Thursday, December 31, 2009

The Big Book of Basketball (Part 3) -- Jack Gets Back

Editor's Note: My response to Dan's earlier post


So I don’t forget when I get to the end of my response, I would be interested to hear your thoughts on the wine-cellar section.

I agree that Simmons certainly could have made the book “better” by doing many of the things you suggested in terms of pop culture references, personal memories, etc. It appears, though, he made a conscious decision to sacrifice writing the “best” book he could in an effort to create something that he hopes will still be relevant in 25 years. His lack of pop culture references (other than to Boogie Nights) seems emblematic of this. The book would be much more enjoyable for today’s readers if he had sprinkled in more references, but it would have risked making it much less enjoyable for future readers. (Although the personal memories would have been enjoyable for all readers.) Unfortunately for Bill, though, it meant he couldn’t write the way he writes best — which might confine his book to the bargain bin with every other sports list book in a few years.

As for organization, as much as I have criticized Simmons for trying to be too much like Bill James, this is one way in which Simmons' writing would have been helped by being more like him. I don’t necessarily agree with you that Simmons should not have used the ranking system as a skeleton to frame the book, but he should have realized he didn't need to write pages to justify where he ranked each player. When James didn't have something interesting to say about a player in the "Historical Baseball Abstract", he simply doesn't say anything at all. This style would have allowed Simmons to rank all these players, while focusing on the ones he had the most to say about, as you suggested. I know I certainly could have lived without him explaining why he decided to rank Cliff Hagan ahead of Jack Tyman.

I also wonder how much of our frustration has to do with how we decided to read the book. Both of us chose to read the book straight-through in a relatively condensed period of time. Would it be better consumed in smaller portions? Maybe pick it up to read about one player a night before bed?

In regards to your thoughts on individual parts of the book, I wanted to expand upon your comments about the cocaine references. I actually wouldn’t have minded the quantity of these references except that they were all exactly the same (late 70s basketball+cocaine=bad). Essentially this tells me that Bill knows nothing about cocaine in the game other than that David Halberstam mentioned players used it in “Breaks of the Game”.

So I’m not entirely negative, there was one thing Simmons wrote in the book I wanted to agree with — I wish the NBA (another other sports leagues) would be willing to have a bit more fun. The only people that take themselves more seriously than the NBA and NFL are Michigan Daily news and opinion staffers. I’m not saying every one of his radical suggestions in Chapter 6 should be adopted, but I wouldn't be opposed to at least considering a four-point, half-court shot or holding a double-elimination tournament for the last two playoff spots in each conference. Why are these leagues so averse to doing something exciting or fun?

The Big Book of Basketball (Part 2) -- Dan Responds

Editor's Note: As I mentioned earlier, Dan B. and I will be having a conversation on Bill Simmons' "The Big Book of Basketball". Here is his response to my earlier post.


I'm finished -- I actually finished a couple days ago, but I'm responding now. And on the whole, I feel exactly as you do about the book. When people ask me "How was it?", I respond "Good", but before the word is even out of my mouth I'm already qualifying it. It ends up being a stuttered yes and scattered thoughts. It's a mess. Which is appropriate, because the book is kind of a mess.

I'm not going to address your points individually, because I mostly just agree with all of them, and it'd be boring to read that I agreed with all of them. But I do have one over-arching thought that I think might address many of the points at the same time. So I'll make that point, and then briefly mention other things that I noticed/had thoughts about.

My biggest problem with the book is a combination of your points 4,5, and 6 I guess. It seemed like he couldn't decide how he wanted to write and organize the book. The best way for him to do it was not to rank the best players in this stupid pyramid idea. The book should have been written like the allen iverson (page 454), david robinson (right after him), and bill walton sections, along with maybe bernard king. those sections absolutely stood out to me as by far the best sections of the book (along with the michael jordan section actually).

He's not a stat guy like bill james -- he doesn't know anything about stats, he doesn't understand them, and he doesn't really believe in them. Which is fine. But he shouldn't try to be a stat guy, and include that stuff. He would have done much better if he had realized his strengths. What are those? Well, he really is a huge basketball fan, and he has been to a ton of games, and he makes fun analogous comparisons between athletes and other cultural aspects. So that's what he should have stuck with. Don't tell me about trying to compare stats between eras -- you have no idea what you're doing. What I want to read from you is why Bill Walton is like 2pac, how the Celtic crowd reacted when David Robinson walked into the arena, and about the confrontation between Iverson and the referee. These are things that are interesting to hear from YOU, these are the things YOU write well (the last couple paragraphs on Iverson I would argue are the best-written in the entire book). Don't try to be a basketball scholar -- you're not that. And for older players, he should have either totally ignored them if he wasn't going to add anything original, or address them like he did with bernard king. I specifically remember coming away from the Bernard King section thinking that I understood Bernard King a lot better than I had before (Simmons either compared him to Carmelo or made me compare him to Carmelo, which makes sense, and helps me understand. Of course this could be wrong, and I'm just not old enough to know). But he does it with anecdotes, with first-hand or second-hand descriptions, and with arguments that go beyond statistics, and delve into how he was looked at by other players, and what the feeling was in the arena when he was playing.

So what he should have done was organized the book into "why history/statistics won't paint the whole picture on these guys" rather than "the list of 96 best players ever." I think that's probably what he started out doing, but then stopped for some reason.

OK, onto my little notes and thoughts.

Page 205 -- This is Simmons' section on Len Bias. At the bottom of the page, he argues that Bias "resonated with black fans much the same way Hawk, Pearl, and Doc did back in the day." I'm sorry, you're Bill Simmons. You're an extremely pale white guy from Boston whose first car was a Porsche and whose dad owns a yacht. If you don't want to be absolutely laughed at, you need a citation for this. Desperately. Better yet, don't include it. I actually hated almost the entire Len Bias section. It's just whining mostly. Nothing I hadn't heard or read before.

Page 217 -- At the top of the page, Simmons talks about how the NBA leads its journalists to "write black." Needless to say, this section is atrocious and offensive. I almost stopped reading. He also makes the point on this page that the NBA box score never deceives, but then argues throughout the rest of the book that stats don't tell the whole story. I'm not saying these things can't both be true; they could. Or one of them could be true. Or neither of them could be true, which is actually the case. The NBA box score does deceive all the time, and while advanced statistics don't tell the "whole" story, they can tell an awful lot of it. But of course Simmons never addresses these stats other than to say they don't work because one time Marreise Speights was ranked higher than Shane Battier in PER (nevermind that Hollinger admits that PER doesn't cover defense, or that there are TONS of other statistics that should be incorporated into an analysis of two players).

Page 323 -- Simmons talks about noticing that 2-guards make some sort of leap between 23-25 years old in his David Thompson. I found this interesting and original. I enjoyed it (even if others might think it's obvious). I also thought the David Thompson section on the whole was actually relatively well-done.

Page 344 -- Reggie Miller chapter. I actually mostly liked this chapter, but there was a paragraph on this page that was laughable. Simmons argues that (i'm paraphrasing) 21 superstars crossed paths with reggie during his career, who were all mortal locks for the all-star team, including jordan, bird, isiah, iverson, pippen, and dominique wilkens. He then, in the VERY NEXT SENTENCE, argues that if reggie was really all that good, his career should have been as successful and substantial as all those guys. since he has fewer all-star game appearances than all those guys, and since he's the only one who never appeared on an all-NBA first or second team, his career couldn't have been so great. Simmons, amazingly enough, is ignoring the obvious point that is basically jumping off the page: maybe miller didn't make the all-star teams or all-NBA teams BECAUSE ALL THOSE GUYS ARE FUCKING LEGENDS WHO WERE BETTER THAN HE WAS. that doesn't mean that reggie wasn't great -- all it means is that he wasn't as good as those guards. And those guards are some of the best of all time. Next paragraph, bill says "nine of his contemporaries at shooting guard made all-NBA (first or second)....reggie only made third-team all-NBA three times." WELL MAYBE THAT'S BECAUSE THE OTHER TWO TEAMS WERE TAKEN UP BY THE GUYS YOU JUST FUCKING MENTIONED. needless to say, this was abominable. i have to move on.

Page 356 -- I really liked the Bernard King section. Why? Let's see. Bill makes bullet points, and each goes to a strength of his. Bullet Point 1) Bill compares King to a corned beef sandwich. BP 2) talks about watching the 1984 playoff game against the celtics, and how unstoppable King was. BP 3) talks about how he rooted against Kobe breaking King's record because of how that record spoke to NY basketball fans. The rest of the bullet points I didn't much care about, but these three were good enough. I can honestly say that I came away from this book with a much better understanding of bernard king than i went into it with, which is rare for me and bill.

