Making the Financial Networks Useful

Starting with the little spat between John Stewart and CNBC I started to think seriously about how the financial news stations are extremely broken. Now, I’ve mused on specific parts of this equation before. However, I’ve been writing this post, a more complete look, for a while. So, imagine my surprise when Barry Ritholtz beat me to the punch! Barry’s look, though, seems to focus more on the “low-hanging fruit” when it comes to improving CNBC. Personally, I think there is a massive overhaul needed. So, instead of taking the same approach as Barry (telling a network how to improve itself) I’ll focus on describing what my ideal financial news network would look like.

1. Make no buy/sell recommendations. Honestly, the shameless self-promoters that  go on CNBC are quite often wrong. There is no accountability for recommendations–obviously, the logistical issues are both important and daunting. However, there is a much larger problem that is most observable with Jim Cramer. I have no doubt Mr. Cramer is intelligent, just as I have no doubt that his show is useless drivel–he needs to make so many recommendations just to fill his airtime that no one ever sees his performance, CNBC doesn’t track it, and all the studies that look at his recommendations need to make huge assumptions. But, the easiest explanation of why recommendations are bad comes from a post entitled Lawyers vs. Detectives. Clearly, also, there doesn’t exist the air time or continuity to track and update recommendations correctly–the logisitical issues I mentioned earlier. And, to be frank, any idiot can just dump ticker symbols onto the screen and say a few sentences about why those ticker symbols are good or bad… and be completely wrong or stupid. The point of a good finance network should be to bring reporting and analysis to light. (Further evidence: look at Barron’s experts who, as a whole, underperform passive indices. And they are tracked and asked for analysis of their picks regularly.)

2. Emphasize investiagtive journalism. Financially literate, intelligent people can add a whole lot of value when it comes to explaining and digging into economic and financial stories. Think Kate Kelly and her three part tick tock of the Bear Stearns situation as a good example. Think of the deep look into the mortgage industry that NPR did. Think of the detailed profiles of various individuals at the center of the finance world. Clearly, there is a lot of value to be added merely by going beyond the puff piece. Right now what people get 90% of the time when it comes to finance reporting pertains to what the Dow Jones did or is doing for the day. Guess what? When stocks go up, it’s because there are more buyers than sellers. When they go down, vica versa. Trying to divine more than that from the market move on a given day is as useless and surface as it often is wrong.

3. Hire experts and not personalities. I’ll tell you a secret… Maria Bartiromo adds no value if you know anything about markets and finance to start with. I’ve seen her provide an outlet for executives to provide narrative versions of their press releases several times. There is never a question I’ve heard her ask that was probing or had an answer I didn’t already know from reading the NY Times or the WSJ. She doesn’t even understand journalism very well! The entire lineup of attractive and vacuous seat-warmers add no value. Remember this little episode with Fox Business news? Now, that’s a little different because it was live, breaking news. However, a thinking person probably would have stopped before talking about how great a move it was for Apple to buy AMD, despite the fact that such a purchase would have been “WTF?!” move for Apple–the current anchors just talk to talk. I even remember a CNBC anchor pulling up a guest’s chart on a segment (the network had been hyping this segment for a few hours–theoretically the anchor had prepared for it) and asked why, if things were so dire, the chart showed such a strong rally/uptrend. Well, the chart was showing spreads for a certain class of bonds–and, as we all know, when yield goes up, price goes down! She was anchoring a segment on fixed income (and had already been chatting about the topic for a few minutes!) and still couldn’t figure out what was going on in a very simple chart… Surely there’s room for improvement!

The model, though, for financial news anchors should really be an engaged, credentialed moderator. Thomas Keene, honestly, is a great example of this. I don’t catch his show (or podcast) as often as I would like, but whenever I do it’s clear he’s intelligent, familiar with the underlying issues, and that he views his job as getting his guests to make their case as well as expose the “other side” of the argument. A network should be able to create a lineup of intellectual experts (with relationships and enough personality to be interesting) in equity markets, corporate credit/finance, economics, macroeconomics, currencies, commodities, personal finance, etc. Networks haven’t seemed to figure out that, unlike human interest stories and traditional news, having some domain expertise is vital to being able to ask the right questions and get the underlying reasoning out into the open.

