How the art world embraces much more photography than, say, painting — WaPo

Can we force the ratings agencies to have some kind of skin in the game should their ratings go spectacularly awry? — Drum

The end of TED’s magnum opus on banker pay has some really good insights — TED

Vanity Fair owns the Conde-McKinsey-end-of-an-era story — VF

Konczal on Waldman on Konczal on vanilla products – this is the blogosphere at its finest — Rortybomb

Placebo may cause side effects — the same side effects as the medicine for which it’s standing in — Cheeptalk

This CQ mess makes the Economist look positively evil. Do they know that? — WaPo

True Blood, now in its 18th week of DVD release has $54.998 million in total sales. — TV by the Numbers

Newsmax publishes, then takes down, column calling for military coup against Obama — TPM

With the FDIC taking over 95 banks this year, it has many assets to dispose of, including a Ferrari — The Deal

Running a bank the size of BofA is impossible. So long as the Fed does its best to make the banking system profitable, you could put a baked Alaska in charge and the bank would throw off billions of dollars a year in profits. The job of the CEO is not really about managing down, so much as managing out — repairing relationships with Andrew Cuomo, Sheila Bair, Barney Frank, Mary Shapiro, Elizabeth Warren, and other Washington VIPs. The board will want an experienced manager, to be sure. But they’ll really want someone with political skills, who can calm the savage beast that has woken up DC and which is eyeing the giant of Charlotte.

Which is one reason it’s not so ridiculous that Sallie Krawcheck is being talked of as a serious contender for the top job at BofA. She has the kind of credibility as a straight-shooter that the company desperately needs, and she might be able to mollify some of the bank’s more antagonistic foes.

Meanwhile, if the board starts looking at external candidates, all such candidates must be thinking in the back of their head that a very similar opening is likely to appear at Citigroup sooner rather than later. Vikram Pandit has done amazingly well just to outlast Ken Lewis — his ability to stay in his job is impressive, even if it’s largely a function of the fact that Citi has no succession plan. But as the last of the great destroyers of value still to be drawing a paycheck, he can’t last much longer.

It’s a good time, then, to be a potential megabank CEO. But it’s still a thankless job. Both banks are too big to manage, and both are likely to be broken up eventually. And that kind of decision can’t come from a new CEO: it has to come from the board.

Ken Lewis is leaving Bank of America — and about time too. The board now has three months to find a successor; the new chairman, Walter Massey, has no real choice but to move “in a deliberate and expeditious manner” to find a replacement.

The timing is intriguing, coming the day after this statement from Jamie Dimon about Bill Winters:

“Choosing between two outstanding people is the hardest part of this job. Bill is an outstanding professional. He has expressed a desire to be his own CEO and I think that is entirely reasonable.”

Would BofA choose an investment banker as its new CEO? That didn’t work out so well for Citigroup. But on the other hand, Lewis has been personally identified with Bank of America for as long as it has existed in its present form (essentially, from the day that Nationsbank acquired the legacy BofA). There’s certainly no heir apparent.

With John Thain out, the most likely successor is probably Brian Moynihan, the man who was parachuted in to save the day in the wake of Thain’s ouster. But the fact that BofA isn’t announcing a successor now is indicative of the chaos within the bank, and indicative too that Lewis’s departure isn’t entirely voluntary.

Did Massey finally get fed up with the SEC, and the New York attorney general, and Judge Jed Rakoff, and half of Congress, and a large part of the shareholder base, all calling for Lewis’s head? Maybe we’ll see when details of Lewis’s exit package emerge. My guess is that his last act as CEO will be to strong-arm the board into giving him something very generous.

Comment of the day comes from Chris:

The person most willing to take on risk is the one unaware he is doing so. He charges no risk premium…

The resulting market equilibrium is that the guy who is unaware of the risk ends up loaded with it. Then the music stops.

