Stanford: The Manhunt Begins

Posted on February 17, 2009 by Felix

Given the amount of time that the SEC and the media have been sniffing around his operation, today’s fraud charges can’t have come as much surprise to Allen Stanford. And given that he owns banks in many different jurisdictions (the FT has found entities not only in the US and Antigua, but also New Zealand, Switzerland, Colombia, Ecuador, Mexico, Peru, Panama, Venezuela, and, of course, Panama), as well as what Matthew Goldstein calls "a number of private jets", one expects that at this point his contingency plan is well underway.

Yesterday, Stanford spokesman Brian Bertsch "wouldn’t discuss the whereabouts of the Texas billionaire", probably because he didn’t know those whereabouts. It’s probably a safe guess, however, to say that he’s not in the US, and neither is he in the US Virgin Islands, where he lives most of the year. Antigua? It’s possible, but I’d say unlikely. More probable is somewhere with an ask-no-questions private-banking industry and a vague-to-nonexistent extradition treaty with the US.

Remember that according to the SEC complaint, the lion’s share of Stanford’s assets were placed in a "black box" under the control of just two people: CFO James Davis, and Allen Stanford himself. Remember too that Stanford has been reneging on deals to provide tens of millions of dollars in financing to the kind of micro-cap companies the firm specializes in. Stanford probably had that money cued up in liquid form, ready to go; I wouldn’t be at all surprised if he just decided to trouser it personally instead.

My guess is that only Stanford knows where his depositors’ money has gone, and that for the time being he still has control of most of it. If the US authorities have any interest in reuniting those depositors with any of their cash, they might end up having to cut some kind of deal with Stanford. But they’ll need to find him first.

For anybody who’s coming new to this story, it began with an article entitled "Duck Tales", which can be downloaded here, in Veneconomia magazine in Venezuela. The article essentially accused Stanford of being a fraud; it was picked up by Venezuelan blog Venepiramides on February 6, and had made it to Portfolio.com by the morning of Feburary 10. The following day, February 11, there was a big article at both BusinessWeek; by February 12, the rest of the mainstream media had cottoned on, if cautiously.

By yesterday, with depositors flying to Antigua in a desperate and doomed attempt to cash out their CDs, it was all over bar the formal indictment. Stanford Group is now in receivership, and its top two executives are fugitives from justice. But given that they seem to have been operating this scam for over a decade, they surely saw this coming long before the authorities started asking awkward questions. In fact, they’re probably shocked themselves at how long it’s taken the SEC to get to this point.

Allen Stanford might be a moustachioed crook, but he’s not stupid. There’s still a good chance that he could live out the rest of his life in sybaritic luxury, even as his investors lose substantially everything they entrusted to him and his offshore bank.

Posted in fraud | 2 Comments

Millennium: A Stanford Copy-Cat

Posted on February 17, 2009 by Felix

Adrienne Carter has found what looks very much to be the first — but surely not the last — of banks which won’t withstand much if any scrutiny in the wake of the Stanford collapse. Does any of this sound familiar?

  • It’s offering interest rates of 7% on 1-year CDs.
  • It’s based in a small Caribbean tax haven (in this case, St Vincent & the Grenadines).
  • It’s another bank which doesn’t make loans; instead, "Millennium Bank has its own affiliate asset management company with highly seasoned professionals who invest meticulously on a global scale in carefully selected real estate markets and equities as well as viable private investments."
  • It’s part of an opaque international financial network. (cf Stanford’s many iterations.)
  • Its reassurances are far from reassuring:

Deposits in Millennium Bank are safeguarded by established laws and regulations strongly enforced by the International Financial Services Authority (IFSA). This strict regulatory audit and monitoring system ensures that private or offshore banks are financially viable at all times therefore eliminating the requirement for deposit insurance.

If you haven’t heard of IFSA, don’t worry, it’s a purely domestic institution in St Vincent & the Grenadines, whose full name is actually International Financial Services Authority of St Vincent & the Grenadines.

It’s not clear how many people were greedy or foolish enough to invest their money in Millennium Bank: this is surely a much smaller operation than Stanford. It’s also unclear whether anybody outside St Vincent & the Grenadines has any jurisdiction over this bank: although it claims to be a subsidiary of something called United Trust of Switzerland, that doesn’t mean it has any Alpine connections:

The regulators in Switzerland haven’t heard of United Trust. A spokesperson for the Swiss banking authority said: “The United Trust of Switzerland is not a registered/licensed bank in Switzerland and has also no other license of the Swiss Financial Supervisory Authority.”

If anybody has had any dealings with Millennium Bank, or has a vague idea how big they are, do let me know. Now that the MSM is all over Stanford, the blogs have to move on to the next kill.

Posted in banking, fraud | 2 Comments

Stanford: How Quickly did the SEC Move?

Posted on February 17, 2009 by Felix

According to the SEC press release, it has acted with lightning speed:

Said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement: "We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors."

But most reports have the SEC investigating Stanford for many months, while according to Matt Goldstein of BusinessWeek, "people familiar with the probes say the SEC investigation goes back at least three years and possibly longer".

It’s quite clear that if the SEC had nipped this fraud three years ago, an enormous amount of damage would have been avoided. So is the SEC "moving quickly and decisively", or is it actually acting very slowly indeed?

It’s also worth asking whether it’s purest coincidence that the SEC action comes exactly one week after questions about Stanford started being raised in the media (a/k/a my blog). They slowly investigate for months if not years, and then the minute the story hits the press they’re suddenly ready to go to court? Weird. After all, my blog entry just piggybacked on analysis performed by Alex Dalmady back in October — analysis which he only got around to writing up in January.

I’m certainly glad that the SEC has moved decisively in this case, and didn’t wait for Stanford to give himself up, a la Madoff. But there’s really no indication that the SEC has moved quickly.

Update: Goldstein now puts the duration of the SEC investigation at "about two years".

Posted in fraud | 2 Comments

Highlights of the SEC Complaint Against Stanford

Posted on February 17, 2009 by Felix

The SEC complaint against Stanford is quite astonishing. Here are some of the highlights, which include a slew of outright lies and even an investment with Bernie Madoff.

  • Impossibly, Stanford’s portfolio managed to rack up identical 15.71% back-to-back returns in 1995 and 1996 — which implies that this fraud has been going on for at least 13 years.
  • Stanford, and his CFO James Davis, have "wholly failed to cooperate with the Commission’s efforts to account

    for the $8 billion of investor funds purportedly held by" Stanford International Bank.

  • Stanford told at least one customer that the SEC was freezing the CDs, rather than Stanford itself.
  • Stanford’s public statements about its investments "are false":

A substantial portion of the bank’s portfolio was

placed in illiquid investments, such as real estate and private equity. Further, the vast majority

SIB’s multi-billion dollar investment portfolio was not monitored by a team of analysts, but rather

by two people – Allen Stanford and James Davis.

  • "SIB has exposure to losses from the Madoff

    fraud scheme despite the bank’s public assurances to the contrary": Stanford invested money with Tremont Partners, which in turn invested more than 6% of that money with Madoff. One analyst came up with an estimate of $400,000 in Madoff losses.