Page 360 -- Simmons just recites facts he learned about Paul Arizin in the last two years. Totally unnecessary. I don't care. Boring. Stop it.

Page 401 -- We get it with the cocaine jokes already. Simmons has an infatuation with cocaine and basketball. It's incredibly annoying. He talks about it all the time, and makes horrible jokes about it. I hate it. Stop it. There's a horrible Michael Ray Richardson coke joke here, and I had just reached my limit. Couldn't stand it anymore. I put the book down and didn't come back to it until the next day.

Page 402 -- Bill decides to talk here about how basic NBA statistics have failed us. Which is interesting, because it goes against his earlier thesis. It's also interesting because Bill then starts talking about all the statistics that we "should" invent, totally ignoring that for all of his made-up statistics that are relevant (about 60%), we ALREADY HAVE STATISTICS THAT MEASURE THEM, YOU JUST DON'T KNOW WHERE TO LOOK. Anyways, this comes out of a section on Wes Unseld where Bill wonders about how Wes was so good when he had atypical size and weight for a center. He ignores the existence of chuck hayes, who, if you know anything about basketball, seems to me like an offensively-limited version of what wes unseld used to be. It just shows a basic lack of understanding about how NBA statistics work now, and how they've been adjusted in the past couple years to account for things like this.

Page 408 -- Gary Payton named his kids Gary Payton Jr and Gary Payton II. I didn't know this. It's glorious. Thank you Bill.

Page 442 -- I loved the Walt Frazier section here. Really enjoyed it. Like I (think I) understand King better, I think I understand Frazier better too. Well done. He describes Walt's go-to move in detail, talks about how demoralizing it was for opposing crowds in detail, and it's great. Then he speculates about a coke problem, and I lose interest. But the first part of it is great.

Page 454 -- Great Iverson section. Best writing in the book I think. Bill does best when he says "screw the stats." Even if it's not technically correct, it's interesting, and it's an argument. It's your book Bill, make it your book. Also loved the following David Robinson and Bill Walton sections. If you only read 15 pages of the book, read from the beginning of the Iverson section to the end of the Walton section.

Page 510 -- (Describing Barkley) "Who would have been a more fun teammate than Charles Barkley? He loved gambling, drinking, eating, and busting on everyone's balls. (Wait, that sounds like me!).

I threw up here.

Page 680 -- I love the wine cellar section, except snubbing Kobe for Wade is actually indefensible. I can explain why if you're interested, but this is long enough as is.

So yeah, I enjoyed the book, I guess, kind of, but there's lots of things wrong with it, but it's mostly entertaining, but incredibly frustrating, and he's annoying with style, and makes a lot of wrong choices, and it's horrendously organized....

Thursday, December 24, 2009

The Big Book of Basketball (Part 1)

Editor's Note: In an effort to actually motivate myself to write, I hope to engage in a series of conversations with various people using this blog. I'm starting with a discussion with Dan. B about Bill Simmons's "The Big Book of Basketball". If you want to participate and/or have another topic you want to discuss on the blog, please shoot me an e-mail. I think it will be fun.

Below are my opening thoughts on the book. Dan will respond later this week.

Rarely have I felt as conflicted about a book as I did while reading The Book of Basketball. On one hand, it was entertaining and informative enough that I’d recommend it to almost anyone with even a casual interest in basketball (it’s hard to argue otherwise given that I finished the book in two days). On the other, the book is flawed in so many ways beyond the usual criticisms I have about Simmons's work.

I have liked Simmons going back to his earliest stuff on, but the book’s first chapter encapsulates why I can barely get through his stories today — he’s no longer satisfied being Bill Simmons. Simmons used to have a very unique voice; now, he wants to write like Malcolm Gladwell and Chuck Klosterman (Doesn’t “The Secret about basketball is that it’s not about basketball” sound like something very similar to what they would say?). He used to write about the pranking,  gambling, and boozing he’d do with his friends JackO, House, and J-Bug; now he wants to name-drop by writing about his “friends” Gus Johnson, Jimmy Kimmel and Matt Damon. He used to criticize all the people he said journalists would never attack for fear of losing access; now, he verbally jerks off Isiah Thomas — someone Simmons has blamed for ruining the Raptors, the Knicks, and the CBA — for spending 15 minutes next to Simmons at a pool in Las Vegas and passing along a “brilliant” concept about basketball (essentially, the so-called “Secret” is that basketball is about teamwork, chemistry and people) obvious to anyone that’s played the game (even I knew it and I was a sixth-man in eighth-grade basketball)*.

*And even if you like some of the other Simmons-esque writing techniques such as pop culture references, I feel like you’d be disappointed by the book—95% of the references were to Boogie Nights or real porn movies.

As for the problems that go beyond my usual criticisms his work, I must revert to a list:

1.)    Much like with “The Secret” he takes credit for concepts he believes are brilliant that are really quite obvious. For instance, his “world-renowned Kurt Cobain theory” — the rocker’s legacy has benefited from dying early.

2.)    I enjoyed the content of the footnotes, but they became very distracting from a reading standpoint. Given he goes into many tangents throughout the book, it’s unclear why he could not have simply incorporated many of these tales into the main portion of the book. Even though they were at the bottom of the page and not the end of the book, it disrupted the flow of reading having to glance down there.

3.)    Simmons also tries to argue that the stats don’t really matter as much as we think (especially in his argument about why Russell>Wilt), but in ranking players, he uses statistics to prove almost all of his points (hedging this with statements like “I usually hate stats, but…” similar to the racist comment prefaced by “I’m not a racist, but…”). And even aside from this inconsistency, it seemed like a poor literary choice to insert chunks of paragraphs filled with statistics into his writing.

4.)    I appreciate his research, but the book reads like someone who spent a year or two researching a subject (which is what he did) and then said “Hey, look, here is everything I found.” It's like a history test in college—a pure information dump. His work contrasts quite clearly with someone like Bill James (clearly the person Simmons is trying to emulate) who has absorbed, digested and processed everything he's learned about a sport over his life. 

5.)    I’ll admit I’m just a casual NBA fan, but Simmons’s rankings seem very uncreative. He spends much of his book ripping players such as Karl Malone, Kareem and Wilt, but then bows to conventional wisdom and ranks them very high within his Pantheon. Again, contrast this to someone like Bill James, who was not afraid to rank Craig Biggio as one of the best baseball players of all time.

6.)    Similarly, although I don’t necessarily have problems with many of the rankings themselves (because I don't know enough about the NBA), I do have a problem with how he reached his conclusions—his arguments were often illogical and inconsistent. For instance, he ranks Scottie Pippen as one of the all-time greats and even says it’s arguable he was as good an all-around player as Jordan, but (either on the section about Jordan or someone he is comparing to Jordan) makes it sound like Jordan had no one else good on his team (Simmons makes many mentions of this in Jordan's early career where maybe it wouldn't be as contradictory, but there is one specific passage I remember that clearly was contradictory). Likewise, many of the other rating systems he creates have these problems. He admits, for example, that Player X is an exception to his 42-Club system. Then three paragraphs later he talks about how great of a test it is because it draws a perfect line that only includes players that should be included. I'm admittedly not a huge NBA guru, but the abundance of simple logical errors in this book is troubling. 

7.)    I'm fairly certain that many of the ideas for which he takes credit (and beats to death) are stolen from other people (I think the stuff about the ‘70s, which is among the strongest part of the book, relies quite heavily on David Halberstam’s “Breaks of the Game” and Terry Pluto’s “Loose Balls”). He does credit some other writers during portions of the book, but I feel as though quotes are more to be like "See, I read SI as a kid and respect great journalists" than adding anything to the book.

8.)    He outright admits to lying about something in one of his columns (albeit a minor point) to increase the rhetoric effect. Yikes!

Your thoughts on my thoughts? As a bigger fan of the NBA than I am, do you have any thoughts about his discussion of players and teams you are familiar with? What do you make of his discussions of race?

Tuesday, October 6, 2009

Worse than I thought

As I'm sure you know, I've certainly criticized the rating agencies a fair amount in the past. However, I was still shocked to discover the following statistics in a Financial Times column by Michael Milken* the other day.