4. Go beyond soundbites and short on-air segments. I think finance is much more complicated than normal news, in the same way that political news usually is more complicated: there are lots of underlying dynamics, complex rules, and large parts of the process are hidden from view and established through precedent. Unlike a plane crash, terrorist attack, or story about some zany celebrity antic, financial news that focuses on the “what” instead of the “why” is dull, uninteresting, and useless. This is why financial news, in the first place, tries to explain what’s going on. So, it should only be natural that financial news, if it needs the “why” to be useful and is more complicated than garden-variety news, needs to allocate more than a few minutes to a given issue. No one is going to understand what’s going on with commercial real estate in five minutes. CDOs can’t even be explained in ten minutes, let alone covered in the context of the credit crisis in that time.

How can a financial news network, then, ensure that there is enough depth to a story or segment? Well, time is obviously a big piece of the equation. To revisit a prior example, Thomas Keene usually has guests on for 30+ minutes. However, media and a command of visual aides and interactive media online is also important. Some of the most compelling explanations of how CDOs work and different aspects of the credit crisis are graphics. Further, finance is based on data–models, data highlighted in charts and stories, and other material should all be made available online.

5. Embrace new media. As far as I can tell, no financial news station has a strong online presence. If a strong group of credentialed experts is the backbone of the network’s on-air talent (see #3 above) then they should have deeper, more valuable insights than what they can cover on the air. These thoughts should be blogged about, tweeted, and whatever else to make them as accessible as possible–more and more the “conversation” is online and to join it one must have their thoughts online. The NY Times does a good job at this–their columnists and reporters write all sorts of blog entries ranging from deep, researched pieces to random musings and clever one-line arguments.

Further, with my idealized network, all the content from on-air segments would be put on YouTube and made available to whomever wants to link or embed it. Openness and access would be key strategies for the network. A part of this is also making the on-air personalities and others who contribute regularly interact with the public as much as possible (currently, Twitter is a great medium for this).

6. Emphasize standards–make objectivity, fairness, and accountability the network’s core values. Barry talked about this in his list:

7.  Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.

Now, this ties in with some of what I’ve said above. However, my point goes beyond this. Executives should not want to go one my idealized network when they need to “get out a statement”–the “narrative press release” as an interview is useless and doesn’t hold the subject of the interview accountable for their words. Similarly, when a guest comes on and makes an assertion that is incorrect it needs to be challenged at the time and corrected later–I clearly take a harder stance on this issue than Barry does. If people will be making their investment decisions based on information presented on the network and then they need to trust the network–viewers need to know the network strives to prove correct information and puts every effort into doing just that. Also, the rules of “journalistic engagement” for the network (things like policies on anonymous sourcing) should be public.

7. Make education a pillar of the network. Finance and markets, as I describe in multiples places above, are complicated and often counter-intuitive–a fair amount is “inside baseball.” Having a section of the website and some on-air time dedicated to explaining both terms and important but obscure facts and market dynamics is an important service. Simple things, like bond math, are important and static–these concepts (that subtly undergird all other topics–remember the anecdote about the misread chart above) should be revisited whenever absolutely necessary while being available at all times.

If these simple pieces were all followed, I believe there would exist a simple to follow, engaging financial network that would add a ton of value where there currently is a void. Then, maybe, the other networks would need to follow suit. I won’t hold my breath.

Revisiting a Debate We Should be Past

Recently, Felix Salmon, Clusterstock, and others have been mentioning an essay from the Hoover Institute about the financial crisis. Now, I haven’t yet linked to the essay in question… I will, but only after I’ve said some thing about it.