  • "Since 2005, SGC

    advisers have sold more than $1 billion ofa proprietary mutual fund wrap program, called Stanford

    Allocation Strategy, by using materially false and misleading historical performance data."

  • Both Stanford and Davis "refused to appear

    and give testimony in the investigation."

  • "Tier 3" assets of SIB — "unknown assets under the apparent control of Stanford and Davis" — accounted for 81% of the Bank’s investment portfolio as of December 2008.
  • Stanford’s senior investment officer did what he was told by Laura Pendergest-Holt, the CIO:

The SIO followed Pendergest’s instructions, misrepresenting that

a team of 20-plus analysts monitored the bank’s investment portfolio. In so doing, the SIO never

disclosed to investors that the analysts only monitor approximately 10% of SIB’s money. In fact,

Pendergest-Holt trained the SIO "not to divulge too much" about oversight of the Bank’s

portfolio because that information ”wouldn’t leave an investor with a lot of confidence."

  • "SIB’s accountant, C.A.S. Hewlett & Co., a small local accounting firm in

    Antigua, is responsible forauditing the multi-billion dollar SID’s investment portfolio. The

    Commission attempted several times to contact Hewlett by telephone. No one ever answered the

    phone."

  • "SCM,

    with the benefit ofhindsight, picked mutual funds that performed extremely well during years

    1999 through 2004, and presented the back-tested performance ofthose top-performing funds to

    potential clients as ifthey were actual returns earned by the SAS program."

  • In any case, the performance claims were simply false: "(e.g., a claimed return of 18.04% in 2000, when actual SAS investors lost as much as 7.5%)."

The only thing missing here is any indication of how much money Stanford really has. If he’s really a billionaire, then maybe all his personal cash can be put towards making his depositors whole. But I suspect that if you have a Stanford CD, you’ll end up with pennies on the dollar. Or maybe a really nice new home in Antigua.

Posted in fraud | 3 Comments

Stanford: The SEC Moves

Posted on February 17, 2009 by Felix

The SEC has frozen all the assets of Allen Stanford and his companies, as well as those of his CFO and CIO. I think you can guess why:

The SEC’s complaint, filed in federal court in Dallas, alleges that the defendants have committed an $8 billion fraud… The complaint alleges that acting through a network of SGC financial advisers, SIB has sold approximately $8 billion of so-called “certificates of deposit” to investors by promising improbable and unsubstantiated high interest rates, supposedly earned through its unique investment strategy, which has purportedly allowed the bank to achieve double-digit returns on its investments over the past 15 years. According to the Complaint, the defendants have misrepresented to CD purchasers that their deposits are safe.

More from the complaint when I get it, but this is clearly the end of the Stanford financial empire.

Update: The complaint is here.

Update 2: The official SEC press release (rather than the litigation release) is here.

Posted in fraud | 2 Comments

Taxing Falling Carbon Emissions

Posted on February 17, 2009 by Felix

Back in November 2007, in a long post on the relative merits of a carbon tax and a cap-and-trade system, I said that one big advantage of cap-and-trade was that it was "a dynamic hedge of fat-tail CO2 risk". The tail we were all thinking about back then, of course, was a large and continued rise in carbon emissions which proved impervious to a set carbon tax. But of course there are two tails to any distribution, and right now we’re at the other end: both carbon emissions and carbon prices are falling quite fast. Hellasious at Sudden Debt sees this as an argument against cap-and-trade alone:

As prices for CO2 permits drop – recently from 30 euro/ton to 8.85 euro/ton – industry can simply put off becoming greener until economic conditions improve. This regime, therefore, does not drive continuous greening but does so only on a marginal basis: pressure to change varies with economic activity, since most activity is still "black".

The answer to the tax or trade question is quite simple: both.

I have a certain amount of sympathy with this view, but the fact is that if all you care about is reducing carbon emissions, then a massive global economic slowdown is pretty much the best and most reliable way of achieving that — much better than any tax or cap-and-trade system.

What’s more, it now looks that any cap-and-trade system implemented by the Obama administration will come into force either during or immediately after such a slowdown. As a result, the caps in a new cap-and-trade system are likely to be much lower than they would otherwise have been. That’s good news too.

And the fact is that the only thing that really matters, from a carbon-emissions standpoint, is the aggregate amount of carbon pumped into the atmosphere over time. The planet doesn’t care whether we have "continuous greening" or not, all it cares about is how much carbon is in the atmosphere. So long as emissions are falling one way or the other, that’s a good thing, from a climate-change perspective.

Besides, with double-sided safety valves and the like, it’s possible to implement an effective minimum carbon tax even within the context of a cap-and-trade system, if you’re so inclined. So let’s keep working, hard, on a cap-and-trade system: it might take a bit longer than originally intended, thanks to the urgency of the economic crisis, but it really should be lined up and ready to go as soon as it’s legislatively feasible.

(HT: Jones)

Posted in climate change | 2 Comments

GE Datapoint of the Day

Posted on February 17, 2009 by Felix

Rolfe Winkler has run the numbers on how GE compares to other banks (yes, GE is a bank) and has come to the conclusion that as of December 31, GE had total tangible common equity of… wait for it… $5 billion. As a result, its leverage ratio, of tangible assets divided by tangible common equity, is a whopping 140 — the kind of number which would make Fannie or Freddie blanche.

GE is now trading at less than $11 a share, which is a drop of 81% from its all-time high in 2000, and a drop of 36% just since the beginning of this year. It’s weird: even as the company retains its triple-A rating, the stock market seems to be worrying that it might actually be moving into the arena of insolvency.

GE’s not trading at option value yet — it still has a market capitalization of more than $100 billion — but it’s clearly distressed. According to Winkler, GE managed to lose $9 billion of tangible common equity in just three months. With only $5 billion left, this might be a good time to start raising equity, rather than debt.

Posted in stocks | 2 Comments

Geithner’s Vagueness Explained

Posted on February 17, 2009 by Felix

How could Geithner’s much-vaunted financial rescue plan have been so stunningly vague on arrival, given the amount of time he’d worked on it? The Washington Post reveals that in fact he’d only been working seriously on it for less than a week: it’s Plan B, and he only dropped Plan A at the last minute.

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

Well, that explains quite a lot, I suppose. But the fact is that any Plan B, with details-to-be-ironed-out-later, is going to look better than any Plan A, with its plethora of devils in the details. And James Kwak has some detailed reasons why this particular Plan B doesn’t look so hot.

Interestingly, one other big problem at Treasury is too few cooks rather than too many:

Obama’s senior economic advisers were hobbled in crafting the plan by a shortage of personnel. To date, the president has not nominated any assistant secretaries or undersecretaries at the Treasury, and the handful of mid-level staffers who have started work were still finding their offices and getting their building passes and BlackBerrys.

Moreover, the department made a strategic decision to limit input from the financial industry and other outsiders, aiming to prevent leaks and avoid a perception they were designing the plan for the benefit of big banks. But that also meant they were unable to vet their plan with the companies involved or set realistic expectations of what would be announced.

It’s a serious problem for America and the world that Treasury has basically done nothing since November 4, when Paulson lost his mandate and basically started doing as little as he possibly could. How long does it take to switch teams?