Many investors have relied on another fallacy – that rating agencies accurately rate enterprises and securities across different sectors. For much of the 20th century, AA-rated railroad bonds defaulted twice as often as single-B industrials. Recent regulations provided incentives for investment in complex, AAA-rated mortgage-backed securities never close to AAA quality. Ironically, investors will lose more money on AAA credits than on any other rating category.

With results like those, it's a no wonder the rating agencies need government support to sustain their oligopoly.

*Yes, that Michael Milken

Thursday, September 24, 2009

Plus ça change, plus c'est la même chose

A investment banker with a very good take on the problems with the Wall Street bonus system. Note that it was written in 1988.Sounds familiar:

The headlines now are filled with stories of Wall Street's woes. Thousands are losing their jobs. Once powerful firms are being humbled by their own increasing debt and management problems. Many firms are turning to management consultants, a sure sign of widespread turmoil and desperation, for answers. How did an industry that could boast the highest returns, the brightest talent and the greatest compensation get to be in such trouble?

Part of the answer rests in the compensation system that fueled the explosive growth of investment banking. The bonus system — the annual ritual of money and merit. It is at bonus time that bankers, traders and salesmen look to getting their rewards. This is the time when the legendary endless hours, extraordinary creativity and plain hard work get the big payoff... for the year's work.

And, that is it. The bonus was simply for a year's work; but more importantly, the entire focus of the year's work was the bonus.

Does this short-term system serve the long-term best interests of clients and Wall Street firms themselves, particularly now? The bonus system has had an insidious effect on the economy, Wall Street's clients and ourselves as investment bankers. It directly skewed the structure of many Wall Street firms and, thereby, the national economy. It guided the energy of many of our society's best and brightest members, making their perspective short and their attitudes increasingly arrogant. It often undermined and diluted traditional standards of excellence.

But, the Wall Street bonus system reflects a larger societal problem, not simple greed as many believe, but the almost insatiable desire to have everything now. Bonuses are simple and logical. There is nothing wrong with the concept. But, the amounts involved on Wall Street, in practice, are enormous, almost unreal. And, now in the midst of extraordinary turmoil perhaps the way we pay ourselves must be challenged.

Wednesday, September 23, 2009

PSA on Banker Pay

Following up on a recent post by Tyler Cowen, Matt Yglesias says today that the empirical evidence that banker pay played a role in the crisis is "quite weak". He concludes:

All that said, what I think people really need to do is confront the fact that obscene banker compensation is really a social justice issue rather than a financial regulation issue. Which is to say the sky-high pay seems wrong just as such rather than because there’s a specific bad incentives issue that needs to be corrected.

But Ygelsias's comments miss a key point about the both the study and the structure of investment banks--the problem is not with the CEOs* (which the study measures). Rather, it's the traders swapping complex derivatives, bankers packaging shady mortgages, and salesman foisting these crappy products on customers we have to worry about. These people very clearly have incentives to think about the short-term gains rather than the long-term losses. The pay structure encourages bank employees to gamble with shareholders' money in a way that gives the bankers huge rewards if they win, while sticking them with little of the downside.

True, there probably aren't many, if any, studies that could empirically prove this. But that's because it's impossible to get actually get data on this to measure. CEO pay has to be reported to the SEC, but the numbers for non-top management employees are closely guarded. Banks are reluctant to turn them over to federal law enforcement agents when asked. Do you think they're going to hand them over to academics for research that will mostly be used to criticize their practices?

*Most of the CEOs of these banks were bond traders or salesman in a time when finance was much less complicated. I highly doubt the really understood what was going in many of the more complex areas of the bank, which is why the overly relied on measures like Value at Risk.

Wednesday, September 2, 2009

What Do They Get Paid For Again?

All the hubbub over the Freep's big Michigan story has inspired me to make my glorious (although likely short-lived) return to the blogosphere. I don't want to rehash many of the issues that have been discussed in detail (although I imagine I'm in the minority of Michigan fans on this one), but I did want to point something out I haven't seen anywhere else.

There has been a lot of discussion about how the Free Press failed to get both sides of the story. I'm not sure this is true.

The Freep DID seek out both sides of the story. Unfortunately, in typical fashion for a large entity (whether it be a school, company, etc.), the athletic department chose to give out a boiler plate response from all the parties involved. If it's true that the University isn't breaking any rules, shouldn't the PR department get some of the blame for not explaining to the journalists why Michigan's program falls within the established bounds? It's kind of tough to give both sides of the story equal treatment when one side refuses to talk you. Should the Free Press be required to make Michigan's argument for them if Michigan won't make that argument itself?

Somebody really need to explain to me what PR departments do. It seems like Michigan is working from the same playbook as the investment banks. Isn't their goal to head off stories like this one?

Tuesday, August 4, 2009

In The Hole

Following up on today's earlier post, I found this post on NJ's underfunded pensions from Harvard University's Kennedy School of Government lecturer and former assistant secretary in the U.S. Treasury Department Thomas J. Healey interesting:

New Jersey is on the cusp of a public pension crisis that could dwarf the $3.5 billion to $4 billion funding shortfall projected by Gov. Jon Corzine in October. Although the figures are obscured by current accounting rules, a detailed examination shows that New Jersey actually faces a potential $80 billion pension shortfall (not even counting the more than $20 billion in losses from the current stock market free-fall) and $50 billion in unfunded post-retirement medical and prescription drug benefits.

This total unfunded liability of $130 billion is more than four times the state's 2008 fiscal year budget, and represents a shortfall of around $44,000 for every household in the state. It's fair to conclude that sooner or later, someone -- almost certainly the taxpayer -- will be forced to shoulder this staggering fiscal burden.

This Explains A Lot

Barry Ritholtz posts today about a New Jersey firefighter stuck as the only tenant in a Florida high-rise condo. Although Ritholtz focused on the real estate aspect of the story, a few of the commenters on the story itself wondered how exactly a firefighter could afford the $430,000 vacation home. The answer is simple: he works in New Jersey.

According to a public salary database at the Asbury Park Press, the firefighter made $152,210 last year ($117,612 from the fire department plus $34,598 from the town). Even better, the firefighter, now 45 years old, plans to retire in four years. Assuming the standard 25 years of service, he'll pull down 65% of that salary -- or $98,936.5 per year -- in retirement, plus of cost-of-living adjustments (and likely full medical benefits, too).

Obviously, firefighters are putting their lives on the line, so I'm not complaining about them specifically. But when you expand these sort of salaries and benefits to policemen, teachers, and every other state and local employee, it adds up. It's no wonder that, according to the Tax Foundation, New Jersey ranks first out of all 50 states in terms of individual state and local tax burdens, while also having the worst tax climate for businesses in the country.

UPDATED: Included salary breakdown.

Thursday, July 30, 2009

Economic Profits vs. Accounting Profits

I don't mean to pick on James Kwak over at Baseline Scenario because I do generally enjoy the blog, but a piece of a post he wrote today reminded me of an elementary mistake many people make that is worth pointing out.

Criticizing a piece in today's Washington Post written by a Yale Law professor, Kwak says:

In a competitive market, if one company is earning high profits, then other people will want to start new companies to compete with it. By entering the market, they increase competition, reducing profit margins for the original market leader; more companies and more competition also mean more innovation; both of these factors increase overall social welfare. In a true competitive market, one without barriers to entry or market power, companies should not earn any profits at all, because competition will drive price down to marginal cost.

But Kwak fails to draw the distinction that he is talking about a different type of profit than the professor is talking about.

The professor is referring to accounting profits. This is what a company reports to the public in the form of net income at the end of a quarter or year (corporate earnings, as the professor calls them). Quite simply, it is the company's total revenues, or sales, minus its expenses, which include the cost of labor, supplies, shipping, buildings, etc. It's what accountants get paid to figure out.

Kwak confuses things, though, because he is referring to economic profits. This is what an economic professor is talking about when he teaches you Econ 101. This includes "costs" an accountant would not consider when reporting net income, mainly opportunity costs. An opportunity cost, as Wikipedia nicely sums up, is the "value of the next best alternative forgone as the result of making a decision."* Economic profits -- not accounting profits -- go to 0 in a perfect economy because companies will continue to enter a market until the benefits of entering market B (in other words, the opportunity cost to entering market A) outweigh the benefits of entering market A. The cost of having to choose to enter market A instead of entering market B, though, is not an expense as an accountant would think of things, so you can easily have an accounting profit in a perfectly competitive market where economic profits are, in fact, equal to zero.

