey, restructuring

specialists, "to protect their interests" given that they "face

substantial losses" if Northern Rock is sold. That’s surprising, given

that Northern Rock still has a market

cap of about $1.5 billion – presumably that’s the amount of value

left over in the bank once all its creditors have been paid off in full.

We’re also told that Northern Rock is considering

staying independent, relying on a £10 billion credit line from adviser

Citigroup. It’s far from obvious why that would be an attractive option if there

really is, as rumored, serious interest in the bank not only from Flowers but

also from the likes of Cerberus, Blackstone, and Apollo.

Northern Rock’s management and a large number of its lenders, then, are clearly

far from convinced that a real offer will emerge, even as speculators are bidding

up its stock in hope that some private-equity shop or other will swoop in and

give them a windfall. My guess? A takeunder, where Northern Rock agrees to sell

itself at some discount to the secondary-market price. The private-equity shops

know, along with management and shareholders, that this is a distressed asset,

so I doubt much of a bidding war will emerge.

Posted in banking, private equity | Comments Off on Northern Rock: Takeunder Candidate

Newspapers Should Allow Their Content to be Embedded

Posted on October 8, 2007 by Felix

Mark Thoma has a provocative and very interesting idea: newspapers and other

publishers should allow

their content to be embedded on other websites just as easily as YouTube

videos can be embedded today. That content would, naturally, include ad units,

the revenue from which would go straight to the newspapers’ bottom line.

This seems to have lots of advantages. Newspapers would increase their circulating

substantially as their articles went out to all the blogs, and since the ads

would accompany the articles their ad revenue ought to increase. People running

blogs would have free access to content without worry about copyright, etc.,

allowing them to collect information from various publications and specialize

in particular topics (e.g. economics). Newspapers would, essentially, be like

TV stations of old and blogs would play the role of TVs (though with more

specialization) and receive and show the content along with the embedded ads.

Indeed, a website already exists which tries to monetize this business model:

thenewsroom.com has content from the

likes of AFP which can be embedded into blogs, with the blogger retaining 25%

of the ad revenues. But really no such middleman is necessary: the BBC could,

if it wanted, simply add an "embed" button to all of its stories and

allow them to appear anywhere on the internet. (Since the BBC is a public-service

broadcaster, it might be the obvious entity to experiment with such a business

model.)

Increasingly, on the internet, content wants to be distributed. That’s why

RSS is successful, and it also helps to explain the success of the Huffington

Post, which always includes inks to external news stories on its home page alongside

links to internally-created blog entries. Sites like Sploid, which consisted

of only external links, failed – but maybe if they could host

those stories themselves, rather than linking to other websites, a whole new

groundswell of "daily me" sites would be launched, with readers gravitating

to their own personal favorites.

I like Mark’s idea a lot, for much the same reason as I like everybody to serve

full RSS feeds: it’s a positive-sum game for all concerned. On the internet,

the more you give away, the more you receive.

Posted in blogonomics, Media, technology | 2 Comments

Richard Prince vs Louis Vuitton

Posted on October 8, 2007 by Felix

Little did I know, when examining

Richard Prince’s success in the art world, that he would become the latest

artist to be swallowed up by the Louis Vuitton machine. He’s in illustrious

company – Vuitton has worked in recent years with highly sought-after

artists such as Olafur Eliasson and Vanessa Beecroft. Interestingly, however,

both of those artists maintained more of an arm’s-length association with the

brand, showing largely self-contained artworks within the context of Vuitton’s

stores. Prince, by contrast, has gone down the same road as Stephen Sprouse

and Takahashi Murakami, and has actually helped design handbags for the French

fashion house. And Lauren

Goldstein Crowe is not impressed.

Me? I kinda love it. Eliasson is a blandly corporate artist who specializes

in making beautiful objects: he fits right in to Vuitton shop windows. Beecroft

is an Italian fashionista extraordinaire whose imprimatur is much sought-after

by fashion houses. Sprouse and Murakami are self-promoters who jumped at the

opportunity to burnish their own brands by advertising themselves all over Vuitton

handbags. But Prince? Prince is edgier, and more subversive. And in that sense

he has a very similar attitude to that of Marc Jacobs back in his grunge days.

Lauren is shocked:

The bag he chose to give to selected front-row editors was particularly bad.

When my friend opened hers we laughed out-loud.

Because they were done by an artist, they are supposed to be ironic. The ghosted

logo, the shiny finish are supposed to make it look like a bad Chinese fake.