I was on the front lines of the securitization boom. I saw everything that happened and am intimately familiar with how one particular bank, and more generally familiar with many banks’, approach to these businesses. I think that there are no words that adequately describes how utterly stupid it is that there is still a “debate” going on surrounding banks and their roles in the financial crisis. There are no unknowns. People have been blogging, writing, and talking about what happened ad naseum. It’s part of the public record. Whomever the author of this essay is (I’m sure I’ll be berated for not knowing him like I was for not knowing Santelli — a complete idiot who has no place in a public conversation whose requisites are either truth or the least amount of intellectual heft), unless it’s writing was an excesses in theoretical reasoning about a parallel universe, it’s a sure sign they don’t what they are talking about that they make some of the points in the essay. Let’s start taking it apart so we can all get on with our day.

For instance, it isn’t true that Wall Street made these mortgage securities just to dump them on them the proverbial greater fool, or that the disaster was wrought by Wall Street firms irresponsibly selling investment products they knew or should have known were destined to blow up. On the contrary, Merrill Lynch retained a great portion of the subprime mortgage securities for its own portfolio (it ended up selling some to a hedge fund for 22 cents on the dollar). Citigroup retained vast holdings in its so-called structured investment vehicles. Holdings of these securities, in funds in which their own employees personally participated, brought down Bear Stearns and Lehman Brothers. AIG, once one of the world’s most admired corporations, made perhaps the biggest bet of all, writing insurance contracts against the potential default of these products.

So Wall Street can hardly be accused of failing to eat its own dog food. It did not peddle to others an investment product that it was unwilling to consume in vast quantities itself.

(Emphasis mine.)

Initial premise fail. I had a hard time finding the part to emphasize since it’s all so utterly and completely wrong. Since I saw everything firsthand, let me be unequivocal about my remarks: the entire point of the securitization business was to sell risk. I challenge anyone to find an employee of a bank who says otherwise. This claim, that “it isn’t true that Wall Street made these mortgage securities just to dump them on them the proverbial greater fool” is proven totally false. There’s a reason the biggest losers in this past downturn were the biggest winners in the “league tables” for years running. As a matter of fact, there’s a reason that league tables, and not some other measure, were a yardstick for success in the first place! League tables track transaction volume–do I really need to point out that one doesn’t  judge themselves by transaction volume when their goal isn’t to merely sell/transact?

In fact, the magnitude of writedowns by the very firms mentioned (Merrill and Citi) relative to the original value of these investments imply that a vast, vast majority of the holdings were or were derived from the more shoddily underwritten mortgages underwritten in late 2006, 2007, and early 2008. In fact, looking at ABX trading levels, as of yesterday’s closing, shows the relative quality of these mortgages and makes my point. AAA’s from 2007 (series 1 and 2) trading for 25-26 cents on the dollar and AAA’s from early 2006 trading at roughly 67 cents on the dollar. The relative levels are what’s important. Why would Merrill be selling it’s product for 22 cents on the dollar if the market level is so much higher (obviously the sale occurred a few months ago, but the “zip code” is still the same)? This is a great piece of evidence that banks are merely left holding the crap they couldn’t sell when the music stopped.

Now, onto the next stop on the “How wrong can you get it?” tour.

It isn’t true, either, that Wall Street manufactured these securities as a purblind bet that home prices only go up. The securitizations had been explicitly designed with the prospect of large numbers of defaults in mind — hence the engineering of subordinate tranches designed to protect the senior tranches from those defaults that occurred.

Completely incorrect. Several people who were very senior in these businesses told me that the worst case scenario we would ever see was, perhaps, home prices being flat for a few years. I never, not once, saw anyone run any scenarios with home price depreciation. Now, this being subprime, it was always assumed that individuals refinancing during the lowest interest rate period would start to default when both (a) rates were higher and (b) their interest rates reset. [Aside: Take note that this implicitly shows that people running these businesses knew that people were taking out loans they couldn’t afford.] Note that the creation of subordinate tranches, which were cut to exactly match certain ratings categories, was to (1) fuel the CDO market with product (obviously CDO’s were driven by the underlying’s ratings and were model based), (2) allow AAA buyers, including Fannie and Freddie, an excuse to buy bonds (safety!), and (3) maximize the economics of the execution/sale/securitization. If there were any reasons for tranches to be created, it had absolutely nothing to do with home prices or defaults.