This doesn't necessarily mean Kwak's main argument is wrong, but it is a mistake worth mentioning (which is why I pointed it out in the comments of the post, too). Hopefully this post will keep you from making the same mistake in the future.

* For instance, let's say you take a job with company A for $50,000 over a job with company B for $45,000. The opportunity cost of taking the job is $45,000.

Thursday, July 9, 2009

Why Financial Journalism Has Struck Out

The Atlantic’s Derek Thompson wrote an interesting post today critiquing the problems of financial journalism by comparing it to political journalism:

“Politics, I think, is fundamentally different than economics because...well, I don't want to say "because it's just just simpler," even if I suspect it might be the case. Instead I'll say this: Much of economics has its own language. For many Americans, it's a foreign language. Financial regulation reforms, like assessing risk in shadow banking markets, is still, I'm unembarrassed to say, a bit shadowy to me. And the right way to do stimulus spending in a crisis is still shadowy for the economic industry, even though they've been studying it for 60 years!

On the other hand, you don't need to exotically expand your civic vocabulary to understand that American politics is about votes, interests and values, and when you stir them together, you get a stew called strategy. Everybody gets politics, because it's all so much like life. If you were tasked with describing politics exclusively through sports metaphors, I think you could do it pretty effectively. The Democrats struggling to write a passable health care bill to get conservative Democratic support? Kinda like a coach designing a playbook for a quarterback with compromised skills. Obama pledging openness rather than clenched fists to troubling foreign leaders isn't so different from a team's strategy of dealing with troubled players (Artest, Owens, Sprewell) through inclusion rather than punishment. On the other hand, after 10 months, I still can't conjure baseball metaphors for the Public-Private Investment Partnership.”

So does financial journalism simply need more metaphors? Not necessarily. But if economics is going to be as approachable as politics, we're going to have to get creative. We can start by speaking in English, as Felix Salmon wrote, rather than Wall Street acronyms. We can start by imagining our audience, not as the author of the blog post we're responding to, but as the readers of the blog post we're writing, who don't know a CDS from an STD, because we haven't fully explained it since an entry we wrote in March. But we can do it. We can be readable!

I’m actually surprised Thompson considers journalists using sports metaphors to describe politics as an example of successful coverage. I think many people would argue that coverage like that is one of the biggest problems with political journalism. It doesn’t make it more “approachable”—it just fails to adequately discuss the real issues behind legislation. We don’t get to read about the various economic advantages and drawbacks of various health care plans floated by Congress, for instance, but only about which bills can get passed. I’d hate for finance journalism to be more like that.

The mainstream media already tries to shoehorn its business and finance coverage within that structure. Reporters write profiles glorifying (or villifying) CEOs — just like they might write about politicians. They report about company X’s decision to introduce a product to battle with company Y or combat broader trend Z—just like they might write about the fight over a bill. But it’s more difficult to write an explanatory piece about a complex financial instrument—just like it’s difficult to write about the substance of various bills. Journalists need elements like conflict, plot, and characters that that don't necessarily help explain those sorts of things.

The problem is not that readers can’t understand finance (or politics) if you aren’t able to easily compare it to life, sports, or some other thing the “common man” can grasp. The problem is that journalists can’t write about it within their traditional narratives without using those sorts of metaphors. It’s not just about finding the proper language to describe collateralized debt obligations of asset-backed securities, credit default swaps and other complex financial topics in terms readers can comprehend. It’s about finding organizations and structures of stories to convey that knowledge—and I’m not sure they exist in the traditional journalist’s toolbox.

This is why blogs have been so successful in explaining the financial crisis to us. They don’t need to use the inverted pyramid structure or write killer ledes and nutgrafs — they can simply explain collaterlized debt obligations of asset-backed securities to us. Or they can use cool graphics. It’s a bit easier to get something like that on a blog than it is to get it on the front page of the New York Times.

Wednesday, July 8, 2009

Guess the Center for American Progress Pays Pretty Well

In Matt Ygelsias’s post on Google Chrome OS today, he asks why there is so much interest in netbooks:

I have to say that I’ve never totally understood the appeal of the netbook concept. The low cost is nice, but you can’t use it as your main “go to” computer. So if you have to buy another computer anyway, you may as well invest in a decent laptop. It’s not as if my 13 inch MacBook Pro is so crippling heavy I can’t take it around with me. And I get around town by walking/biking—what does America’s car-dependent majority need with an ultra-light computer?

As Ygelsias himself notes, the problem with regular notebooks is not their size—it’s their cost. The 13-inch MacBook Pro would cost you $1199.99. Compare that to the $325 Asus eee 1000HA, and you can see the appeal.

Despite Ygelias’s contention, there is no reason you couldn’t use a netbook as your “go to” computer. Most people waste money by purchasing computers with more power than they’ll ever use. If you’re doing high-end video editing*, sure, it’s probably worth it to pay extra for an Apple. If you’re just doing word processing, browsing the internet, and listening to music, a netbook will do just fine.

And if Ygelsias is really concerned about power, he should welcome Google OS given that its entire purpose is to advance cloud computing, which could help make netbooks as useful as any other computer. No longer will you rely on your own hardware to complete tasks—you can instead use the internet to access a remote server far more powerful than any computer you’ll ever own**. There’s almost no need to buy Microsoft Word when you can use Google Docs for free.

Google OS aims to make this as easy as possible by booting up your computer and connecting you to the Internet — and thus your applications — as quickly as possible. You’ll have the ability to access your files anywhere***, won't have to worry about software being compatible with your computer’s hardware, and benefit from the lack of bloat on your own computer. And, of course, you’ll save yourself a lot of money. Makes sense to me.

* Or really must look cool.
** Mark Thoma points out this is like returning to the early days of mainframe computers.
*** Obviously, there are drawbacks to this, such as you probably don’t want to rely on Google to store all your personal documents. But for most files, this will probably work.

Monday, July 6, 2009

Who Was Buying It?

In a recent Twitter debate with Felix Salmon regarding Matt Taibbi’s scathing Rolling Stone article on Goldman Sachs, financial reporter Heidi Moore raised an interesting point: investment banks and others could not have created many of the structured finance products that have played a key role in the current crisis if there was no demand for them. So it’s worth examining not just the sell-side of the market, but the buy-side, too.

Personally, I don’t know enough about the specifics of the CDO ABS market to speak authoritatively on who was buying these products and why (and I doubt you want to hear about them).* However, I think we can look at the problem more generally to determine why seemingly sophisticated institutional investors time-and-time again get suckered into buying into the latest fad the investment banks are peddling, whether it be Internet IPOs, mortgage-backed securities, or whatever else they’ll cook up next.

*Although if you do, Yves Smith over at had a great conversation with a commenter that explores this issue.

I have three theories:

1.) Forgetting the SALES in Salesman – People tend to think they’re getting unbiased advice when it comes from financial-services professionals. That nice mortgage broker really wants to help you afford a new home. The Merrill Lynch man suggests you buy a certain stock to start stashing away for your son’s college fund. Unfortunately, you can no more rely on the people on the sell-side of the market for help than you would your average car-dealer.

The job of people on the sell-side of the market is, not surprisingly, to sell. The mortgage broker really wants to sell you a mortgage not to help you get that house but to make his own commission. Same thing with the Merrill Lynch broker. When it comes to the salesman selling to institutional investors it’s no different. Michael Lewis chronicled in Liar's Poker the art of "blowing up a customer." One player in a story Lewis wrote for Portfolio remarked how he would always ask salesmen from the investment bank: “I appreciate this, but I just want to know one thing: How are you going to screw me?”. Come to think of it, I might prefer the used-car salesman.

Most people would probably be surprised to learn investment banks don’t really have any fiduciary duties. When they’re underwriting a deal, they don’t have a responsibility to get the best deal for the client coming to market with stocks or bonds. When they’re selling those stocks or bonds, they don’t have any obligation to the investor to make sure the product they're selling is worth the investment. It’s a wonder why anyone keeps believing them.

2.) Let's Make a Deal – I also suspect that some institutional investors often invest in certain deals expecting to get a deal on another. The investment banking salesman and the institutional investors are engaged in repeated interactions**. If an institutional investor participates in one deal he's not so certain about, I’m sure salesman offers to get the investor a big discount on another deal.

** Which you think would deter the activity in Theory 1, but it clearly does not.

3.) But Mom… - Finally, I suspect many institutional investors buy these product because of the everyone-else-is-doing-it philosophy. On one hand, you might say this is simply stupid. But from an individual perspective, it may make some sense.