I don’t know where they were made, but the smell they gave off was pretty

powerfully toxic. So the option of these editors giving them to their daughters

for dress up is out of the question — lest they risk damaging their children’s

brain. But irony in bags is a risky road to take. Design really expensive

bags that look cheap? How easy for a fashionista to do one better and just

buy the real fake.

I’m not sure that ironic is really the mot juste. The way I see it,

Prince is attempting to do for high fashion what he already did for high art:

change the very criteria by which quality is judged. Prince’s great achievement

in the art world, the thing which made him one of the most important artists

of the post-War(hol) era, was his idea that he could appropriate mass-market

iconography and simply by declaring it to be high art, make it so. Here, he’s

doing much the same thing with handbags.

If you want to make a fake Richard Prince, it’s easy. Just take a photo of

a Marlboro ad, blow it up, and frame it. Done. I imagine that Prince is quite

tickled that one inevitable consequence of his designing Vuitton handbags is

that there really will be lots of fakes on the market pretty soon.

In fact, I fully expect him to collect as many of those fakes as he can find,

and I daresay that he might even start appropriating them and turning them into

genuine Richard Princes by decree.

In a way, Lauren has put her finger on exactly why this collection might be

much more interesting than the average handbag line: it takes aim at a crucial

support of the entire fashion industry, the distinction between real and fake.

In some ways, the fake Richard Prince bags will be more real than the

genuine ones, which can after all only ever pretend to be fake. This is of course

very troubling for the fashion industry – that’s the whole point. So congratulations

to Marc Jacobs and Richard Prince for knocking the fashionistas a little off

kilter. In the grand scheme of things, it will only help to improve Jacobs’s

iconoclastic reputation, and the fashion world will start to enjoy the frisson

it received last night. So, as in any good fairy tale, everybody wins in the

end. Even the Chinese counterfeiters.

Posted in art, intellectual property | Comments Off on Richard Prince vs Louis Vuitton

The Rubin-Bernanke Phone Call

Posted on October 7, 2007 by Felix

Teh internets aren’t happy about the fact that Bob Rubin, Lew Ranieri, and

others got

to speak one-on-one with Ben Bernanke in the wake of the August FOMC meeting.

(See John

Carney (twice),

Kevin Duffy, and

Greg

Newton, for starters.) But the chap who actually got all the details of

the conversations with a FOIA request, Penn’s Kenneth Thomas, thinks the conversations

were a jolly good idea on Bernanke’s part, and evidence that he’s trying to

"get up to date with what is going on". And Larry

Kudlow, who supports Bernanke’s actions, doesn’t deny that Rubin et

al were instrumental in driving monetary policy:

It seems clear that Rubin started a chain reaction on August 8 — only

one day after the Fed’s disappointing, hold-the line policy decision

that so disappointed financial markets and intensified the credit turmoil.

Essentially, the academic Bernanke became a hands-on market participant through

his contacts with Rubin, Paulson, the hedgies, and others. He reached out

to savvy financial-market players who put him in touch with the real world.

He then embarked on a 5-week journey that shook world credit markets out of

their financial panic and started the healing process that continues to this

day.

Now a large part of Bernanke’s mandate is to regulate banks and to keep an

eye on the markets. There would be a lot more complaining if Bernanke hadn’t

talked to private-sector grandees like Rubin and Ranieri. But I’m fascinated

by this part of a Chuck

Prince profile in the NYT:

On Aug. 8, a day after the Federal Reserve decided against lowering interest

rates, Mr. Rubin made a phone call to Ben S. Bernanke, the Fed chairman, to

compliment the decision, according to a person familiar with the call. Although

Mr. Rubin’s interactions with federal regulators have drawn scrutiny

in the past, this person said that Mr. Rubin acted “on his own behalf

and not on behalf of Citigroup.” This person also said Mr. Rubin made

the call out of concern that a rate cut might encourage reckless behavior

on Wall Street.

If the "person familiar with the call" wasn’t Rubin himself (I suspect

that it probably was), then it’s someone expressly authorized, if not outright

instructed, by Rubin to place these talking points in the New York Times. It

seems that Rubin is at pains to point out that (a) it was Rubin personally making

the call, not the chairman of the executive board of Citigroup; and that (b)

Rubin supported the August decision to keep rates on hold, and was not trying

to talk Bernanke into a rate cut.