This is possibly a very beautiful and elegant explanation for the extreme profitability of investment banks. They charge their clients a lot of money to take risk off their hands, and then they transformed that risk, using sophisticated financial engineering, into instruments which didn’t, on their face, look risky at all, and which could easily be sold to risk-averse investors. Bingo, massive profits.

Financial complexity and innovation, on this view, are essentially tools of obfuscation. And it’s easy to hide risks when risk-averse investors want debt-like products which retain their face value: such instruments tend to have very low volatility, and so look and feel as though they’re low-risk, even if they’re full to bursting with enormous amounts of tail risk. The answer, as I’ve said many times in the past, is for risk-averse investors to be willing to take a small amount of explicit market risk, and to move towards safe equities (utilities and the like) and away from debt. Because if they go to an investment bank asking for safety, they’re likely to just get hidden risk in return.

Paul Steiger’s salary in 2006, his last full year as editor of the for-profit WSJ: $547,692

Paul Steiger’s salary in 2008, his first full year as editor of the non-profit ProPublica: $570,000

Update: ProPublica’s Dick Tofel points out that Steiger did get options when he worked for the WSJ, which brought his total compensation comfortably into seven figures. Steiger gets no bonus at ProPublica. Not that he really needs one, given that he’s earning almost $50,000 a month.

I met up with Joe Hagan this morning, in the wake of the appearance of his big New York story on Zero hedge. The vitriol aimed at him from the Zero Hedgies is something to behold, both in the comments on nymag.com and on ZH itself. For instance, these three consecutive comments:

Let’s get some of his work particulars, as well as information about his father. And does he have kids?
Hagan: you’re just another meal in the food chain, and you might find ZH readers are a hungry lot.

welcome to fight club joe.

Joe forgot we are the ones that educate his kids, care for his parents, fix his car and deliever his pizza. hehe

There’s genuinely nothing in the article which could remotely justify that level of hatred, except maybe for the fact that Hagan outed ZH as Dan Ivandjiiski. (Something the NY Post had done back on September 2.)

That said, however, it’s undeniable that ZH has a huge following: Quantcast puts pageviews at over 5 million a month, and uniques at over 330,000. (The ratio between the two is very high indeed by website standards, showing how sticky and addictive the site is for its loyal readers.)

Who are these people who flock to zerohedge.com and lap up everything they’re served? They clearly love the chart-filled posts about intraday movements in the stock market, which is one clue. I think what we’re dealing with here is, essentially, retail day-traders, as profiled by Hagan back in February. (Hagan told me that even back then, before ZH really took off, the day-traders he was writing about were constantly reading the site.)

You need to be a little bit delusional to be an individual day-trader, paying substantial sums for information, technology, and trading spreads every day and yet somehow reckoning that by zooming in and out of highly-levered ETFs you can not so much beat as utterly obliterate broader market returns. All day-traders think they’re above-average; they have to, otherwise they wouldn’t have the hubris necessary to do it in the first place.

The idea really took hold in the popular imagination sometime during the first dot-com boom: stay at home, hook in to the markets, and make more by trading your own account than you ever would working for the Man. Call it the ultimate triumph of Capital over Labor.

It’s not hard to guess why these people might be angry: they’re losing substantial amounts of their own money in the market, and they’re casting about for someone to blame. The insanely profitable Goldman Sachs, for one, is always a good target. And indeed it might well be the case that Goldman’s traders probably are picking off a lot of these individual day-traders, and making quite a lot of money off them in aggregate.

Remember too that day-traders tend to be quite rich (or they wouldn’t have money to play with) and convinced that they know something most people don’t (or they wouldn’t have their self-perceived edge in the market). At that point it becomes quite easy to see how they would be attracted to a conspiracy theorist like ZH, who writes dense and often hard-to-decipher posts about the arcana of how the market works. The masses read Dan Brown for fun; the day-traders read Zero Hedge for profit.

None of this really explains the unbridled anger aimed at Hagan, but for the fact that when you’re casting around for someone to blame, and a major media outlet paints your idol as some kind of sleazy kook, you’re liable to take extreme umbrage — especially when you can hide safely in complete anonymity. The Zero Hedgies, in other words, are the 4chan of the financial blogsphere, which is maybe one of the more depressing aspects of the degree to which the financial blogosphere has matured.