Institutional investors are judged based on how they do compared to other institutional investors. Sure, manager X may think the market is overvaluing Internet stocks, for instance, but if he doesn’t invest in them he will find himself falling behind ever other manager that is investing in them. With returns consistently lagging the market, he will likely see investors pull their money out of his fund. Consequently, he may lose his job before the market crashes and he’s proven right.

Alternatively, manager X might suck it up and just invest in the overpriced Internet stocks. When he is right and the market crashes, he fund loses — but so does every other competing fund. He doesn’t look any worse than any other manager that “didn’t see it coming” and hangs onto his job. It's OK to fail as long as everyone else does to.

Anyway, that's not meant to be a definitive list. Just some ideas kicking around in my head. Take it for what it's worth.

Wednesday, July 1, 2009

Let's Not Forget

Matt Yglesias writes today about a Washington Op-Ed regarding the budget crisis in California. Yglesias makes an important point:

Even the whole “green shoots” debate is really about whether we can expect things to be somewhat better or somewhat worse six months out from now. In either case, things really are really bad right now. And a whole bunch of states including large ones like California and Pennsylvania—are soon to implement substantial cutbacks in services at just the time when the objective need for social services is going up.

The near-term fiscal pressures state and local governments will face is one of the things that concerns me most looking at the economy moving forward. Most of these governments are required by law to balance their budgets. As tax receipts fall, cuts must follow. Although there's certainly an argument to be made that many state and local governments are bloated, a period of economic distress is an inopportune time to reduce spending. Cuts by these entities have the potential to counteract any spending increases by the federal government and send our economy plunging.

One only needs to look at the Great Depression for proof. Most high school history classes teach you that the federal government used the New Deal to boost the economic recovery. What they fail to mention--which you can see below--is that state and local governments ran surpluses to balance out the federal spending. If my memory serves me correct (I can't find the actual numbers), federal, state, and local governments ran an aggregate SURPLUS for most of the Great Depression, with the state and local governments essentially nullifying any impact of FDR's fiscal stimulus. Only during World War II did the U.S. finally return to producing at its maximum capability. I really hope we don't forget that lesson.

Source: Econobrowser

Tuesday, June 30, 2009

Taibbi on Goldman PR

Just a brief follow-up on my post about the PR departments at investment banks from a few weeks ago. Rolling Stone writer Matt Taibbi discusses the tact Goldman Sachs took regarding his big piece I'm sure you've heard about here.

Sunday, June 28, 2009

Now That's An Aggressive Advertising Strategy

Talk about going after the competition:

Saturday, June 27, 2009

Rating the Rating Agencies

One of the more disappointing elements of the administration's proposed financial regulation reform is the absence of any real action regarding the rating agencies. After the tongue-lashing Congress gave rating agencies executives regarding the whole we'd-rate-this-stuff-if-it-were-structured-by-cows fiasco, I assumed that this would be addressed. But as Barry Ritholtz pointed out, the rating agencies were largely left out of the outline.

Although much of the criticism of rating agencies stems from the inherent conflict of interest of the issuer-pays model the big three* use, the real problem is the rating agencies' government-ordained role in the financial system. The issue is not that investors became overly reliant on on the rating agencies, but rather that the rating agencies are embedded into regulatory models, as Marc Flandreau and Norbert Gaillard point out. Mutual funds, banks, and other financial institutions all have requirements limiting what securities they can own based on how those are holdings are rated. Even if the financial institutions don't want to care about what the rating agencies say, they law says they have to.

*Standard & Poor's, Moody's, and Fitch

It's unfortunate these regulations gives so much power to these--or any other--institutions. I don't blame the rating agencies for getting things wrong, because it's foolish to expect them to get them right. You could count on one hand the number of people that actually predicted the crisis. What makes the rating agencies better at this than anyone else? If you really could, for instance, predict that Lehman Brothers would fail, you'd make a lot more money shorting the stock on your own than you would downgrading the rating while working at Moody's. Their models are essentially based on what has happened in the past**. No amount of regulation is going to improve the rating agencies -- or anyone else's -- ability to forecast the future.

** Mortgage-backed securities never defaulted--until they did.

So the problem is not reforming the rating agencies themselves, but rather reforming the system to remove their influence. The rating agencies themselves are now using the First Amendment to argue they shouldn't be responsible for what they write. If the rating agencies are now backing away from what they've said in the past, why should the government continue to give them oligopoly for the future?

Thursday, June 25, 2009

Money Well Spent

The WSJ today makes the SHOCKING discovery that the government is paying up to $60 million per year to help employees pay off their student loans. It says the practice is coming under growing "scrutiny".

WASHINGTON -- Congress and federal agencies are expected to spend as much as $60 million in fiscal 2009 on a little-known taxpayer-funded perk: repaying government employees' college loans.

Paying off staffers' old student loans is rare in the private sector. And while total spending on the benefit in the federal government remains relatively small, it has multiplied since the program began seven years ago, according to federal records and government officials.

And gives us this "helpful" quote:

Carol Sladek, head of the work-life consulting practice at Hewitt Associates, a human-resources consulting company in Lincolnshire, Ill., called student-loan repayments an unusual benefit. "I have never heard of that practice in the private sector, much less in this economy," she said

First, why do people insist on compartmentalizing compensation into things like perks, rather than just looking at the overall pay package? Instead of making student loan payments, the government could instead just pay staffers $10,000 more per year. I highly doubt there would then be a story about the "scrutiny" growing over staffers getting paid too much. For some reason people tend to view "free" stuff as having a value much higher than what it's really worth.

Second, it seems to me this is money well spent. About 48.7% of the student loan payments occurred within the Department of Justice, where staffers get paid far below the standard rates they could earn in the private sector. An entry-level DOJ attorney would have made just $60,989 this year, nowhere near the $160,000 top law firms have typically paid first-year associates*. Even an experienced attorney joining the DOJ at the top of its payscale can't make more than $153,200. An extra $10,000 in loan payments seems like a small price to pay to give the government a chance to attract top-level talent that would otherwise not be able to afford work in the public sector.

* Even some of the firms that have deferred associates have offered to pay more than $70K.

Thursday, June 11, 2009

Why Oh Why Can't We Have A Better Blogosphere? (Brad DeLong Crash-and-Burn Edition)

I like Brad DeLong and often agree with what he has to say, but he can be a pretty big dick (for lack of a better term), especially about the press*.

* Some recent headlines include: "We Need to Be Who We Can Be--and That Means We Need to Not Listen to the LIkes of Thomas Friedman and Richard Cohen", "New York Times Crashed-and-Burned-and-Smoking Watch (David Brooks Edition)", "Washington Post Crashed, Burned, and Smoking Watch: Charles Krauthammer", etc.

Which is why I couldn't help but find funny Judge Richard Posner's critique of DeLong's review of Posner's most recent book. One can only imagine what DeLong would say if someone made factual errors like he did. And notice that he still hasn't even made the corrections to his blog post, even after people pointed them out.:

I am not in fact "leader of the Chicago School of Economics" and I am not a judge of the Fourth Circuit**. (Later in his review DeLong calls me "one of America's leading public intellectuals," with "very wide" influence--both of which statements are incorrect***.)

** Posner's on the Second Circuit, FYI.
*** Yes, part modesty/self-deprecation by Posner, but, still, he's got a point.

To borrow (and slightly modify) a phrase from DeLong, Why Oh Why Can't We Have a Better Blogosphere?

Friday, June 5, 2009

And We're Listening to Them Why?

Apparently, a Goldman Sachs research report revising its outlook on oil helped send oil prices higher this week. From CNN:

Also supporting oil prices, Goldman Sachs (GS, Fortune 500) released a research report Thursday raising its 3-month price target for crude oil to $75 a barrel from $52 a barrel. By the end of 2009, the report predicts oil will reach $85 a barrel, up from $65 a barrel. And by the end of 2010, Goldman forecasts that crude will hit $95 a barrel.

"When Goldman Sachs starts to talk bullish the market seems to move like it just got an offer that it just can't refuse," said Phil Flynn, senior market analyst at Alaron Trading, in his daily research note.

This would be the brilliant analysts at Goldman Sachs that predicted this last May:

Arjun N. Murti remembers the pain of the oil shocks of the 1970s. But he is bracing for something far worse now: He foresees a “super spike” — a price surge that will soon drive crude oil to $200 a barrel.