Methinks that Rubin doth protest a little too much, here. As Deutsche’s Michael

Mayo points out later on in the NYT piece, Rubin has been paid more than $100

million by Citigroup this decade, in return for which he has never talked to

investors and has never taken any managerial responsibility for any Citigroup

businesses. In other words, he got paid $100 million precisely because he has

clout with the likes of Ben Bernanke, and is a master of the well-timed, strategically-placed

phone call. In return for that $100 million, we can assume that Rubin’s phone

calls tend to coincide with Citigroup’s interests.

As for Rubin’s hawkishness, is it a mere coincidence that Bernanke slashed

the discount rate just two days later? I’m with Kudlow on this one: Rubin did

indeed help steer Bernanke into rate-cutting mode. (And there’s no indication

that Rubin disapproves of Bernanke’s decision to cut rates in September.)

So the main thing we can learn from the NYT plant is that Bob Rubin is a little

bit embarrassed about that phone call, now that it has been made public. Which

in turn suggests that Carney et al might have something of a point,

even if it’s probably stretching things to say that Bernanke is responsible

for imparting "inside information" to hand-picked market participants.

Posted in banking, fiscal and monetary policy | Comments Off on The Rubin-Bernanke Phone Call

Home Buyers are Smarter Than You Think

Posted on October 5, 2007 by Felix

One of the great things about capitalism, at least as it’s practiced in the

US, is that everybody seems to have a reasonably strong implicit faith in efficient

markets. You can wander into pretty much any store or coffee shop in pretty

much any town, and be relatively safe in the assumption that the prices they’re

charging are market rates and that you’re not being ripped off.

On the other hand, a lot of the recent headlines about the subprime mortgage

business put paid to that assumption. Millions of homeowners, it would seem,

were sold subprime mortgages when they would have qualified for much cheaper

prime mortgages. The winners? Sleazy mortgage originators. The loser: Joe Homeowner.

Given that a mortgage is a product costing hundreds of thousands of dollars,

it’s quite astonishing that it is here, where one might expect people to be

the most price sensitive, that so many people got ripped off to the tune of

so much money. But that does indeed seem to be the case, and so Justin Fox has

now decided that the problem is so bad, people should pay a third party a flat

fee in order to get

peace of mind and be able to sleep safe in the knowledge that they have

an appropriately-priced mortgage.

It’s fair to say that most people cannot be expected to puzzle out on their

own whether a mortgage loan is a good deal or a bad one. This is not necessarily

because they’re stupid or irrational, but because understanding amortization

and the present cost of future commitments is not something the human brain

really evolved to do.

I don’t buy it, for two reasons. Firstly, the third party that Justin is plugging

doesn’t seem, to me, to offer much more than free services like Lending

Tree. And I’m always extremely suspicious of any service with opaque pricing:

nowhere on the website are we informed how much the service actually costs.

If this is such a great idea, one would think that they would be trumpeting

their pricing from the rooftops, rather than doing their very best not to reveal

how much they charge.

But on a much more basic level, I do trust in efficient markets, and

I don’t think that people will really benefit from this service.

This isn’t just a gut feeling: it’s been empirically

demonstrated by James Vickery, of the New York Fed, in a wonderful

paper entitled "Interest Rates and Consumer Choice in the Residential

Mortgage Market". Consumers, it turns out, even if they don’t feel particularly

knowledgeable when it comes to mortgages, turn out to be extremely

price-sensitive. If fixed-rate mortgages go up by just one tenth of one percentage

point, for instance, the market share of fixed-rate mortgages will plunge by

10.4 percentage points.

Not only are homebuyers able to shop around for the cheapest possible mortgage,

then; they’re also able to do interest-rate swaps in their head, without even

realising it. Quite impressive, really.

That said, there’s no doubt that there are sleazy subprime mortgage

originators, and that they have put people into unsuitable mortgages.

This is a classic sleazy-salesman problem, however: it really doesn’t apply

to the kind of people who proactively go out and look for a mortgage on their

own behalf. And those are the people to whom this new service is targeted: the

very people who don’t need it.

If you’re buying a house and shopping for a mortgage, then, or if you own your

house and you’re shopping for a refi deal, then keep on doing whatever it is

you were doing. You’re not going to get ripped off, and you don’t need to pay

money to any third party to ensure that you’re not going to get ripped off.

If, on the other hand, a single mortgage broker approached you, rather than

the other way around, then go ahead and check what he’s offering against a couple

of other mortgage providers. Once again, you shouldn’t need to pay any money

for this service. The mortgage market is actually surprisingly competitive and

efficient, and you can trust in that.