Robert Pozen has an interesting idea:

In my view, the adverse repercussions of Lehman’ failure could have been substantially reduced if the federal regulators had made clear that they would protect all holders of Lehman’s commercial paper with a maturity of less than 60 days and guaranteed the completion of all trades with Lehman for that period.

James Kwak tries to flesh it out:

Once the government has determined which liabilities and exposures will have systemic ripple effects (he says short-term CP and outstanding trades), it could just announce a guarantee on those liabilities and exposures and let everything else go into bankruptcy. Now maybe they didn’t have time to make such a determination the weekend before Lehman failed (although arguably they had since March to figure it out), but by the time Citi and BAC and the last AIG bailout rolled around arguably they did. I’m not enough of a markets person to be sure this would work, but it seems like a viable proposal.

One has to be careful when using the term “bankruptcy” with respect to banks, because I think what we really want here is a massive debt-for-equity swap which keeps the bank viable in some form, rather than outright liquidation (which is what banks have to do if they file for bankruptcy). Given the fact that recovery rates for unsecured bank creditors in liquidation are very close to zero, few creditors would be likely to object to such a thing. Is such a thing possible under the government’s existing resolution authority? I’m unclear on that, but I’m definitely interested in the details of Pozen’s proposal.

One big problem here is that such a plan can’t really be institutionalized ex ante: the last thing we need is an incentive for too-big-to-fail banks to borrow short rather than long, because there’s a semi-explicit government guarantee on all of their funding less than 60 days. Or maybe the Fed could force all banks to have no more than x% of their unsecured debt in the form of commercial paper.

James Kwak has a great response to Robert Shiller’s FT op-ed about financial innovation. But his line at the end about how “for the sake of argument, I am willing to concede that these are useful innovations that would make people better off” has been misconstrued, and it’s worth pointing out that in fact they’re not useful innovations that would make people better off.

Why not? Mainly because, at heart, they’re all variations on the theme of doing-clever-things-with-as-yet-uninvent ed-derivatives. But that’s a theme which really shouldn’t have survived the financial crisis.

In 2003, Alan Greenspan famously said that ““what we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so.” But, as it turned out, they weren’t. Lots of people wanted to transfer risk, and precious few were genuinely willing and able to take it on: even hedge funds generally prided themselves on being lower-risk than the stock market as a whole.

The result was a system where derivatives were used to hide risks, and shunt them off, unseen, into the tails. A system where hidden risks turned out to be much more dangerous than if they’d all been out in the open all along.

In each of Shiller’s examples, you start with a risk that an individual wants to lay off: the risk that home prices will fall, or that the market will plunge just before you retire, or that inflation or healthcare costs will kick in after you retire. And in each case, the individual tries to lay off that risk elsewhere.

Shiller simply takes it on faith, however, that a nice liquid market can and should spring up to provide two-way prices in such risks, solving lots of problems at a stroke; he doesn’t stop to consider that maybe the reason such markets haven’t sprung up is precisely that there’s no real demand from anybody wanting to take on those risks. In reality, Shiller should know that better than anyone: his much-vaunted house-price derivatives have gone nowhere, partly because no one ever really had any need or desire to go long.

Shiller’s first proposed innovation is an attempt to deal with the regrettable move, in recent years, towards a “popular reliance on housing as an investment”. Only except for suggesting the obvious — moving people away from the idea of housing as an investment, and towards good old-fashioned renting — he comes up with a complex mortgage with all manner of embedded options. As with any derivative, those options will be a zero-sum game, and you can be sure the homeowner is going to end up on the wrong side of it. But Shiller still seems to think it’s a good idea for homeowners to buy them, instead of simply getting a plain-vanilla, easily-comprehensible mortgage, with payments which are set over the life of the loan and which are entirely predictable.

