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Stephen Foley

Stephen Foley is Associate Business Editor of The Independent, based in New York. In a decade at the paper, he has covered personal finance, the UK stock market and the pharmaceuticals industry, and been the Business section's share tipster. And since arriving with three suitcases in Manhattan in January 2006, he has witnessed and reported on a great economic boom turning spectacularly to bust. In March 2009, he was named Business and Finance Journalist of the Year at the British Press Awards.

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Posted by Stephen Foley
  • Wednesday, 2 June 2010 at 03:40 pm


Phil Angelides resisted actually breaking into song today, thank goodness, but the chairman of the Financial Crisis Inquiry Commission did unveil the official anthem of the world economic collapse.

Fed up with the parade of executives saying that there was simply no way they could have seen the coming housing collapse and market meltdown, he has taken to reciting Don McLean lyrics.

There were plenty of people calling the house price rises of the Noughties a bubble waiting to burst, and economists including Nouriel Roubini predicting the wider fallout, Mr Angelides gently pointed out to the chief executive of Moody's, the credit rating agency whose optimism on housing led it to say that billions of mortgage derivatives were safe as, er, houses.

And then he recited the chorus from Can't Blame The Wreck On The Train:

When the gates are all down, and the signals are flashing, and the whistle is screaming in vain,
And you stay on the tracks, ignoring the facts, well you can’t blame the wreck on the train.
Man, you gotta quit blaming that train.


All together now....


Yahoo: A tragedy

Posted by Stephen Foley
  • Friday, 28 May 2010 at 09:47 pm

Yahoo is a tragedy unfolding in real time. That’s not news. The more interesting question is whether Carol Bartz, the company’s chief executive, is a tragic figure. Has the outsider, brought in to shake up the internet behemoth, been swallowed up and rendered mad by the sheer impossibility of returning Yahoo to relevance? Or are her wild and obscenity-laden promises to restore old glories masking a secret strategy to shave the company away, piece by piece, until only a profitable rump remains?

Yahoo, of course, was one of the great pioneers of that first phase of the internet, acting as a gateway to the web for new users. It still boasts more than half a billion more or less regular users. And yet it feels curiously thin, as if it could sink tomorrow and cause barely a ripple.

One “big picture” test of value is, how much inconvenience would the disappearance of a company cause? For users of Yahoo email accounts, some for sure; similarly perhaps for users of its instant messaging and the photo sharing site Flickr. But who would really miss its sprawling mix of news and entertainment, when better content is just one click away?

Its irrelevance is not the tragedy, that’s just a judgment on the fact that it does nothing that is unique on the web (and very little that is best-of-breed).

User engagement is falling at an alarming rate, with visitors spending one-quarter less time on Yahoo sites than they did at the start of 2009, when Carol Bartz took over as chief executive. There is an explosion of vibrant content on the internet, but it is fragmented amongst specialist sites. Yahoo says it wants to be at the centre of people’s online lives, but for a content company, the slogan sounds like an echo from a bygone age. There is no centre now

In an ideal world, Ms Bartz, a Silicon Valley veteran previously at the software firm Autodesk, would be pursuing a secret strategy. The official one looks distinctly uninspiring. The investor day hosted by Ms Bartz this week answered some important questions about how Yahoo is integrating its search business with Microsoft’s Bing, to whom it outsourced most of the business of serving ads alongside search results. But it left the bigger question of “What is Yahoo for?” at the level of banalities.

Yahoo is back, Ms Bartz said, in a statement so divorced from the attitude in Silicon Valley and on Wall Street that it seemed rather sad. “It has its focus, it is excited about the future, and it has its pride back,” she said.

Could it be that the real intent of talking up Yahoo’s engineering prowess and hyping major new initiatives is to limit the brain drain that is going on at the company, while the secret strategy is something quite different? If only.

Ms Bartz has actually been making a lot of the right decisions. Increasingly, the company’s websites are just the skin over other people’s more dynamic online business – another example this week being the decision to stop pretending its users were able to find a date on Yahoo Personals and to ferry them instead to One interpretation of the acquisition earlier this month of Associated Content – the self-styled “people’s media company”, which buys cheap news content from a network of freelancers – is that Ms Bartz is trying to average down the cost of content for Yahoo sites and ultimately plans to cull the numbers of its in-house journalists.

But while Yahoo in practice is being shrunk down, scaling back its ambition, and defining itself in ever-narrower terms, the fact is Ms Bartz is not doing this fast enough. Though I wish that she was bent on a secret new strategy, I’m not really convincing myself. The chief executive should be trumpeting a ruthless intention to get ahead of Yahoo’s user defections and outsourcing still more of its content. She should also be bold in hacking off some of the company’s international businesses while they have significant value. That way, the chronic underperformance of Yahoo’s shares might be reversed. But Yahoo will not and cannot accept this fate.

The clincher for me was the exchange on Monday, when Ms Bartz had told an interviewer at the TechCrunch Disrupt conference to “fuck off” when pressed on her vision for the company. This is the real Yahoo, the one that swallows chief executive after chief executive. An ageing giant in a tragic, defensive crouch.

Moral hazard stalks tech

Posted by Stephen Foley
  • Friday, 28 May 2010 at 08:58 pm

Moral hazard is not confined to banking. It is the bogeyman of the hour, this notion that businesses take more risks when they know that they will be bailed out if the going gets sour.

As well as outraging the general populace (who, in the case of banks, are the ones who fund the bailout), moral hazard also profoundly distorts the economy. Capital is hardly being allocated most efficiently, to the activities that really will add profits and jobs to the economy over the long run, when one becomes divorced from the consequences of one’s actions.