Posted in housing | Comments Off on Home Buyers are Smarter Than You Think

US Congress Embraces Necessity of Reducing Carbon Emissions

Posted on October 5, 2007 by Felix

This is good news, I think. The House Energy and Commerce Committee just issued

a white

paper on carbon controls, which starts off by saying unambiguously that

"The United States should reduce its greenhouse gas emissions by between

60 and 80 percent by 2050 to contribute to global efforts to address climate

change". Now 2050 is a long way off, and it would be nice to have some

nearer-term targets, but it seems as though the US legislature, which has historically

not been very amenable to such thinking (remember Kyoto?) is finally coming

around to the side of the angels.

The white paper seems smart to me. It says, reasonably enough, that a cap-and-trade

scheme will be front-and-center in achieving carbon emissions, but does add

that "tax policy could play an important role" as well in reducing

greenhouse gas emissions.

Peter Dorman complains

that the paper "speaks vaguely of “distributing” permits without

even raising the possibility that they should be auctioned" – but

my reading is slightly different, that the paper is deliberately fudging the

issue and leaving the door to an auction mechanism pretty wide open. In any

case, even if permits aren’t auctioned in the first year of operation, there’s

no reason why a future legislature can’t slowly reduce the amount of permitts

allocated and increase the number of permits auctioned.

The whole paper seems sensible to me, and aware of the practical difficulties

of a cap-and-trade system as well as the areas where a carbon tax might be able

to fill in some of the gaps. I look forward to the next occupant of the White

House actually enacting this kind of thinking.

Posted in climate change | Comments Off on US Congress Embraces Necessity of Reducing Carbon Emissions

Rich Immigrants

Posted on October 5, 2007 by Felix

Paul Krugman and Chris Dillow both post interesting blog entries today, and

the intersection of the two is even more interesting, I think. Krugman notes

that London seems to be becoming

a "rentier city", where the global rich from Russia or India or

Arabia live off wealth made elsewhere. Dillow, meanwhile, notes that the African

soccer players for Arsenal FC are much more likely to encounter racism in Bucharest

than they are in London. Economic growth and success, he says, go hand

in hand with tolerance.

Global cities like New York and London certainly attract their share of poor

immigrants – but they also attract much more than their share of rich

immigrants. And in general, people are more likely to have racist attitudes

to those below them on the socio-economic ladder, as opposed to those above

them.

When I was growing up in south London, I knew few Africans (as opposed to Caribbeans:

I lived very close to the vibrant Caribbean community in Brixton). But the Africans

I did know generally came from wealthy and well-educated families. Indeed, if

you include the Indians thrown out of Uganda by Idi Amin – a large number

of whom ended up in the UK – one can reasonably say that Africans living

in the UK have historically been some of the richest and most sophisticated

immigrants that the country has seen, if you exclude Krugman’s rentiers. If

you include Krugman’s rentiers, then it’s even clearer that rich immigrants

can be instrumental in improving prosperity.

This is one reason why the US should beef up its H visas for skilled immigrants

and generally be much more welcoming towards the global rich than it is today.

A lot of anti-immigrant feeling in the US is really aimed not at immigrants

in general so much as at poor immigrants in particular. (I’m an immigrant here

myself, and I certainly haven’t encountered anti-immigrant prejudice.)

If immigrants get richer, then the anti-immigrant right will naturally become

weaker.

Posted in immigration | Comments Off on Rich Immigrants

Winner of the Day: Santander

Posted on October 5, 2007 by Felix

The RBS-led consortium has now officially won ABN Amro, and the WSJ has an

excellent play-by-play

of how the deal went down, including a graph of how the consortium members’

stocks have been doing this year. While RBS is down 15% and Fortis is down 18%,

Santander has been holding reasonably steady, down just 2.3% year-to-date.

There’s good reason for this: the winner’s curse falls mainly on RBS, with

most of the rest of the brunt being borne by Fortis. Lina Saigol pointed out

on Monday that the consortium is paying

a premium of roughly 70% to where ABN shares would be trading had the takeover

battle not happened. But why would the ABN shares be so low? Mainly because

of credit-market woes – and it’s RBS which is going to end up with ABN’s

credit-market operations.

Fortis is the other big potential loser in this deal, since ABN is based in

Holland, and extracting ABN’s capital-markets and headquarters operations from

its Dutch retail operations is going to require some tricky surgery indeed.

Santander, on the other hand, is sitting pretty. It’s getting the Italian operations

– which have only recently been bought by ABN, and therefore should be

quite easy to unbuy – as well as Banco Real in Brazil, which has always

been run very much at arm’s length. (When I reported a story

for Euromoney about ABN’s strategic interest in Brazil, it took me well over

a year to find anybody associated with the Brazilian operations who wasn’t based

in Brazil and who could speak to the Dutch bank’s global vision.)