Posted in fiscal and monetary policy | 1 Comment

Stanford vs Citi

Posted on February 17, 2009 by Felix

Comment of the day comes from John Slater:

You’ve had some interesting posts on Stanford. It appears that they have taken deposits to acquire trading/speculative assets. Not sure that what the big trading banks have done is all that different in the end.

It’s a good point. Of course, the big trading banks do make loans. But they’re just as prone to excess and sports sponsorships as Stanford. And they can lose more money in a quarter than Stanford International Bank has as its entire deposit base. But hey, at least their depositors have FDIC insurance, which means that you, the US taxpayer, are guaranteeing they’ll get their money back. Thanks!

Posted in banking | 3 Comments

Extra Credit, Monday Edition

Posted on February 17, 2009 by Felix

Wristcutters: An Economic Story: My Bloggingheads diavlog with Jesse Eisinger.

Saving Federal Arts Funds: Selling Culture as an Economic Force: The Senate voted against it, but $50 million in extra arts funding did make it into the final stimulus bill. That’s not much, but it’s better than nothing.

Tracking the Household Balance Sheet: A typical US family’s net worth has fallen 35% from 2007 to 2009. Or more, if you mark their cars to market realistically.

OBVIOUS tag, where are you? When physicists try to do finance.

Chávez Decisively Wins Bid to End Term Limits

California Lawmakers Fail to Pass Budget

To See Ourselves As Others See Us: David Warsh joins Paul Krugman in singing the virtues of the excellent Baseline Scenario.

And, of course, your daily Stanford links:

Stanford Depositors Head to Antigua for Redemptions: The bank run has clearly begun.

Stanford: The right to reply: One James Donaldson attempts a defense of Stanford.

Stanford probe hits islanders

Crazy for Cricket: The Forbes profile of Stanford. It says that golfer Vijay Singh is an investor, and talks about his early days as a distressed-property speculator.

Posted in remainders | 1 Comment

Alex Dalmady, the MSM, and Stanford

Posted on February 16, 2009 by Felix

Alex Dalmady, the analyst who broke the Stanford story, has a blog now, and he’s not afraid to use it: his latest blog entry has appeared with the headline "The WALL STREET JOURNAL can kiss my ass!": (Update: Dalmady’s entire blog has now disappeared; he emails to say that he thinks he was hacked. I have a copy of it; if he lets me, I’ll republish it here. Update 2: The blog’s now back up but not the WSJ entry.)

They were among the last to call…

What did I expect from THE JOURNAL? I really expected the cavalry. Validation. They have analysts and auditors and people who can pick this up quickly…

Their first article was a total lame-out… I called them out on it. Lame! They called… no, no, no we’re on it. We want to interview you personally, too…

Then they don’t want to see me (I was trying to schedule my day). Then they do…

But here’s the catch: no one can know, no one can tell, I can’t say anything about what we talk about…to anyone…

This is EXACTLY why guys like Markopolos and myself don’t go to guys like you with tips. Lesson learned.

This, ladies and gentlemen, is how the journalistic sausage is made. It’s a hyper-competitive world, which is good in some respects, but very bad in others — the Stanford case being a prime example. When Dalmady broke the story, Matt Goldstein of Business Week and Alison Fitzgerald of Bloomberg were already quite far advanced in their own investigations of Stanford. As a result, the WSJ and the NYT were reluctant to report the story, and were pretty late to the game. The FT had it even worse, being hobbled by lawyers worrying about the UK’s draconian libel laws.

Since then, the Stanford story really hasn’t gained traction in the way that one might have expected. Zachary Roth of TPMMucraker, for instance, first found the story in the NYT, and put up a blog entry on Friday morning. Later that day, he realised the story was a bit older than that, and put out an update giving BusinessWeek credit for "breaking" the story on Wednesday. But even as he continues to follow the story today, there’s no indication that, I, for one, was reporting it on Tuesday morning — and there’s certainly no mention of Dalmady. Isn’t the whole point of the blogosphere that it’s meant to be able to glom onto stories without the intermediation of the MSM?

More generally, essentially no media source has had the guts to do what Dalmady expected of them — which is to take a critical look at Stanford’s financials, as he did, and try to work out whether they indicate the presence of fraud. Instead, most of the Stanford reporting has been about regulatory investigations — including the SEC investigation which has been dragging on for at least three years now. There are a few subplots involving the incentives offered to people selling CDs, and of course in England there’s the whole cricket angle as well, but in general the media has been extremely wary of coming out and doing any accusing themselves: they prefer to let the accusations lie hidden, implicit, behind "straight reporting" of SEC, Finra, and (according to the WSJ) FBI investigations.

Part of the reason for this is that the stakes are extremely high. As a blogger, I have relatively little equity in being right, and in fact I’m the first to admit that I’m regularly wrong on matters big and small. I would never expect anybody to take a blog entry of mine as the gospel truth: I call things as they seem at the time, and as new information comes to light I’ll change my opinion accordingly. But a newspaper can’t do that: it can’t, without covering its face in egg, say something like "well, Stanford looked like it was a fraud, but now, in the light of new information, we can see that it wasn’t fraudulent after all". So editors are ultracautious about any such story.

I do expect that eventually one major media outlet — I have no idea which — will manage to get enough ducks in a row that it will feel able to come out and make some serious accusations directly against Stanford, rather than just reporting on the investigations of others. But to date, most of the MSM hasn’t even reported accurately on what Dalmady is saying. Here’s the WSJ, for instance:

“The first thing that grabs your eye is the business model," says Alex Dalmady, an analyst who unveiled concerns about Stanford International Bank in the magazine VenEconomy Monthly but isn’t involved in the investigation. "Taking deposits and playing the stock market — this is way too risky”.

Not only does this imply that Dalmady merely "unveiled" previously-existing "concerns", as opposed to directly investigating the bank’s financials and raising them himself. It also waters down what those concerns are: Dalmady thinks that Stanford’s running a Ponzi scheme, not just that its investments are "risky". And Reuters was even more circumspect, to the point at which the true meaning, if it was there at all, disappeared entirely:

After reviewing Stanford’s financial statements, Dalmady concluded that it used borrowed money, or leverage, to pump up investment returns.

On his blog at BusinessWeek, Goldstein hints at some of what’s been going on:

Too often in the news business, there’s a tendency not to give credit to others covering a story well. I guess it’s just the competitive nature of the business that can make that a hard thing to do. And it’s especially difficult when chasing a fast, unfolding story such as the one involving the investigation of Stanford Financial.

Goldstein then praises a few of the other reporters and bloggers who have been following this story — although he neglects to link to any of them. And although it seems that the WSJ was willing to report in some detail on Dalmady’s story, it was only willing to do so if it could somehow get the "exclusive".

But that’s not how a story like this one works — especially not when you come to it late. It was the blogs who brought Dalmady’s analysis to the attention of the MSM: the story was first published by Veneconomia magazine in Venezuela; was then picked up by Venepiramides (in Spanish) on Friday, February 6; then by The Devil’s Excrement the following Monday, Inca Kola on Tuesday, and finally me later that morning. To read all the coverage, however, you’d think that no news had been broken before the BusinessWeek story appeared on Wednesday, February 11.