Mr. Murti, who has a bit of a green streak, is not bothered much by the prospect of even higher oil prices, figuring it might finally prompt America to become more energy efficient.

An analyst at Goldman Sachs, Mr. Murti has become the talk of the oil market by issuing one sensational forecast after another. A few years ago, rivals scoffed when he predicted oil would breach $100 a barrel. Few are laughing now. Oil shattered yet another record on Tuesday, touching $129.60 on the New York Mercantile Exchange. Gas at $4 a gallon is arriving just in time for those long summer drives.

Mr. Murti, 39, argues that the world’s seemingly unquenchable thirst for oil means prices will keep rising from here and stay above $100 into 2011. Others disagree, arguing that prices could abruptly tumble if speculators in the market rush for the exits. But the grim calculus of Mr. Murti’s prediction, issued in March and reconfirmed two weeks ago, is enough to give anyone pause: in an America of $200 oil, gasoline could cost more than $6 a gallon.

Ummmm, oops:

Thursday, June 4, 2009

My Apologies

About a week ago, I criticized Congress for resorting to "elementary school-like tactics," asking in what other professional world they'd be acceptable. The WSJ finds a case of it in the business world today:

Wednesday's shareholder meeting was marked with unexpected acrimony. Biogen's chairman, Bruce Ross, recessed the meeting for more than three hours over shouted objections from Mr. Icahn's representatives.

Biogen's executives then retreated to a small patio at the headquarters of the American Academy of Arts and Sciences in Cambridge, where the meeting was held, and phoned major shareholders to solicit support.

Mr. Icahn's nominees returned to a Boston-area hotel and did the same.

As I always say: Real mature, guys, reaaallllllll mature.

Wednesday, June 3, 2009

Would That Really Be Good?

Great article today from the Wall Street Journal on financial institutions' efforts to lobby for an accounting rule change:

Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets.
Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April.
The payoff is likely to be fatter bottom lines in the second quarter.

I’d like to set aside the ethics of politicians such as Rep. Paul Kanjorski, who over the past two years received "$704,000 in contributions from banking and insurance firms, the third-highest total among members of Congress, according to the FEC and the Center for Responsive Politics.”* I’ll also ignore for the day the debate over which accounting rule is right.


But take note of this quote from a Kanjorski spokesperson:

“A spokeswoman says Rep. Kanjorski believes the accounting industry's rule-making body, the Financial Accounting Standards Board, or FASB, made the right move since neither mark-to-market critics nor advocates are "entirely pleased with the outcome." She says campaign contributions didn't factor into the congressman's thinking.”

Why would a decision be good just because both sides are unhappy? Shouldn’t we be making decisions because…I don’t know…that decision is simply the right thing to do. There should be no need to compromise when one side is wrong.

Just more typical PR BS. But at least Kanjorski’s people tried to defend him.

Friday, May 29, 2009

Something I'll Never Understand

As I'm sure you all know, I'm never one to pass up the opportunity to poke fun of investment bankers. That said, I don't get why they allow themselves to get beat up in the press so that I and others can do it.

Take for example this story by Bloomberg's Michael Quint:

MTA Likes Bond Traders So Much to Forgo Subway Cars

May 29 (Bloomberg) -- The first winners in the Metropolitan Transportation Authority’s $750 million bond sale were traders who bought and unloaded the debt immediately for a quick profit, not commuters on the 5:49 p.m. train from New York to Scarsdale.

The April issue was part of President Barack Obama’s Build America Bond program to let local governments borrow at lower cost by having the U.S. Treasury bear 35 percent of their interest expense. The MTA, operator of the nation’s largest transit system, is raising fares an average of 10 percent starting next month to help cover a $1.8 billion budget deficit.

With the federal subsidy, the agency was able to pay a yield high enough for an immediate $3 million profit for traders, according to data compiled by Bloomberg. Lowering the yield 0.1 percentage point on the taxable issue would have saved about $9 million, enough for the agency’s share of eight new subway cars.

Valid or not, the bankers have their reasons for why the believe the pricing was adequate. But rather than explain this to reporters for print, they stew about the stories in private (I've heard them). And their PR guys make their companies look horrible by letting the story hang out there:

Brian Marchiony, a JPMorgan Chase spokesman, declined to comment on the MTA’s pricing or its own bond sale. The agency paid underwriters led by the New York-based bank $6.68 million to handle the sale.

Dellaverson’s statement said Goldman Sachs Group Inc., the agency’s financial adviser, had access to market information that helped it sell with more favorable terms than the earlier transactions that week by California and the New Jersey Turnpike Authority.
California Borrows

Before the MTA transaction, the price of California Build America Bonds underwritten by Goldman Sachs traded at 3.33 percentage points over Treasuries, or less than the 3.5-point spread set at the transit authority’s sale, according to Bloomberg data.

The MTA paid Goldman Sachs $487,500 for advice on getting the highest price and lowest yield, according to Aaron Donovan, spokesman for the agency. Michael DuVally, a spokesman for the New York-based bank, declined to comment.

Maybe I just don't understand communications, but how is this a good PR strategy? I really don't get what investment bank PR people get paid to do, because they rarely give anything other than a no comment and there companies consistently come out looking awful in the media. Can anyone explain to me why you wouldn't at least try to defend the company?

Thursday, May 28, 2009

I'm Not A Lawyer...

But it seems to me that an article by Slate's Ben Sheffner on whether today's meeting of newspapers executives would violate antitrust law is a bit off. From Sheffner:

Antitrust law is complicated, but one principle is very simple: Competitors cannot get together and agree on price or the terms on which they will offer their services to their customers. It doesn't matter if the industry is ailing or if collusion would be "good" for society or necessary to preserve democracy. An agreement regarding pricing is "per se"—automatically—illegal under Section 1 of the Sherman Act, the main federal antitrust law.

All but a few newspapers currently give away their Web content for free. Many would like to start charging but are afraid that if they're the first to make the leap, their readers will abandon them for the remaining free alternatives. One obvious solution would be for them to agree to make a collective leap behind a pay wall.

But such an agreement would be blatantly illegal, says Kenneth Ewing, a partner at Steptoe & Johnson who, as head of his firm's antitrust practice, advises corporations on how to stay out of trouble. "It's Antitrust 101. If you're a competitor of another company, you violate federal and state law if you agree on the price or the general terms on which you are willing to compete."

Benign meetings of the American Widget Manufacturers Association can, in the absence of very careful lawyering, become the venue for unlawful antitrust conspiracies in which general discussions about industry conditions and trends can segue into verboten conspiracy. "To put a group of competitors together in a room and have them discuss anything even close to considering prices … is a very risky undertaking," says Maxwell Blecher, a prominent antitrust attorney who represents plaintiffs in price-fixing suits. In a 2007 presentation, Ewing advised that when competitors meet, they should "avoid topics" including "prices, payment terms, costs, wages or salaries, profit levels … [and] business strategy."

I would agree with Sheffner that this would be a worry for the American Widget Manufacturers Association. I'm not sure, though, it would be for these newspaper executives.

Sure, if the owners of two newspapers in the same city collaborated on business strategies, they would run afoul of antitrust laws. Which is exactly the reason why the Newspaper Preservation Act of 1970* allows newspapers to sign joint operating agreements that exempt them from anti-trust laws. See: the Detroit News and Free Press.

*Signed by Nixon!

But that's not the case here.

A very key concept in antitrust law is how product and geographical markets are defined. Essentially, we want to know who are a company's competitors and what are consumers' other options in every geographic market. For instance, if Trader Joe's and Kroger wanted to merge, economists would analyze how this would impact the grocery store market in Ann Arbor, Chicago, Columbus, etc.**

** Regulators always try to define markets as narrowly as possible for antitrust purposes. When Whole Foods and Wild Oats merged, for instance, the FTC tried to argue they would monopolize the market for "natural and organic food," while the companies tried to argue they were in just the grocery store market, because many competitors also sold those goods.

Although newspapers from different cities are in the same industry, I would argue they're not really competitors--even with the Internet. If the San Francisco Chronicle started charging for access to its website, the fact the Miami Herald also did this wouldn't really harm local news consumers. San Francisco-ites would instead turn to blogs, TV, or the alternative press to get their local news***. In fact, it'd be nearly impossible to argue newspapers from different cities are competitors given that local monopolies are the reason many newspapers had been so successful. And without being competitors, you can't really break antitrust law.