Meanwhile, the economic outlook for Brazil is looking as positive as ever,

even as recession fears continue to stalk the US.

RBS’s Fred Goodwin, then, faces a long and arduous process of breaking up a

$100 billion bank, and won’t even get his coveted LaSalle at the end of it.

Santander’s Emilio Botín, on the other hand, should be able to start

integrating Banco Real with his existing Brazilian operations much more quickly.

And he has now truly consolidated, once and for all, Santander’s position as

the biggest and best bank in Latin America: Citigroup, his only real competitor

in the region, has almost no presence in Brazil, which is by far Latin America’s

most important country.

Posted in banking | Comments Off on Winner of the Day: Santander

Ngozi Returns to the World Bank

Posted on October 5, 2007 by Felix

Ngozi Okonjo-Iweala is, unfortunately, not American enough to be president

of the world bank herself. But the president of the world bank is smart enough

to appoint

her managing director – a very senior position (see the new,

old

org charts for an indication of the responsibilities that managing directors

hold) at the organization she has worked for for most of her professional life.

Congratulations to both Ngozi and Bob Zoellick.

Posted in world bank | Comments Off on Ngozi Returns to the World Bank

PR Lie of the Day

Posted on October 5, 2007 by Felix

A Sprint spokeswoman declined to comment. She said Mr. Forsee was traveling

and couldn’t be reached.

One might say that if the CEO of communications giant Sprint Nextel can’t be

reached when he travels, that’s reason right there to oust

him.

Posted in defenestrations | Comments Off on PR Lie of the Day

Markets: The Payrolls Test

Posted on October 5, 2007 by Felix

The reaction to today’s strong

payrolls report will say a lot about just how bullish the market really

is. Both the stock and bond markets have been a little Alice-in-Wonderland of

late, rising on bad news in the expectation, we’re told, that more bad news

means more rate cuts in the future. Now, however, it looks much more likely

that we’re stuck

at 4.75%.

In the grand scheme of things, this is good news. It means less chance of a

recession and less chance of inflation. It means that the economy is

robust enough to weather housing-sector weakness, especially with a weak dollar

starting to feed through into export figures. But it also means that Wall Street

can’t just sit back and wait for its free lunch rate cuts:

real businessmen in the real economy have to actually go out and work

for their profits. If the reaction to the payrolls report is particularly bearish,

then that might be a sign of the markets coming round to reality.

One other point is worth making, however: the monthly payrolls report, for

all that it’s the most important economic data release for the markets, is in

reality increasingly

meaningless. The Fed won’t hold off easing on the strength of this one report

alone, and neither the market nor economists should read too much into it, especially

when so much of the labor-force growth might have come from quirks surrounding

employment dates in the public-sector school system.

Posted in economics | Comments Off on Markets: The Payrolls Test

Sony BMG Thinks You’re a Thief

Posted on October 5, 2007 by Felix

If you want to buy music, buying a CD is a good way of doing it. There’s no

risk that some computer error will destroy your purchase, and it’s easy to transfer

the songs onto your computer and iPod. Many people, I suspect, are like myself:

I do buy CDs, but I never play them on a CD player. Instead, the CD gets ripped

straight into iTunes and then stored in a dark corner somewhere in case of emergency.

Which, according to Sony BMG’s head of litigation, Jennifer Pariser, makes

me a thief. Here’s what she said testifying in court, in the case Capitol

Records, et al v. Jammie Thomas:

"When an individual makes a copy of a song for himself, I suppose we

can say he stole a song." Making "a copy" of a purchased song

is just "a nice way of saying ‘steals just one copy’," she said.

This kind of absolutism can’t help but backfire on Sony, and not only because

Sony itself makes any number of computers and music players which try to make

exactly this kind of "stealing" as easy as possible. Pariser is essentially

saying that anybody with an MP3 player is a thief – and people with MP3

players, of course, are the heart of Sony BMG’s customer base. If a company

continues to insult its customers like this, it’s unlikely to do very well.

On the other hand, this is clearly a very fruitful line of thinking for the

likes of the IPI

to explore. Work out how many songs are ripped from CDs every year, and then

come up with a percentage of those songs which would otherwise have been bought

on iTunes if no-one ripped CDs or downloaded music illegally. Presto –

even more spurious "losses" for the music industry to moan to Congress

about!

(Via Guambat)

Posted in Media | Comments Off on Sony BMG Thinks You’re a Thief