It’s understandable, then, where Dalmady’s animosity towards the WSJ is coming from. First the WSJ, the rest of the MSM, and even parts of the blogosphere basically pretend that the blogs never had this story first — and then the WSJ asks the very same blogs to bend over backwards to cooperate with them. This is not a tactic with a high chance of success.

Posted in fraud, Media | 1 Comment

America’s Insolvent Banks

Posted on February 16, 2009 by Felix

John Hempton has 5,155 words on bank insolvency today, and makes the good point that "insolvency" is not well-defined. So what do I mean when I say that some big banks are insolvent? I mean that when you look at assets you shouldn’t include things like goodwill, and instead concentrate only on concrete things like cash and retained earnings; then, value loans on a held-to-maturity basis. If you do that, those assets are worth less than the face value of total liabilities.

Hempton makes the good point that mark-to-market values are significantly lower than held-to-maturity values because the buyers of distressed loans want much higher returns (on the order of 15%) than the discount rate (on the order of 5%) that you’d use to value a held-to-maturity value.

So how do you work out a reasonable held-to-maturity value for an asset book? As Hempton says, you can’t trust the banks themselves to tell you, because they will lie: the downside to telling the truth is death. His idea is to use TARP funds to capitalize ten different funds, each of them mixing public and private capital, and each of them buying banks’ assets using cheap money as funding. That should give a good basis for a vaguely realistic valuation.

But is that really necessary? We already have such funds (capitalized with public funds, with access to cheap liquidity): they’re called banks. No one trusts Citigroup when it takes a bunch of nuclear waste on its trading book and suddenly reclassifies it as being held to maturity and therefore exempt from mark-to-market requirements. But if JP Morgan was to buy the stuff on Citi’s trading book, and Citi was to buy the stuff on JP Morgan’s trading book, then at that point the prices would be much more believable. And these big banks have a very low cost of funds indeed, thanks to a Fed which is more than willing to provide them with essentially unlimited liquidity.

Hempton is also convinced that given a few years, banks will be able to recapitalize themselves all on their own, out of operating profits:

The pre-tax, pre-provision income of the banking system normally funded is probably 300 billion. It is probably much larger if the funding costs were reduced to near Treasury levels. If you haven’t noticed interest rate spreads and hence pre-tax, pre-provision profits of the banking system should (presuming normalised funding) be way way up. 300 billion is an underestimate. So if there are 2 trillion of losses and 1.4 trillion of starting capital then four or five years and we are back to fully capitalised. We would get back there faster than that – because the banks have raised considerable capital on the way down and not all the 2 trillion of end losses are born within the banking system.

I’d take issue with some of these numbers: $300 billion a year is $3,000 per US household per year. That’s real money. We’re entering a world where households have lower borrowings, higher savings, and much greater awareness of the banking system; we’re also entering a world of much stricter bank regulation, which means less opportunity for banks to gouge consumers when it comes to fees. So do I believe that the banking system will be making something like half a trillion dollars a year in operating profits if and when it gets back to some kind of steady-state sustainability? No.

I’m also dubious about the $1.4 trillion in starting capital — that’s regulatory capital, which is a very different animal from something like tangible common equity, and importantly it includes preferred shares, which I, for one, consider much closer to being liabilities than equity as far as a bank is concerned.

Hempton thinks that on this basis the system is "brimming with solvency"; if I had to point to one place where I clearly disagree with him, it would be here. I think that on a snapshot basis the system is worse than he calculates, and I also suspect that going forwards the ability of the banking system to recapitalize itself is much weaker than he thinks.

Still, he’s indubitably correct on the subject of the "Geithner plan" — which is one of those phrases that genuinely belongs in scare quotes:

As far as I can see there is no detail – and if you don’t have detail you don’t have a plan.

This is one of the reasons I’m becoming increasingly convinced that we’re turning Japanese: given how hard it is to do something bold, it’s always easier to faff about and do something woefully insufficient. Unless and until Geithner announces a plan worthy of the name, we’ll have to assume that to be the base-case scenario.

Posted in bailouts, banking | 2 Comments

The Psychic Bailout

Posted on February 16, 2009 by Felix

Guess what? It turns out that hope is a plan, after all! Six middle-aged Englishwomen have decided that they can get the country to "overcome whatever obstacles and difficulties we may face as a country, an economy and as individuals":

For exactly two minutes on March 6th at 11.00am our consortium of psychics and healers will act as a channel for the positive thoughts of the entire country.

It’s bound to work: just look at the thought that has gone into this.

The time, 11.00am is a master number, or a powerful 2 (1 + 1) which is the duality of the inner and outer self, encouraging us to look within to find solutions.

And it’s scientific, too!

It is a proven scientific fact that thinking about something often causes it to happen. Some call this quantum physics.

Who knows — maybe lots of positive thinking really can turn around those animal spirits. It’s probably more likely than GM saying "thanks very much for the bailout money, we shan’t ever need any more".

Posted in bailouts | 1 Comment

How the Economic Sausage is Made

Posted on February 16, 2009 by Felix

Gregory Clark reveals all:

Recently a group of economists affiliated with the Cato Institute ran an ad in the New York Times opposing the Obama stimulus plan. As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus — thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that "all I know on this issue I got from Greg Mankiw’s blog — I really am not equipped to debate this with anyone."

Clark’s at UC Davis; the only Cato signatory there is Kevin Salyer, who is indeed a fully accredited university macroeconomist — even if he doesn’t feel qualified to debate something as basic as the economics of fiscal stimulus.

Posted in economics | 1 Comment

The Kanjorski Meme, Mark II

Posted on February 16, 2009 by Felix

Tyler Cowen is now talking about the Kanjorski Meme Mark I (I thought I’d dealt with that one already) — but that’s not the end of the story, as Sam Jones demonstrates today.

Sam has what you might call the Kanjorski Meme Mark II: it’s much less alarmist, but also more plausible, and it’s based largely on a September report from the House Economic Committee. Here’s the important bit, buried on page 9:

For the week ending on Wednesday September 17, 2008, investors redeemed $145 billion from their money market mutual funds. On Thursday September 18, 2008, institutional money managers sought to redeem another $500 billion, but Secretary Paulson intervened directly with these managers to dissuade them from demanding redemptions. Nevertheless, investors still redeemed another $105 billion. If the federal government were not to act decisively to check this incipient panic, the results for the entire U.S. economy would be disastrous.

I phoned the author of this report, House staffer Robert O’Quinn, on Friday, to ask him what his sources were for this assertion; I’m still waiting to hear back from him, but of course that’s not going to happen today, which is a federal holiday.

In any case, this is the only place this assertion has been made: I haven’t seen it reported anywhere else. That’s not to say it didn’t happen: September was a crazy month in the capital markets, and reporters were so busy chasing the latest news that they could easily have inadvertently let something like this drop. But Ben Smith, of Politico.com, has talked to Kanjorski’s spokeswoman, Abbie McDonough, and she is still citing the New York Post article rather than anything else as Kanjorski’s source.