Shiller’s second innovation is target-date mutual funds: I’m almost surprised that he didn’t suggest some kind of principal-protection scheme, involving derivatives, instead. (Maybe because that would have sounded too much like portfolio insurance, which caused the 1987 crash.) But target-date funds are widely misunderstood, and in 2008 some 2010 funds contrived to underperform the S&P 500. They’re a mess, and they’re expensive, and it’s not obvious that they do any good. So color me unconvinced on this front.

Finally, Shiller dreams of annuities which would pay out a set amount of money per month for life, after adjusting for inflation, and which on top would include all healthcare costs. Nice dream, Bob. But there’s a good reason such things don’t exist: no insurer wants to take on a large amount of those kind of risks, and nor would any self-respecting insurance regulator allow them to do so. There isn’t a long-dated derivatives market in future health-insurance costs, but if there were, very few people would have any reason to sell protection against those costs rising, at any price. Sure, a few hedge funds might dabble in the market. But they could never satisfy demand. And in any case, as with the mortgages, the buyer of the annuity would generally lose out, just because of the zero-sum nature of derivatives. Since the cost of the embedded options would be hidden in the price of the annuity, the insurer would have a license to charge through the nose for it, and the buyer of the annuity would never know.

Simplicity and transparency are good things, and Shiller’s innovations go the other way instead. That’s nothing to get excited about.

Ryan Avent defends me against DeBord: “there is a very strong correlation between living in sprawl and being obese”. — The Bellows

Time magazine does a double smackdown on the Wash Post’s super-lame Twitter policy — Poniewozik

It’s been a while since I saw a personal-finance column with the phrase “round up to the nearest quarter-million” — BNet

Matt Taibbi joins the naked-short-selling-is-a-crisis crowd — True/Slant

Vodafone pays its bike commuters £85 per month — FT

The Atlantic’s First Draft of History event later this week now has a website — Atlantic

Chittum finds explicit political partisanship in the WSJ’s lede on Merkel’s victory — CJR

Geoff Hargadon’s “Cash For Your Warhol” prank at the Rose Art Museum — Wooster Collective

Princeton sign painters must think the local geese are smart enough to read signs — Twitpic

Gay Talese on how the tape recorder killed journalism. Wonderful, wonderful stuff. — BigThink

Ben Stein has “earned acclaim as an economist and a former columnist for the New York Times”, we’re told. From whom? — BizJournals

John Cassidy starts blogging — NewYorker

This is big news, in the world of sovereign debt restructuring: Ivory Coast, which defaulted on its Brady bonds in 2000, has come to a deal with the London Club of private creditors to restructure them.

The most striking thing for me, about the deal, is the fact that Ivory Coast was talking to the London Club at all. The London Club is a group of large commercial banks (Citibank, Barclays, SocGen, you get the picture) who lent billions of dollars to third-world countries in the 1970s and then saw it defaulted on in the 1980s. Eventually, with the help of the US Treasury, those loans were restructured into bonds, which were named after the Treasury secretary at the time, Nick Brady.

Ecuador was the first country to default on its Brady bonds, in 1999. Ivory Coast followed, as did Argentina. But when Ecuador and Argentina restructured their bonds, they didn’t go back to the London Club — they went to the bond market. The London Club is a place to go when a finite number of creditors hold loans; not when thousands of bondholders hold bonds. Or not until now, anyway.

A glance at the terms of the new Ivory Club bond screams “loan restructuring”. Bonds tend to be restructured into something simple: a plain-vanilla global bond, normally, with a set coupon and maturity date. By contrast, the new bond which Ivory Coast is issuing is horribly complex: it starts paying interest immediately, at 2.5%, which then steps up to 3.75% after two years, and to 5.75% another 18 months later. Then, once a six-year grace period os over, the principal of the new bond starts amortizing, according to an almost arbitrarily-complex schedule:

payments 1 to 2: 1%; payment 3: 1.5%; payments 4 to 6: 2%; payments 7 to 12: 2.5%; payments 13 to 22: 3%; payments 23 to 26: 3.5%; payments 27 to 28: 3.75%; and  payments 29 to 34: 4%.