***UPDATE:Forgot to add this, but if we're defining a market as electronic news in San Francisco, for instance, it's relatively easy to break into. Establishing a printing press and distribution network may have created barriers to entry, but basically anyone can setup a website. And if the San Francisco Chronicle was charging for access, it'd be relatively easy to undercut them and draw traffic to your site. These people are competitors, not newspaper websites in far-off cities.

Again, I'm not lawyer. And I certainly haven't crunched the numbers an economist would. But I'd be willing to bet that newspapers would not lose an antitrust lawsuit if they all agreed to charge for access to their websites.

Whether it'd be a good business decision for them to do that, though, is a different story...

Wednesday, May 27, 2009

It's Not That Hard

A while back, I pointed out why it was ridiculous for Goldman Sachs and other banks to say that because AIG was a triple-A rated company, the banks should not be blamed for taking on all these risks with AIG as a counterparty. So I was glad to see Dow Jones columnist Donna Child earlier this week provide even more proof for how outrageous the banks' claims are.

NEW YORK (Dow Jones)--Described as a "black hole," American International Group Inc. (AIG) is largely inscrutable - but not to everyone. Like the proverbial canary in the coal mine, key reinsurance markets delved deep into the operations of AIG and concluded that they could not sustain life.

Had investment banks had the benefit of the same insight, they might have averted the counterparty risks that required a substantial bailout orchestrated by the U.S. Treasury.

Why did reinsurance markets possess the insight that had eluded investment banks?

Investment bankers understand single transactions and fees for insurance company clients, such as bond offerings, sidecars or equity issuance.

Reinsurance, which is contingent financing for underwriting risks, contains all of these features with an element of continuity that becomes an intangible asset between the insurer and reinsurer. Reinsurance companies, therefore, have a much longer time horizon than investment banks.

With a potential long-term exposure to AIG, reinsurance markets carefully scrutinized AIG's business as part of their underwriting due diligence. Because of the longevity of AIG's business commitments, the long-tail nature of certain of its liabilities and its pricing practices, including those at AIG's London-based Financial Products unit, leading reinsurance markets concluded, in the phrase of one provider, that "making a return on reinsuring AIG was an accomplishment if not a rarity."

Having reached this conclusion years ago, leading reinsurance markets declined to participate in certain of AIG's transactions and thus averted the costly lessons learned by investment banks with credit counterparty exposure to AIG and ultimately, because of the systemic risk involved, to the U.S. Treasury.

Is it too much to ask bankers and traders making millions of dollars a year to actually, you know, do research into the risks they are taking?

Tuesday, May 26, 2009

Some Of Us Like Our Privacy

Say you're the New York Yankees. You just spent $1.5 billion on a new stadium. It has a state-of-the-art audio-visual system. Bars, restaurants, and concession stands. Even nice elevators to the upper level. But you can't spare a future extra bucks to put dividers between the urinals*. Come on.

*Even worse, they're the urinals that jut out from the wall like regular toilets, not the ones that are parallel to the wall.

Friday, May 22, 2009

The "Experts"

Perhaps more so than ever, the average American wants financial experts to explain to them what's happening in the market. Why, on any given day, did the market go down? More important, they ask, what will it do in the future? And read the Wall Street Journal, watch CNBC, or check out one of many blogs, and you'll find thousands of different thoughts on those questions.

Unfortunately, I rarely hear any of these "experts" give out the one piece of advice that they all should know--no one has any idea what stocks will do tomorrow, much less a year or 10 from now. Study after study has shown that picking stocks is a worthless exercise. Most mutual fund managers can't beat the market year-after-year, much less your average amateur investor*. It's not even really clear whether the great Warren Buffett is a really, really great investor, or just extraordinarily lucky.

* Please don't pick stocks and don't invest in actively managed mutual funds. Buy an index fund with low expenses. Or throw darts. Or hire a chimp to throw darts. Seriously.

If people would even really think about what some "experts" are telling them, this would all be clear. For instance, Zero Hedge points out today that a research piece by Morgan Stanley upgraded the price targets on most major banks by a median of 33%. Part of its rationale: using 2012 for normalized earnings. 2012?!?!?!? If only they had been so prescient about what would happen three years down the road in 2005, we wouldn't be in the mess we're in. Does anyone really believe these people can predict this?

Why anyone gets paid to give this sort of advice--and why anyone would buy it--is beyond me.

Wednesday, May 20, 2009

I'm Always Amazed

I know I shouldn't ever be too surprised at the way things work in Washington D.C. But every time I see a story like this, I get more depressed about the way this country is actually run:

WASHINGTON -- Democrats in the House Energy and Commerce Committee have taken a novel precaution to head off Republican efforts to slow action this week on a sweeping climate bill. They are hiring a speed reader.

Republicans on the committee have said they may force the reading of the entire 946-page bill -- as well as major amendments that measure several hundred pages -- all aloud. This is a procedure lawmakers have a right to invoke. Republicans are largely against the bill, which aims to cut emissions of so-called greenhouse gases by more than 80% over the next half-century but would be costly.

I know BS like this goes on all the time, but it's absurd that the people leading our country have so distorted the the political process that it's now full of elementary school-like tactics. In what other serious professional realm would this be acceptable? And if this is what they're doing in public, who knows what they're doing behind the scenes.

Tuesday, May 19, 2009


I find it quite funny that David Brooks cited Jim Collins' Good to Great as a study of the best characteristics of CEOs:

These results are consistent with a lot of work that’s been done over the past few decades. In 2001, Jim Collins published a best-selling study called “Good to Great.” He found that the best C.E.O.’s were not the flamboyant visionaries. They were humble, self-effacing, diligent and resolute souls who found one thing they were really good at and did it over and over again.

If one actually looked at some of the 11 profiles included in the book, he might not be as impressed. As Steven Levitt pointed out last year, the CEOs Collins praised included now bailed out Fannie Mae and now bankrupt Circuit City. So much for Built to Last.

From Levitt:

I seem to remember that someone did an analysis of the companies highlighted in Peters and Waterman’s 1980’s classic book In Search of Excellence and found the same thing.

What does this all mean? In one sense, not much.

These business books are mostly backward-looking: what have companies done that has made them successful? The future is always hard to predict, and understanding the past is valuable; on the other hand, the implicit message of these business books is that the principles that these companies use not only have made them good in the past, but position them for continued success.

To the extent that this doesn’t actually turn out to be true, it calls into question the basic premise of these books, doesn’t it?

Monday, May 18, 2009

If You Build It, They Might Not Come

As part of its increasing involvement in the auto industry, the Obama Administration made some big news today on the emissions front, according to the NYTimes:

WASHINGTON —The Obama administration will issue new national emissions and mileage requirements for cars and light trucks to resolve a long-running conflict among the states, the federal government and auto manufacturers, industry officials said Monday.
President Obama will announce as early as Tuesday that he will combine California’s tough new auto-emissions rules with the existing corporate average fuel economy standard to create a single new national standard, the officials said. As a result, cars and light trucks sold in the United States will be roughly 30 percent cleaner and more fuel-efficient by 2016.

One problem: What if consumers don’t want to buy them?

The common myth among the chattering classes is that the U.S. automakers are struggling because they allowed foreign automakers to take the lead on environmentally friendly technologies, such as hybrid vehicles.

The New York Times even makes this point at the end of its story.

During the presidential campaign, he gave a speech in Detroit chastising the American automobile industry for doing too little to reduce the nation’s dependence on foreign oil and to improve the vehicles’ fuel efficiency.

"The auto industry’s refusal to act for so long has left it mired in a predicament for which there is no easy way out," Mr. Obama said.

That inaction has brought General Motors and Chrysler to their current dire state, requiring billions in federal bailouts and Chrysler’s forced marriage to Fiat to survive.

I won’t waste your time detailing the real reasons these automakers are in trouble. I assure you, though, that their failure to act on fuel efficiency have little to do with it. The fuel efficiency standards, on the other hand, had a big part.

For quite a while, the Detroit 3 knew how to make cars Americans wanted—big SUVs and minivans. With gas so cheap in the U.S. relative to other countries, Americans have typically been willing to sacrifice fuel efficiency for more comfort. Paying for fuel-efficient technologies — such as hybrid cars — was simply not worth it for many consumers. A purchaser of the much-lauded Toyota Prius, for instance, would need to drive it 4.2 years before he even broke-even with gas savings compared to a Toyota Camry LE, according to Edmunds. It makes sense as a political statement, not as a money-saving vehicle.