So we have to ask whether it’s credible that money-market funds got half a trillion dollars of redemption requests on the morning of the 18th, and that after a few phone calls from Hank Paulson, they changed their mind. Sam thinks it is:

FT Alphaville is aware of very similar circumstances back in September 2007 when secretary Paulson rang around various money market funds to dissuade them themselves from pulling money from a number of ailing bank SIVs (which were dependent on CP for daily financing). Rating agencies got similar calls.

But there’s a big difference here: in 2007, Treasury was trying to stop the money-market funds from withdrawing money from ailing conduits: it was worried that a certain sequence of events would happen, and intervened to stop it from happening. The 2008 version, by contrast, has the redemption requests already being made, and Treasury stepping in one morning to have them rescinded.

I’m not saying this is impossible, but it’s certainly much more difficult. In 2007, it was clear which arms needed to be twisted: the ratings agencies would be asked to hold off on any SIV downgrades for a couple of weeks, while the big money-market funds would be asked not to try to exit the SIVs all at once. The money-market funds would be inclined to agree, since nobody wants a rush for the exits which is likely to crush everybody.

In 2008, by contrast, here’s what we’re asked to believe happened:

  1. A number of big money-market funds all got massive redemption requests — totalling $500 billion or so — at the same time (specifically, about 11am on Thursday September 18).
  2. The money-market funds communicated this information to the people at Treasury whose job it is to monitor such things.
  3. Those people got scared, and rapidly escalated the information to Paulson.
  4. Paulson, extremely concerned, called the money-market funds and asked for the names and phone numbers associated with all the biggest redemption requests. He then phoned up each of those big clients and persuaded them to rescind those requests, after they had been made, but before the market closed.
  5. The big investors said yes to Paulson, and rescinded their requests.

The most improbable part of this story is not the incredible efficiency of the nexus connecting money markets, their clients, and Treasury — although it would be pretty much the only case in living memory of the government acting on its toes in such a decisive manner, in the middle of the working day. Rather, the most improbable part is the first bit, where a bunch of big institutional money-market investors all decide to sell simultaneously on the Thursday morning. Why should that be the case?

And of course the other big unknown is who these investors are. They clearly need to be very big, and they equally clearly need to be open to arm-twisting from Treasury. Maybe it’s a sovereign wealth fund or two?

It’s also worth noting that this story is entirely distinct from the big-picture story which Sam shows in a chart from Bank of America, showing a move out of prime money-money funds and into government and Treasury funds over the course of a few weeks. That did happen, and the world managed to survive. The big question is whether there was a tsunami of redemption requests on the morning of the 18th, which would have dwarfed the flows that we ultimately saw.

As I say, I have a call in to O’Quinn, so I’ll let you know if I get any more detail on where this story came from, or who knows the truth of the matter. But if any journalist has an interview with Hank Paulson lined up in the near future, it would be great if they could ask him directly about this.

Update: "Short-duration guy", in the Alphaville comments, has a very plausible take on all this. First, he says, it’s simply not technically feasible that Treasury would be able to monitor hour-to-hour redemption requests from money-market funds.

As for Treasury’s actions, the most important development was in fact the decision by the Fed to start accepting asset-backed commercial paper as collateral — thereby allowing money-market funds to meet redemption requests without selling their ABCP.

So color me skeptical on the Kanjorski Meme, in both its Mark I and Mark II forms. I think that Mark I we know for sure to be false, while Mark II is less certainly false but is still a long way from being credible.

Posted in bonds and loans, Politics | 2 Comments

Japan’s Whiplash

Posted on February 16, 2009 by Felix

Edward Hugh has a good summary of what he calls Japan’s “unimaginable” contraction — the one which resulted in that 12.7% annualized fall in GDP in the fourth quarter.

One important lesson, here, is that it’s foolish placing much faith in mean-reversion. There’s still a feeling out there that, yes, we had a few years of bubble and exess, and surely that bubble needs to be popped, but then we can get "back to normal". Well, it’s been 20 years in Japan since its bubble burst, and it seems further away from recovery than ever.

Of course, Japan’s key role in the carry trade tied it in to the global bubble and helped expose it to sharp and painful unwindings. And there’s nothing worse for an exporter than the double whammy of a strengthening currency with weakening global demand.

But more generally, as we saw in Richard Florida’s Atlantic article, the worst repurcussions of a collapsing complex system can — and probably will — be felt in less-than-obvious places. A rough beast, its hour come round at last, is being born somewhere. But maybe not where you think.

Posted in economics | 1 Comment

Extra Credit, Sunday Edition

Posted on February 15, 2009 by Felix

GM to Offer Two Choices: Bankruptcy or More Aid: And if it gets the "more aid", it’ll surely be back for yet more later. This risks becoming the bottomless bailout.

Do Androids Dream of Apple-Blackberry Crumble? The demise of the iPhone, and Apple.

Time to short Jenny Craig? Yes, poor people tend to be fatter. But having less money might yet make you thinner.

Stanford’s Bank Curtails Financing for Elandia as U.S. Probes. Spot the sourcing potshots:

Stanford Group Co., an affiliate of the bank, is under investigation by the SEC and Financial Industry Regulatory Authority, according to people familiar with the matter who declined to be identified because they didn’t want to put their jobs at risk.

Stanford’s operations are also being probed by the FBI, the Wall Street Journal reported, without citing anyone.

Well, technically the WSJ cited "two people close to the inquiry", but maybe there’s a difference between that and "people familiar with the matter".

Related: Antigua PM fears Stanford probe will hurt island.

Conversations: Ben Stein: This video advertorial for the NYT has to be seen to be believed. Apparently Stein’s boat is in this picture. And does anybody want to suggest a caption for this?

steindog.jpg

Posted in remainders | 1 Comment

New York Employment Datapoint of the Day

Posted on February 15, 2009 by Felix

From Richard Florida’s Atlantic cover story:

Financial positions account for only about 8 percent of the New York area’s jobs, not too far off the national average of 5.5 percent. By contrast, they make up 28 percent of all jobs in Bloomington-Normal, Illinois; 18 percent in Des Moines; 13 percent in Hartford; 10 percent in both Sioux Falls, South Dakota, and Charlotte, North Carolina.

Florida’s article is provactive throughout; he says that New York’s density and velocity will serve it well in the creative industries which will end up powering future growth, even if they’re not financial. Certainly if a talented financial-industry professional wants to go off and do something completely different right now, the opportunity cost has never been lower. And New York is a center for many industries, not just finance:

Currid measured the concentration of different types of jobs in New York relative to their incidence in the U.S. economy as a whole. By this measure, New York is more of a mecca for fashion designers, musicians, film directors, artists, and–yes–psychiatrists than for financial professionals.

Such frippery makes Arnold Kling shudder:

I hate the Mets. I find the heavy-handed sensory overload of New York tiring and ultimately unpleasant, in the same way that I find Las Vegas or Disney World unpleasant…

I don’t think that the arts are all that important. To me, creative innovation that matters is somebody in a lab at MIT coming up with a more efficient battery or solar cell. It is somebody at Stanford coming up with a way to make computers smarter or cancer more preventable. I just can’t get excited about some frou-frou fashion designers and the magazines that feature their creations.