This is the kind of repayment schedule only a commercial banker could love. When I covered the Brady market for a living, people used to joke that nobody really understood the structure of the Brazilian C bond, not that that stopped them from trading it. This isn’t quite that bad, but it still pretty much guarantees that trying to work out yield to maturity and the bond’s reinvestment risk is something you want to outsource to your Bloomberg and is not something you can have an intuitive feel for.

So why do it this way? Why did Ivory Coast negotiate at length with a bunch of bankers, rather than simply mandating Lazard to put a bond swap proposal together, which it could then present to the market? My guess is that the answer lies in the nature of Ivory Coast’s bondholders: it wouldn’t surprise me in the least to learn that the overwhelming majority of them are precisely the same banks which lent the country the original money in the first place. There might have been a Brady deal, but those Bradys didn’t really make it onto the open market: they just remained stuck on a small number of commercial-bank balance sheets. And they’ll probably stay there, too, even after this restructuring. You can turn a loan into bonds, but if those bonds rarely get traded and are held overwhelmingly by banks, it’ll still end up behaving just like a loan.

Joe Stiglitz’s high-level UN report on regulatory reform says that sometimes regulators need to have their hands tied:

181. It is not enough to have good regulations; they have to be enforced. The failures in this crisis are not just a failure of regulation but of regulatory institutions that did not always effectively implement or enforce the regulations. In this crisis, the regulatory performance of many central banks has been far from stellar. They did not adequately enforce and implement the regulations at their disposal, and they did not alert governments to the need for additional regulatory authority or restructuring authority when existing authority was not adequate…

186. In light of this pressure, it may be necessary for part of the regulatory structure to be “hard wired,” limiting the discretion available to regulators and supervisors. Counter-cyclical provisioning and capital adequacy requirements of the kind discussed in previous sections should be rule-based, while adjustments to regulation due to evolution of financial practices and innovation will require monitoring and discretion in adjusting regulations as appropriate.

In other words, since regulators have a tendency to get captured, don’t let give them too much discretion — and any changes in regulatory oversight should be done explicitly, through changing regulations, rather than by nod-and-wink.

Interestingly, this is exactly the route chosen by the Obama administration to implement the Credit Card Act. Rather than simply impose new rules directly on credit card companies, the Act forces the Fed to impose those rules. Accordingly, the Fed today issued a formal proposal for implementing the rules which Congress has already mandated. Congress tells the Fed what to do, and then the Fed goes ahead and does it.

There’s a lot to be said for this kind of structure, which makes it much harder for regulators to quietly and unilaterally determine that, hey, why bother. But at the same time, it’s a lot easier to force the Fed’s hand in narrow and easily-defined areas like credit card regulation than it is in something as big and vague as systemic macroprudential risk management. Ultimately, macroprudential regulation can’t be rules-based: there has to be some other mechanism by which citizens can have justifiable faith in their regulators.

These tables come from a study organized by the National Highway Traffic Safety Administration, and they’re sobering: they show that hybrid electric vehicles (HEVs) are in some times twice as likely to be involved in pedestrian and bicyclist crashes as their internal combustion engine (ICE) counterparts.

The first table shows 1.2% of hybrids being involved in low-speed crashes with pedestrians, twice the rate of old-fashioned cars; the second table shows 0.6% of hybrids crashing with bicyclists, again twice the rate of noisier cars.

The reason, of course, is that the hybrids are so quiet: bikers and pedestrians use car noises to help them work out which cars are moving and which aren’t. That’s why hybrid manufacturers are now talking about adding vroomtones. Sounds like a good idea!

(HT: Voiland, via Weisenthal)

Rich Miller reported yesterday that a number of luminaries have diagnosed a significant upwards move in Nairu, the rate of unemployment below which inflation starts kicking in — or, to put it another way, the level of unemployment which the Fed should consider to constitute “full employment”. They include JP Morgan’s chief economist Bruce Kasman; Harvard’s Lawrence Katz; and Ned Phelps, who got his Nobel for looking at such things.