Further, I would claim that there wasn’t even this level of detail applied to any analysis. We’ve seen the levels of model error that are introduced when one tries to be scientific about predictions. As I was told  many times, “If we did business based on what the models tell us we’d do no business.” Being a quant, this always made me nervous. In retrospect, I’m glad my instincts were so attuned to reality.

As a matter of fact, most of the effort wasn’t on figuring out how to make money if things go bad or protect against downside risks, but rather most time and energy was spent reverse engineering other firm’s assumptions. Senior people would always say to me, “Look, we have to do trades to make money. We buy product and sell it off–there’s a market for securities and we buy loans based on those levels–at market levels.” These statements alone show how singularly minded these executives (I hate that term for senior people) and businesses were. The litmus test for doing risky deals wasn’t ever “Would we own these?” it was “Can we sell all the risk?”

But wait, there’s more…

Nor is it plausible that all concerned were simply mesmerized by, or cynically exploitive of, the willingness of rating agencies to stamp Triple-A on these securities. Wall Street firms knew what the underlying dog food consisted of, regardless of what rating was stamped on it. As noted, they willingly bet their firm’s money on it, and their own personal money on it, in addition to selling it to outsiders.

One needs the “willingly bet [their own] money on it” part to be true to make this argument. I know exactly what people would say, “We provide a service. We aggregate loans, create bonds, get those bonds rated, and sell them at the levels the market dictates. It isn’t our place to decide if our customers are making a good or bad investment decision.” I know it’s redundant with a lot of the points above, but that’s life–the underlying principles show up everywhere. And, honestly, it’s the perfect defense for, “How did you ever think this made sense?”

And, the last annoying bit I read and take issue with…

Nor is it true that Wall Street executives and CEOs had insufficient “skin in the game,” so that “perverse” compensation incentives created the mess. That story also does not pan out. Individuals, it’s true, were paid sizeable bonuses in the years in which the securities were created and sold.

[…]

Richard Fuld, of failed Lehman Brothers, saw his net worth reduced by at least a hundred million dollars. James Cayne of Bear Stearns was reported to have lost nearly a billion dollars in a matter of a few months. AIG’s Hank Greenberg, who remained a giant shareholder despite being removed from the firm he built by New York Attorney General Eliot Spitzer in 2005, lost perhaps $2 billion. Thousands of lower-downs at these firms, those who worked in the mortgage securities departments and those who didn’t, also saw much wealth devastated by the subprime debacle and its aftermath.

Wow. Dick Fuld, who got $500 million, had his net worth reduced by $100 million? That’s your defense? And, to be honest, if you can’t gin up this discussion, then what can you gin up? The very nature of this debate is that all of these figures are unverifiable. James Cayne was reported to have lost nearly a billion dollars? Thanks, but what’s your evidence? The nature of rich people is that they hide their wealth, they diversify, and they skirt rules. So, sales of stock get fancy names like prepaid variable forwards. Show me their bank statements–even silly arguments need a tad of evidence, right?

Honestly, at this point I stopped reading. No point in going any further. So, now that you know how little regard for that which is already known and on the record this piece of fiction is, I’ll link to it…

Here ya go.

Although, Felix does a great job of taking this piece down too (links above)… Although, he’s a bit less combative in his tone.

Nor is it plausible that all concerned were simply mesmerized by, or cynically exploitive of, the willingness of rating agencies to stamp Triple-A on these securities. Wall Street firms knew what the underlying dog food consisted of, regardless of what rating was stamped on it.

Why do the Articles about John Thain Change?

Okay, I really wanted to write something insightful about John Thain’s recent dismissal. There’s lots of information swirling around since the story caught fire and, especially with John Thain’s recent memo, I think there’s an underlying story emerging. However, the story keeps changing… Not just as new facts are revealed, but the actual article keeps changing! Let’s look at the timeline.

January 22nd — The narrative turns to John Thain’s excesses and the Ken Lewis flies to New York and dismisses Mr. Thain around 11:30AM.