Florida does say that not only New York but also Boston and Silicon Valley will be winners in the new geography which will emerge from the current crisis. And "heavy-handed sensory overload" is something very closely related to Florida’s density-and-velocity.

What’s more, frou-frou fashion designers and the magazines that feature their creations are genuinely economically important. If Arnold Kling can’t get excited about them, that’s fine. But if "mattering" is judged in terms of value-added or jobs created, then the fashion industry matters a lot, and New York should be very grateful that a large part of it is based right here.

The artsier creative industries are also a huge comparitive advantage for New York over, say, Palo Alto. Someone with the skills of Sergei Brin is in high demand from Sao Paulo to Shanghai. But where will the next Stephen Sondheim head, if not New York?

Posted in cities, employment | 1 Comment

Sunday Stanford

Posted on February 15, 2009 by Felix

The Stanford story is picking up a lot of steam, to the point at which it’s becoming hard to keep up. A lot more information is coming to light about Stanford’s investments, many of which seem to be in highly-illiquid small-cap stocks. Remember, for instance, the $62 million loan which Stanford refused to extend to Health Systems Solutions, thereby scuppering its deal to buy Emageon? Well, it turns out that Stanford owns Health Systems Solutions. The WSJ also reports:

Some Stanford International representatives have been recently advising clients that they can’t redeem their CDs for two months, a person familiar with the matter said. The bank says it has over 30,000 investors and more than $8.5 billion in assets, though it also says the larger group of which it is a part manages over $51 billion in assets.

I’ve been wondering about that $51 billion: we’ve heard a fair amount from holders of Stanford’s CDs, but what about Stanford’s other investors? Big Al, a commenter at Clusterstock, has an interesting theory:

The $50b number is smoke and mirrors. Its $8.5B at the bank and about $6.5b at the b/d (best as i can figure). The rest is ‘under advisement’ which is a game of semantics Allen plays. He has a broker in Houston calling on public taxing authorities. In total, those taxing authorities have about $35b of annual tax revenues. Stanford counts all this tax revenue as being "under advisement" and adds it to his AUM. Allegedly. In my opinion.

Who’s in charge of regulating the statements that financial groups make about such matters? The SEC? Finra?

The whole Clusterstock comments thread is worth reading for some interesting drilling-down into Stanford’s investments, as well as speculation about Stanford’s auditor, who seems to be operating out of an address in Enfield, London, in the same building as ZigZags, the unisex hairdresser.

Meanwhile the FBI is definitely getting involved in the investigation in Houston, maybe because they’re well aware that the SEC seems to be getting nowhere fast:

Another person familiar with the investigation said the SEC has been looking at the certificate-of-deposit business since at least 2007.

Alex Dalmady, the Miami-based analyst who broke the story wide open, has been following matters closely; his latest missive is here. He says that he shouldn’t be given full credit for this, and that if his article hadn’t appeared, both Matt Goldstein of BusinessWeek and Alison Fitzgerald of Bloomberg would have got there soon enough. Which I’m not sure about, especially given that their stories hadn’t got close to the lawyer stage yet: it’s very dangerous for a major media outlet to accuse a bank of being a Ponzi scheme, or even hint at it. That’s a recipe for bank runs, even if the bank is perfectly healthy.

It’s worth mentioning that Stanford does have defenders. One of them just sent me a lengthy email, making a number of points, which are at the very least worth airing:

  1. The length of the SEC investigation: if fraud was as obvious as Dalmady makes it out to be, would the SEC really have dragged out its investigation this long?
  2. Stanford’s 2004 aquisition of Washington Research Group: there were many other potential buyers, so Washington would have done due diligence on anybody buying it. Although maybe any Stanford fraud doesn’t go back that far.
  3. Did investors in Stanford’s CDs go into the deal with their eyes open? They knew they were getting above-market returns and were taking Allen Stanford’s credit risk.
  4. Did Stanford not report below-market returns in years which were great for markets generally? Does that not maybe "suggest some symmetry in their investment approach"?
  5. A lot of the Stanford claims are coming from disgruntled ex-employees, or their friends, which means that they should be treated skeptically.
  6. Is there any reason to believe that Stanford’s auditor, although small, wasn’t realiable?
  7. Given the severity of the allegations, shouldn’t everybody be ultracautious in making them?

All that said, I’m not going to apologize for following this story aggressively. These points might have had more salience a few years ago, but the world has changed a lot since then:

First, we’ve had a global economic meltdown, caused primarily by the financial system. The base case now is no longer to trust financial institutions unless there’s a reason not to; if anything, it’s the other way around.

Second, Madoff.

Third, the rise of the blogosphere. We live in a world where anybody can and will publish anything they like. The only way to deal with that is to increase transparency and disclosure: if someone publishes false allegations against you, you rebut them in detail and in full public view. You can no longer hope to prevent them from making those allegations public in the first place.

Stanford’s PR operation knows this, of course, and its silence speaks volumes. Why didn’t Allen Stanford set up a conference call last week with his CFO and all the journalists and analysts following this story, trying to answer all their questions to the best of his ability? If you’re running a bank, you need nothing more than the trust of the public. And Stanford’s done nothing over the past week to try to regain that trust. Which is very weird, if he’s not a fraud.

Update: Alex Dalmady emails to point out that according to Stanford, 90% of its assets are "up to 1 month Assets", which implies that they’re actually shorter duration than the CDs which make up its liabilities. In turn, that would seem to imply that Stanford, almost uniquely among banks, is not susceptible to a bank run at all.

Posted in fraud | 1 Comment

Extra Credit, Friday Edition

Posted on February 14, 2009 by Felix

Under One Stress Test, Big Banks Look Anemic: If the government’s stress test is anything like Creditsights’s stress test, then Wells Fargo will need another $119 billion; BofA, $99 billion; JPMorgan, $124 billion; Citi, $101 billion; Goldman Sachs, $47 billion; and Morgan Stanley, $34 billion. That’s over half a trillion dollars right there, for those of you counting along at home.

Bankers Face Strict New Pay Cap: Which could apply to as many as 25 executives, if a bank gets more than $500 million in federal money.

To Catch a Thief: Our financial system is run by psychopaths. Literally.

Alexander Hamilton, J.P. Morgan… and Tim Geithner? "Jim "Mad Money" Cramer just sent my head spinning round so fast that my brain became completely unscrewed from my neck and everything I’ve learned about how the economy (doesn’t) work in the last three years evaporated into thin air with an accompanying blasting hiss of boiling steam." That’s news?

Posted in remainders | 1 Comment

Stanford: Your Daily Dose of WTF

Posted on February 14, 2009 by Felix

It took Alex Dalmady 30 minutes to work out that there was something obviously wrong at Stanford International Bank. The SEC, on the other hand, works a bit more slowly:

BusinessWeek previously reported that the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Florida Office of Financial Regulation all are investigating the high-yielding CDs sold by Stanford’s offshore bank, as well as the investment strategy behind them. FINRA and Florida regulators began investigating Stanford Financial and its banks within the past several months. But people familiar with the probes say the SEC investigation goes back at least three years and possibly longer.