Against that, notes Miller, the Fed doesn’t seem to think that Nairu has increased at all.

One of the people Miller quotes as believing that Nairu has risen is Pimco CEO Mohamed El-Erian. I asked him for a bit more detail on his thinking, firstly on what causes changes in Nairu. He replied:

A number of factors are contributing to the increase in theNAIRU. They include:

First, lower labor mobility which, in part, is due to the poor state of the housing market where negative equity positions are hindering what has traditionally been a geographically flexible job hunting process.

Second, the elimination of activities that were facilitated by turbo-charged and unsustainable Wall Street credit factories. These activities that can no longer be supported in a de-levering and de-risking world.

Third, industries–such as autos, finance, and real estate–that are experiencing a major size reset after a period of over-expansion

Fourth, an erosion of skills as people are unemployed for longer

Fifth, the ongoing re-alignment of the global economy in the context of overall over-capacity

All this points to a worrisome picture for unemployment. High rates of unemployment will persist for longer; and the reversion will be to a higher NAIRU. As I noted in today’s FT column, this has implications for the sustainability of the growth recovery, the robustness of social safety nets and other aspects of the social contract, and the mobilization of political support for longer-term structural reforms.

El-Erian also confirmed for me that he reckons a 7% Nairu “sounds reasonable” — well above the 4.8%-5% that the Fed seems to be using.

Determinations of Nairu are always more of an art than a science, but it does seem reasonable to assume that the reasons El-Erian outlines would bring it up. In turn, that’s going to raise problems for right-leaning economists and politicians, who are going to find it harder to extol the abilities of the free market to find employment for all, and thereby dismiss claims that we need to provide a robust social safety net for the millions of Americans who can’t find jobs.

Matthew DeBord takes aim and fires:

Salmon also makes it sound as if the average American eats primarily at off-the-freeway fast-food joints in between trips to the supermarket to fill their car with huge amounts of groceries. They nourish themselves by “absent-mindedly shovelling down an unknown quantity of something random while watching the TV.”…

Oy! Talk about an east-of-the-Hudson River, blinkered mindset. There are plenty of cities in the U.S.—and the rest of the world—where the urban concentration isn’t that dense, people own cars…and remain thin while eating both restaurant cuisine and keeping the pantry stocked, preparing delicious, unfattening meals at home. That’s right, they have restaurants! And they don’t eat their ice cream by the gallon while watching Survivor! Some of them even use their cars to transport their bikes to the (beach, mountains) to ride them for…miles and miles! Or they drive someplace rugged and scenic to take a hike. Or they take frequent walks while also owning a car!

No argument at all, DeBord is right. An active lifestyle on the outskirts of somewhere like Boulder or Portland or San Diego trumps a relatively sedentary life of pork-and-butter-heavy NYC expense-account dinners any day.

On the other hand, if you’re an overweight suburbanite there’s a good chance that you don’t live an active lifestyle. And for the large number of people without the “personal discipline” that DeBord writes about, ceteris paribus they’re likely to be thinner if they live in an urban center. Although buying a bike and heading for the local foothills on a regular basis would be cheaper, more convenient, and more effective.

Das: “self-regulation bears the same relationship to regulation that self importance does to importance” — Kedrosky

“You can quickly see why deer would do well to exit West Virginia and move, say, to Hawaii” — Kedrosky

Allen Stanford, prison brawler — Business Insider

That Zoellick speech in full — World Bank

James Wagner vs the New Museum. The blockish thing on the Bowery does not come out well — JW

Some very good points about the limitations of the Kindle in an academic setting — Princetonian

“China isn’t conquering Russia, it’s just leasing it.” — TED

“Outlets who gag social media are unilaterally disarming in the war for reader attention.” — Carr

“Mr. Murdoch, meet price elasticity”: People don’t like subscriptions going up 50% without any warning or notification.– ZDNet