Later Janaury 22nd — The blogosphere catches fire with the story. Mr. Blodget writes about it here (this link is extremely important later, we’ll come back to it). Deal Journal also dedicates a lot of ink to the events (the last link is great reading, btw). Felix also writes up his thoughts.

January 23rd — The Wall St. Journal sprays their pages with several articles about the situation. Deal Journal provides a nice roundup (note this link too).

January 26th (today) — There is more reporting about BofA’s role in the P.R. nightmare that is Merrill’s early bonus payments.

January 26th (today)– I try to go back and write about the entire incident. Wanting to ensure I catch the emotion and facts as they evolved, I try to go back to the original WSJ article.

The last step is the problem. The article from the 22nd, with all it’s anonymous sourcing and inflammatory language, is totally gone. In it’s place there’s an article dated the 26th, with some of the same information, but a totally different structure. Now, let’s examine the excerpt I was able to find, from Clusterstock (first important link):

Bank of America had lost confidence in Mr. Thain, this person said, after Mr. Lewis learned of mounting fourth-quarter losses at Merrill from the transition team handling the Bank of America-Merrill merger rather than from Mr. Thain himself. And when Mr. Lewis asked Mr. Thain what happened, the Bank of America CEO did not get a “good explanation for what was happening and why,” this person said.

The Bank of America CEO also concluded Mr. Thain has exercised “poor judgment” on a number of fronts. He left for a vacation in Vail, Colo., after the losses came to light, bonus payments at Merrill were accelerated so they could be collected before the end of the year and Mr. Thain had planned to fly this week to Davos, Switzerland, even though Bank of America had signaled that such a trip was not a good idea, this person said.

(Emphasis mine.)

This section appears nowhere in the new article from the WSJ. The entire article has been rewritten. Specifically, the charge about the bonuses being accelerated, emphasized above, is totally gone.

Now, I encourage you to see for yourself. Please don’t take my word for it.. Instead, go click on the links from the 22nd and 23rd, and follow the links to WSJ articles about John Thain being dismissed and see where the link takes you. I’ll even reproduce those here, in context. However, don’t feel shy about verifying!

Well, yes, of course he did.  And it’s apparently a common affliction at Bank of America (BAC). WSJ: Bank of America had lost confidence in Mr. Thain, this person said, after … (from Clusterstock)

Bank of America and Merrill Lynch arranged the deal in less than 48 hours, and the hasty work shows. Thain’s departure Thursday is the clincher… (from Deal Journal)

It was always a bit weird that John Thain was going to stay on at Bank of America, but as it turned out, he lasted less than a month before getting fired this morning by the equally-beleaguered Ken Lewis. (from Felix)

Amazing. Maybe someone has the original article so I can write about what’s been going on and in the public sphere of debate, instead of having to rely on revisionist history.

Why Google Should Buy the New York Times

Well, it seems like this is one of those persistent rumors, although tracking down an actual source of said rumor is difficult. Even Google’s C.E.O. was questioned about it:

[Question:] The New York Times is under pressure to sell. Blogs are abuzz with the idea that Google ought to buy it, because it’s in your interest to keep the quality of journalism high.

[Answer:] I’m not aware of a proposal for us to buy the New York Times, but I’d never rule anything out. So far, we’ve stayed away from buying content. One of the general rules we’ve had is “Don’t own the content; partner with your content company.” First, it’s not our area of expertise. But the more strategic answer is that we’d be picking winners. We’d be disenfranchising a potential new entrant. Our principle is providing all the world’s information.

(emphasis mine).

Now, a few good points are raised. Clearly, as we all realize, the fate of newspapers is a hot topic for debate, partially (mostly?) because it’s a media meta-issue. But, I would claim, there are reasons such a deal could make sense…

1. Google can begin to take a much more integrated path to advertising. Already Google has begun to integrate offline media into it’s suite of products it gives out to track a site’s effectiveness… Now, if Google had an outlet to cross sell print ads and help an end user optimize advertising campaigns across T.V., the Web, and print media … well, sounds like a game changer, no? After that all that’s left are integrating radio, billboards, and maybe skywriting …

2. The New York Times is currently a content creator that distributes its own content. But does it need to be? First of all, the NY Times owns lots of different properties, so their ability to distribute is beyond one print newspaper. Indeed The New York Times itself seems to have the right thoughts as far as leveraging it’s online presence. This seems to show in their results. For example, from their annual report …

The Times Company was the 10th largest presence on the Web, with 48.7 million unique visitors in December 2007, up approximately 10% from December 2006. Last year the Company generated a total of $330 million in digital revenues, up 20%, or 22% excluding the additional week in 2006. Digital revenues now account for more than 10% of our total revenues compared with 8% in 2006.