It’s all well and good being meticulous. But the amount invested in SIB CDs has increased by billions of dollars over the course of the period the SEC has been investigating the bank. Anybody who bought a Stanford CD within the past three years has every reason to be furious at the SEC.

But it gets even better: a certain Lawrence J. De Maria filed a lawsuit in 2006 specifically alleging that Stanford "was operating a Ponzi scheme or pyramid scheme". De Maria got bought off with an out-of-court settlement in December 2007; law enforcement more generally didn’t seem to care in the slightest, either before or after the case was settled.

Could the SEC — not to mention the FBI — really have been this incompetent for years? Actually, don’t answer that. There’s no need.

Posted in fraud | 1 Comment

Magazine Cover of the Year

Posted on February 13, 2009 by Felix

cover.jpg

There really can’t be any doubt about this one: World Finance splashes Sir Allen Stanford all over the cover of its Jan/Feb 2009 issue. And the prose couldn’t be any more glowing, or more ironic:

World Finance’s 2008 Man of the Year award was bestowed upon Sir Allen Stanford as he clearly stood out when, two years ago, he began cautioning those in the financial services industry that an impending global economic storm was brewing. His ability to lead the Stanford Financial organisation through this current turbulent environment unscathed and his commitment to philanthropic causes in the cities around the world where Stanford conducts business were the deciding factors in selecting him as this year’s award recipient.

The interview is well worth reading, especially the bits where Stanford congratulates himself on his investment philosophy. I have a feeling that the SEC might be asking him similar questions, but will want rather more concrete answers.

(HT: Otto)

Posted in Media | 1 Comment

Did Chanos Break the Law?

Posted on February 13, 2009 by Felix

The best way of getting lots of angry comments on a blog entry is to be rude about Apple. But the second-best way is nice about short sellers. So it’s hardly surprising that after I made sympathetic noises about Jim Chanos this morning, commenters rapidly popped up to say that he had committed fraud and must indeed be prosecuted.

But that’s really not obvious at all. Remember what he’s being accused of: front-running the information that a negative research report was going to be put out on a certain company. I asked John Coffee of Columbia whether the SEC has ever prosecuted such a thing, and he replied:

They have where it was the analyst who front ran his own report in violation of firm rules. But today’s case is different because the recipients owe no duty to the analyst UNLESS they agreed to maintain confidentiality.

This case may be affected by the pending Mark Cuban inside trading case where the SEC has alleged that Mr. Cuban had agreed to keep certain information confidential and then traded on it (but did not owe a fiduciary duty). In the actions discussed in today’s news, there can be no claim of breach of fiduciary duty but there could be an allegation by the SEC of an agreement to keep the information confidential until an embargo date.

The fact is that the Cuban case is a bit of a stretch to begin with: it’s basically based entirely on one man’s recollection that Cuban promised to keep certain information confidential. But it’s ludicrous on its face that Chanos would ever promise to keep a research analyst’s information confidential — it’s his job to trade on information. It’s equally ludicrous that a research analyst would ever ask Chanos to keep information confidential until an embargo date — and what’s more, there’s no indication that the analyst in question did so.

In any case, I’m not at all convinced that it’s even possible to start talking about when the contents of research reports become "public information". Research reports, by their very nature, are private documents, which are often released in advance to favored clients. My commenter "Patchie" writes this, which I think is entirely wrong:

Independent analysts are to be independent and the releases of their reports are to be in public forum not private pre-releases so that one gains advantage over another.

If the release of research reports was to be in a public forum, then there would be no way for the analysts to ever make money. Research reports aren’t press releases: they’re bought-and-paid-for private documentation. The recipients, once they have that information, can do with it as they wish. And if the information in the research report isn’t "material public information", it’s hard to see how information about the research report can be material non-public information. Which is one reason why it seems so silly that the SEC is going after Chanos here.

Posted in fraud, regulation | 3 Comments

Are Uninsured Bank Depositors in Danger?

Posted on February 13, 2009 by Felix

One of Dan Colarusso’s favorite bloggers, Hugo Lindgren, picks up on the latest weekly newsletter

from Christopher Wood:

It is even more amazing that Obama does not understand the political appeal of the nationalization option. Maybe the so-called liberal Democrats are worried about adopting such a seemingly socialistic solution … but despite this latest setback nationalization of the banks is coming sooner or later because the realities of the situation will demand it. The result will be shareholders wiped out and bondholders forced to take debt-for-equity swaps, if not hopefully depositors.

"Seemingly" socialistic is right: even the AEI’s John Makin — no socialist he — is quoted in the NYT today as saying that “the lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”

But what about those depositors? Paul Kedrosky is shaken by Wood’s conclusion:

I was with him right up until the last bit, but am I just sleep-deprived, or is Chris really arguing that there is a potential future where some U.S. bank depositors become forced equity holders?

It’s worth remembering that depositors are unsecured creditors of any bank; usually, indeed, they’re by far the largest class of unsecured creditors. Paul seems to think that they are, or should be, senior to bondholders: that might be true de facto, but it’s certainly not true de jure. *

It’s this very fact which led to the implementation of deposit insurance in most major banking systems; at this point we’re up to $250,000 in the US, which is a lot of money. If a bank fails, the FDIC will ensure that its depositors are paid out in full up to $250,000 each. But this is an insurance policy: it’s not a declaration that deposits are in any way senior to bonds. And if bondholders are forced to take a haircut, then by the principle of pari passu there’s a strong case to be made that depositors should take a haircut too.

In practice, this will apply only to uninsured depositors, of course. I’ve got a call in to the FDIC to find out what the total amount of uninsured deposits in the US banking system is, but given that total deposits as of June last year totaled over $7 trillion, it’s bound to be a large number.

(Update: Found it, at the top of page 17 of this pdf. Total domestic deposits at FDIC-insured institutions are $7.23 trillion, and total insured deposits are $4.54 trillion. Which means that total uninsured deposits are $2.68 trillion. That’s huge.)

The Washington Mutual precedent is interesting: the bank’s uninsured depositors remained whole even as its bondholders were largely wiped out. For the time being, I suspect that the FDIC will continue to try to make the distinction, and will put much more effort into protecting depositors than protecting bondholders. But as we’ve learned many times in recent history, it’s very dangerous to rely on precedent in such situations. And so there’s a good chance that at some point, a US bank failure is indeed going to result in losses for uninsured depositors. After all, that’s what always used to happen.

*Update 2: John Hempton calls to inform me that depositors actually are legally senior to unsecured bondholders, although they’re junior to secured bondholders.

Posted in banking | 51 Comments

Colarusso on Blogonomics

Posted on February 13, 2009 by Felix

Dan Colarusso, who used to run portfolio.com, has now moved over to join Henry Blodget’s blogshop. It’s quite a change of pace, as he explained to me in an IM conversation this afternoon:

Felix Salmon:

So!

You’ve been on the job 2 weeks now?

Dan Colarusso:

yup

getting used to the "velocity"

Felix Salmon:

If I’ve got this right, your employers, in order, have been Jim Cramer, Rupert Murdoch, Si Newhouse, and Henry Blodget?