Unfortunately, the fuel efficiency standards set by Congress required the automakers to maintain an average fuel economy for their entire fleet. This required producing unprofitable smaller cars, to offset the lower fuel economy of the profitable big ones. Further, the fleet requirements also provided a nice subsidy to the United Autoworkers union by requiring automakers to maintain the fuel economy standards on domestically produced cars separate from those produced in foreign countries. This prevented the automakers from building profitable SUVs in the U.S., while shifting production of smaller cars elsewhere (where they might have been built more cheaply). Don't let the fact that American car companies sold tons of SUVs and truck trick you into thinking they weren't creating small cars, too*. Thinking logically, they would have had to have been building small, fuel-efficient cars to average out for all the big, fuel-inefficient ones they were building, too.

* If you've ever wondered why rental car companies and other fleets buy so many domestics, here's you answer. Car companies needed to unload all these cars somewhere.

Going back to the New York Times article, the reason GM/Chrysler needed a bailout has nothing to do with inaction on the fuel economy. It has to do with the fact consumers aren’t buying cars. Period. Even Toyota and Honda have lost billions of dollars in this economy.

You can blame years of poorly produced cars for the Detroit 3's downfall**. Or an antiquated franchise system. Or way too many brands. Or poor images. Or managerial arrogance. And so on. I don't think a failure to produce fuel efficient vehicles (if this myth is even true) has much to do with.

**Even though their cars are actually some of the best rated now.

Raising the gas tax would easily solve this problem. Consumers would now have incentives to buy fuel efficient vehicles. Because there would be actual demand, carmakers would have an incentive to build them. But why would any politician do the smart and honest thing that might upset the public, when he can just shift the blame to someone else instead.

Thursday, May 14, 2009

Twitter Away, I Say

Interesting story from the NYO today about how the NYT bigwigs want their reporters to keep their fingers off their iPhones and BlackBerry's during meetings:

At the meeting, Metro editor Jodi Rudoren said that she doesn’t believe Times staffers should be tweeting any internal news—good news, bad news, whatever.

From Bill Keller:

Before we get going, I'm going to say something I perhaps should have said Monday, when we did our digital update in this auditorium. It's important that we be as open as possible with one another about things going on inside The Times. But the level of candor is likely to be diminished if people are Twittering fragments of the conversation to the outside world. We need a zone of trust, where people can say what's on their minds without fear of having an unscripted remark or a partially baked idea zapped into cyberspace.

I find it terribly hypocritical of the Times editors to be admonishing their reporters on this. It's one thing when the Times' business staff refuses to speak to the press. It's quite another when The Times' editors asks their reporters to remain silent on issues about the Times that they would demand their reporters ask sources at other institutions to provide details about*.

* That said, I also tend to think that the media spends way too much time reporting about other media. Do readers care about this? Certainly, the decline of print journalism is a story worth covering, but stories about the layoff of journalists are published at a disproportionate rate to their portion of the total number of layoffs in the broader economy. Although over-inflating the media's own importance is certainly part of this, I actually think it's more related to the relative ease with which journalists can get information about layoffs at other newspapers--as opposed to investment banks, construction companies, etc.

Markets in Everything, Fantasy Sports Edition

Taking a page out of Tyler Cowen's playbook, I found this amusing in the WSJ the other day:

Dodgers fans are not alone in their woes. Manny Ramirez's 50-game suspension is killing many fantasy owners, too. According to the Web site, Manny Ramirez was taken, on average, with the 20th pick in fantasy drafts this year -- about the same as Mets ace Johan Santana. The only people in worse shape are those fantasy owners who recently acquired Mr. Ramirez in a trade. Marc Edelman of SportsJudge, a service that resolves fantasy disputes, says any Ramirez trade made after the news broke Thursday should be nullified. Anything before? "Buyer beware," he says.

Here is there website. It's run by an actual lawyer. And they write real opinions.

Tuesday, May 12, 2009


Looks like Auggie Torres's columns were no help. From the early results of Jersey City's mayoral election:

  • Vote      Count           Percent- 
  • L. Harvey Smith   3,060          13.26%- 
  • Phillip G. Webb     538                2.33%- 
  • Louis M. Manzo    6,030           26.14%- 
  • Jerramiah Healy    12,214         52.95%- 
  • Daniel B. Levin       1,208            5.24%
  • Personal Choice         19                 0.08%
  • Total                       23,069            100.00%

Unless absentee and provisional ballots can keep Healy from getting 50% plus 1 of the votes, it looks like the Jersey City pubs will be in for another four years of strong earnings.

All we need is just a little patience

The elevator bank for the portion of the office that I work on has six elevators. Even though they're really slow, I don't think I've ever waited more than one minute to get an elevator after I push the button to go up from the ground floor. Could someone please explain to me, though, why others feel the need to rush to catch an elevator before it closes so they can squeeze in? Is anyone really that anxious to get to their desk one minute earlier in the morning?

Tuesday, May 5, 2009

I Also Forgot

Not to harp on the Craig Carton/Selena Roberts issue, but I forgot until today about the last time I remember Boomer and Carton being that hostile to a guest -- when former NY Times sports editor Neil Amdur called in to defend Roberts a few months ago. Carton's comments then, as Newsdays' Neil Best reported, pretty much sum up how seriously Carton's views should be taken:

"Does she have an anti-man complex you're aware of?" Carton asked Amdur, later adding, "She doesn't like men, is my assertion." Oy.

Oy, indeed.

Monday, May 4, 2009

I Hate To...

Waste time dissecting sports talk radio, but like The Big Lead, I found myself "increasingly infuriated" while listening to Craig Carton and Boomer Esiason attempted hit-job on Sports Illustrated's Selena Roberts this morning. And I hadn't blogged in a while, so why not start again tonight.

Let me preface this by saying, I actually like Boomer & Carton, even if I don't always agree with them. And I realize that much of Carton's behavior is just part of his shtick. But I was still disgusted with how they treated Roberts when she was a guest on their show today. I don't think I've ever heard them treat a guest more hostility--and, in this case, I think their tone, if not Carton's line of questioning, was completely unjustified. 

My complaints:
  • First, Carton HAS NOT READ THE BOOK. He's entire opinion is based on two excerpts--which I'm not convinced he's actually read--that were clearly publicized because they will generate in the most interest in the book. They represent a small section of what is likely a much more detailed piece of work that will provide context as to why these seemingly small stories--such as the Hooter's tipping incident--play a role in understanding ARod as a man.
  • Carton has consistently been extraordinarily sexist. I assume the "Girl of the Week" segment and "Do You Know More Sports Than  A Housewife?" are standard fare for sports-talk radio. However, anyone that's listened to Carton talk about or to women know he's goes far beyond that. The disdain he has shown for women sports journalists, in particular, would make Zeke Mowatt blush. I'm fairly certain he called Roberts a lesbian last week and, today, referred to her as "babe". I'd be willing to bet Carton would not have the same problems with this book if it was written by a man. Their interview with the Details writer that wrote about ARod was much more civilized, for instance.
  • He accuses Roberts of "going after" ARod, wondering why anyone would want to learn all these details about his private life. Ummm, Carton is always among the first people to jump on these personal details when they come out in the paper, especially when they're about ARod (Carton even admits he essentially has a hard-on for ARod). And he didn't question why people wanted to know about the sordid details of the Cowboys players when he had Jeff Pearlman on to discuss his book. Carton seemed to rather enjoy hearing those stories, in fact.
  • Carton continually refers to her reporting during the Duke lacrosse case. I will admit I haven't extentsively researched it -- and realize it wasn't journalism's finest moment -- but her reasoning for not apologizing seems clear: Even after all the facts of the case have come out, she still believes there was a cultural problem within the program. Should she have to apologize for having an opinion?
  • On the issue of sourcing, Carton's logic seems lacking. He insist that Roberts should have on-the-record sources if she is going to say ARod may have tipped pitches. However, she --and every other journalists -- had on-the-record sources in the Duke lacrosse case, which, as Carton gleefully mentioned, turned out to be wrong. She, on the other hand, had off-the-record sources for her ARod using steroid stories, which turned out to be right. I don't necessarily like anonmymous sources, but that doesn't mean you can't use them to get at the truth. What matters is not the type of source, but the quality. And if the steroid story is any indication, Roberts has good ones on ARod. 
I could really care less about ARod. And I'm not going to read the book. But the way Boomer and Carton treated Roberts today was unprofessional and inexcusable.