(emphasis mine).

Think about how many companies are deciding, now, whether to put advertising dollars to work with the New York Times or with Google… eliminate the decision! Now some of the $42 billion in print advertising dollars doesn’t have to lose effectiveness as circulation drops, it merely becomes more mobile. The chunk that is going to the New York Times (which has approximately $3 billion in revenue) now goes to Google (and who wants to bet it also grows in size?). Furthermore, Google can easily take a great brand and content creation machine and de-couple it from its historical outlet, namely, dead trees. Dow Jones distributes its content, the one who shall not be named generates content for distribution, so why couldn’t Google open up distribution of the New York Times’ content? It could–as a matter of fact the New York Times does this already, with the New York Times Syndicate. I could find no evidence of the syndication effort contributing significantly to the bottom line in the NYT SEC filings nor in their annual report–seems like this effort could be strengthened as well.

3. The New York Times’ ability to distribute content is a great complement to what Google already offers. Have you ever read the New York Times’ own Open, a blog dedicated to coding done inside the Times? Clearly the Times has a massive infrastructure dedicated to personalization, pushing news out into the world, and solving a number of other technological hurdles. Could Google, perhaps, add a full suite of online publishing applications to it’s Google Apps product? I bet.

4. Google owning the New York Times is good for news and journalism. When you have a deep-pocketed owner whose content distribution business focuses on turning out a quality product, it’s better than having shareholders who focus on being profitable. The problem with a newspaper is that it’s business is the newspaper business–it’s not the core business of the New York Times to sell it’s content and drive up the circulation of the papers with which it competes for subscriptions. If Google, with it’s massive online businesses, can drive it’s profit up by 10% (for one year), when added to the annual profits of the New York Times itself, the acquisition has paid for itself (assuming no premium to the market price). This certainly seems doable, given Google’s phenominal growth so far–and once the synergies begin accelerating Google’s own growth, why tinker with the paper?

So, for all these reasons, it seems like Google can jump into the content creation business the right way. With acquiring a strong web presence, getting a “hook” into other advertising avenues on a massive scale, and even adding to their core competencies, Google is uniquely positioned to modernize how the market thinks about the value of newspaper companies. Indeed, in doing all of this, Google can even advance it’s “Do no evil” motto by supporting pure journalism. All-in-all, the combination of these things seems to be a good case to be made by Google for purchasing the New York Times.

Dear Financial Media: Please Rise Above the Least Common Denominator

It’s a simple request. Here’s an example, when a T.V. network talks about Wall St. being happy or sad, “the market” being up or down some percentage, etc. based on what “stocks” do. The S&P 500 represents about $13 trillion (slightly lower, as of this posting). The bond market, though, is over $27 trillion dollars (a statistic from 2006). Now, while the stock and pure interest rates sometimes move in correlated directions, the credit markets or mortgage market can be experiencing a very different directional movement. As recent history has shown us, fixed income markets can be more important to consumers and the economy over a period of days, months, or even longer. So, then, why don’t media organizations describe the financial world based on how fixed income instruments perform? Oh, and lest I forget the $516 trillion notional of outstanding derivatives contracts ($11 trillion in net amount, but counterparty risk makes both numbers valuable) that have been pushing around the larger bond markets recently (ABX, the storied sub-prime index, is a member of the derivatives segment). I realize that these nuances and different markets aren’t easy to explain, but why should that stop the financial media from explaining it?

(I’ll completely skip the fact that it’s often the Dow Jones Industrial Average that’s cited and the issues associated with that index!)