Dan Colarusso:

yes, with some freelance checks from the Sulzbergers and Bancrofts in between Cramer and Rupert

Felix Salmon:

And Blodget is the highest velocity/intensity of the lot? Is that a blog thing?

Dan Colarusso:

I wouldn’t say the most, just the biggest shift between the pace at Portfolio, which was more reflective and here, which is more, reactive

cramer probably wins the velocity of thought category

he’s a rabid entrepreneur when it comes to ideas

it comes from being a trader

Felix Salmon:

Do you have any fears of being dragged into a CNBC/Cramer-like information-overdose whirlpool? Or is that something fun you and Blodget actually welcome?

Dan Colarusso:

that’s our business now. people consume a lot of information.

Felix Salmon:

So you don’t believe that CNBC is Hurting America?

Dan Colarusso:

it’s fun, kind of like being in a bar with traders all day. a lot of good ideas, and punchlines

america does fine on its own. cnbc isn’t hurting anyone

except for the women whose boyfriends are going to buy them the crappy valentine’s day gifts that are being advertised every 10 minutes

Felix Salmon:

Of course.

Maybe it’s worth backtracking a minute and explaining what your new job is?

Dan Colarusso:

well, i’m the managing editor at The Business Insider, a website that covers tech, finance, green and entertainment business news

we just relaunched this week and the goal here is to become the go-to site for interested, smart business readers

Felix Salmon:

It’s still a blog, though, right?

Dan Colarusso:

very much so, but we’ll be broadening out a bit, trying to do more original analysis and, take a breath now, original reporting

Felix Salmon:

and that’s why a managing editor is needed?

you’ve got the herding-cats job?

Dan Colarusso:

well, i think with the flood of news and fragmentation in the markets, any site with ambition to be viable has to have someone kind of organizing, planning and maintaining the voice of the place.

it’s not enough to be purely reactive, you have to push ideas, start conversation and give people good stories to differentiate

Felix Salmon:

and how would you characterize the Business Insider voice?

Dan Colarusso:

TBI voice is knowing, sarcastic and critical

and quick

Felix Salmon:

And that’s across the sites. You dropped The Business Sheet, which was a bit more tabloidy, when you launched the green and entertainment blogs?

Dan Colarusso:

well, the Sheet was replaced by The Biz, which covers entertainment

Felix Salmon:

aha

Dan Colarusso:

I think trying to do something too tabloidy is dangerous because business readers are serious

it’s nice as a sidelight but it’s hard to ride too hard

don’t get me wrong, we like tabloidy stuff, but for reasons of pacing and less of the core

Felix Salmon:

That said, the name "Clusterstock" is pretty juvenile, and it’s staffed by ex-Dealbreaker types (Carney and Wiesenthal), even if it never gets as tabloidy as Dealbreaker

Dan Colarusso:

i like the name and i like the sensibility though we’d like to get more inside wall street with it

somewhere between gossip and news

and Carney and Joe are talented guys

i was a big fan of both of them in their previous gigs

Felix Salmon:

So I need to ask you about Henry’s announcement of your hiring

Dan Colarusso:

shoot

Felix Salmon:

1. How much screaming are you going to be doing around the Business Insider?

Dan Colarusso:

Probably not much. The intensity level here is good. and it’s a small room.

Felix Salmon:

And 2 was I really "unnoticed" before you came along?

Dan Colarusso:

you’d have to ask henry. I certainly hadn’t noticed you 😉

but i wasn’t a big blog fan then. you helped convert me

Felix Salmon:

More seriously, how much attention are you going to be paying to the rest of the blogosphere? I’ve noticed that Henry, for one, almost never links to blogs, or responds to blogs who link to him.

Dan Colarusso:

i think we link a lot. but i pay a lot of attention, if not in linking then in simply looking for ideas to spark stories.

sometimes bloggers push so much stuff out, they don’t see the bigger picture they’re painting. readers need to have that big picture put together for them

Felix Salmon:

Which is the New York Post way of doing things, right? Read a lot of blogs, steal their ideas, give them no credit?

Dan Colarusso:

i hope not. We gave plenty of credit at the Post. In fact, more places stole from my business section than I see anyone stealing from anyone else these days

in fact, on the new TBI, we have headline links sending people to all kinds of sites without ever stopping at our stuff

and that’s right at the top of the homepage.

Felix Salmon:

I’m looking at the top of the homepage now, what links are you talking about?

Dan Colarusso:

in the middle rail. it’s the More section.

right now it’s all internal but a lot of the time, they’ll be pointing to other people

and we also will tell the reader where he or she will be going

i wish i had a screen shot to send you from yesterday

Felix Salmon:

will those links turn up in the RSS feed too?

Dan Colarusso:

i don’t believe so

it’s purely our way of giving our readers what we think is worthwhile

Felix Salmon:

which makes them seem like a less-than-core part of your, um, value proposition

Dan Colarusso:

reader service is everyone’s value proposition in this business. we make them obvious and we do get a fair amount of traffic to our home page and section HPs

Felix Salmon:

the section HPs will also be getting external links?

Dan Colarusso:

yup

the top one now is from Wired

Felix Salmon:

and the TBI homepage is already getting good traffic even though it’s only existed for a week and a half?

Dan Colarusso:

not yet, but the section fronts do because they’re more established

actually the TBI has only existed 4 days

Felix Salmon:

The top "More" link on the TBI page now links to Wired?

Dan Colarusso:

the love bandit teddy bear ad is on CNBC right now, fyi

iPhone ‘iShoot’ Coder Makes $600k In A Month that’s the hed

Felix Salmon:

so, is TBI ever going to be as profitable as an iPhone coder?

Dan Colarusso:

it depends on the iPhone coder

i think it’s a good model. we keep costs down, we generate smart posts and in a few months, we’ll be a little more organized in terms of packaging our best stuff to reach more readers and attract more advertisers

Felix Salmon:

How’s the market for talent? I’ve had more people than ever approach me of late asking if I can recommend good financial bloggers they might be able to hire

Dan Colarusso:

there’s talent and there’s TALENT. a lot of the former, people who can type fast and crack the occasional joke.

we’re lucky. i really like the talent in this room. it’s part of why i came here.

but the blogging business is due for a shakeout. too much masturbation going on, in my opinion

Felix Salmon:

As a no-holds barred new-media type, you’ll jump at the chance to name names, of course

Dan Colarusso:

i don’t have to. they know who they are

but i basically read 10-15 blogs and I need the information more than the average bear

that’s not to say everyone shouldn’t be blogging, but there’s a line between a business and eating cat food

Felix Salmon:

who are your favorite business/finance bloggers?

Dan Colarusso:

i like kevin depew at minyanville

and i really like the financial stuff in NY Mag’s daily intel

it’s worldly and smart

Felix Salmon:

Hugo’s a clever chap who’s on the ball, he should have his own feed

Dan Colarusso:

and when i was getting paid to do it, i rather enjoyed your stuff

HA!

Felix Salmon:

gotta run, there’s a big bowl of catfood waiting for me

cats like Felix like Felix, as they say in England

Dan Colarusso:

c’mon now, we know better than that. you do work for conde nast.

it’s gourmet cat food

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