I was talking moral hazard with the founders of 37signals, a little Chicago tech company, this week, a duo who have made a name arguing that start-ups should never take venture capital money. The way you prove a business, they say, is to get customers to buy something, not to wow an investor, whose motive is to flip the investment to another buyer in the future (which may or may not be the same thing as creating a profitable company).

To my mind, Google has corrupted the technology space. It proselytises a philosophy of “build something wonderful now, and worry about making money from it later”, and has become a buyer of last resort for start-ups, relieving entrepreneurs of the need to build sustainable businesses.

The 37signals team has started highlighting “profitable and proud” small tech businesses on their corporate blog. Three cheers for the counter-revolution.

Why cash is king for the Street's economists

Posted by Stephen Foley
  • Monday, 17 May 2010 at 12:47 pm
A jaw-dropping moment on business television here last week. Citigroup's director of economics and market analysis, Steve Wieting, was asked what an investor with a 20-year time horizon should put in her portfolio. His response: not shares, or even bonds, but cash.

Cash? That investors should just put their money under the mattress for two decades is a monumentally bearish call for anyone to make, let alone for someone at the top of a financial supermarket like Citigroup, where commissions depend on getting clients into investments such as stocks and shares. Forget inflation, this is a prediction of economic stagnation or even contraction.

I spoke to Mr Wieting after his appearance on CNBC to make sure I hadn't misheard. He said he was being a touch frivolous – a balanced portfolio should have a little of all sorts of assets, he told me – but my goodness, he is bearish on the long-term outlook for the US. Try as they might, the economics team at Citigroup cannot make the numbers add up. They have been warning about the looming impact of the baby boomer generation's retirement for several years, but with increasing shrillness since the credit crisis. The cost of caring for the elderly is exploding at 8 or 9 per cent a year, and healthcare bills are rising at twice the OECD average. This is "eating up the economy", Mr Wieting says.

The bailout and stimulus of 2008-9 means the country's finances are now even more ill-equipped to deal with the march of the boomers. Ben Bernanke, the chairman of the Federal Reserve, has taken to asking Congress, very politely, to make some difficult choices about health and pension entitlements, and sooner rather than later. The White House's last Budget factored in heroic assumptions for growth this decade, and still couldn't project the deficit falling to a safe level.

The focus may currently be on the eurozone PIGS, licked by the flames of the bond market, or the UK, whose new government is erecting a firebreak, but the US is slow-marching towards financial crisis, too. I suppose by now it really shouldn't be startling to hear it spoken out loud.
How ironic that the most laughable provision in the Wall Street reform bill going through Congress should have been proposed by a stand-up comedian.

Al Franken, satirist and former star of Saturday Night Live, now a Democrat Senator, won bipartisan support for an amendment that puts a government regulator in charge of the credit rating process. Instead of shopping around for a rating from the most favourable agency, bond issuers will be assigned an agency by a board inside the Securities & Exchange Commission. The idea would be comic if it wasn't so tragic.

Flawed credit ratings on mortgage derivatives were at the heart of the credit crisis and reform of the rating process is an important piece of unfinished business – but not this reform. Senator Franken is helping to entrench the primacy of the credit rating and the power of the rating agencies, when what we should be telling investors is this: do your own damn research.

The financial community has been organised to put too much store in the rating agencies' little stamps of creditworthiness, from AAA to B- and beyond, and in their line between "investment grade" and "junk". The agencies look at every bond issued, from the US Treasury and local governments, through companies from General Electric down to the most speculative, and on into structured finance whence came those monstrous mortgage derivatives. Investors are in effect outsourcing their due diligence.

That is why so many banks and pension funds around the world found themselves stuffed with toxic mortgage derivatives. Standard & Poor's or Moody's or one of their rivals had stamped them AAA, gold-plated liked a US Treasury bond, and that was good enough. Except that rating agencies are only humans. They err.

It is true that in the case of mortgage derivatives the agencies were manipulated by cleverer kids on Wall Street. It is true, too, that they were conflicted by having their fees for rating securities paid by the very banks that created the securities. Senator Franken's amendment was seductive because it resolves that conflict. It creates a board of investors to sit between issuers and agencies, funnelling business between them on an as-yet-undecided and possibly random basis.

But, again: credit ratings are the work of man, not the word of God.

Christopher Dodd, the chairman of the Senate Banking committee and chief author of the Wall Street reform bill, opposed the Franken amendment. The thrust of his proposals lies in a different direction, and though he had been far too tentative, at least it is the right direction. His bill is trying to fillet out all the US laws and regulations that mandate the use of credit ratings. There will be a two-year study aimed at sweeping away the laws that limit certain types of investor to holding only bonds of a certain credit rating. Because of such rules, a downgrade can have knock-on consequences out of all proportion to what is reasonable. Just ask Greece.

Government agencies are also being told to do their own research, to replace credit ratings with other measures of creditworthiness when setting their rules and regulations.

Senator Dodd's reform bill is already robustly tackling "too big to fail", derivatives reform and consumer protections, so it would be a shame if it gets rating agency reform wrong. He might still get to squish the Franken plan before the bill gets to the White House for signing. Let's hope so.

Anything that puts a quasi-governmental stamp of approval on credit ratings is to be discouraged. What we really need is for the bond market to become a bit more like the equity market, and for credit rating agents to be seen a little more like stock analysts. We should set as much store in a Moody's rating of AAA, B- or junk as we would in an equity analyst's rating of buy, sell or hold. By which I mean, not much.

We don't know all the causes yet of Thursday's bout of insanity on the Dow Jones Industrial Average, but this much is clear: regulators have lost control of the equity market.

If you've been bewildered and frightened by the complexity of the credit markets, where untold dangers lurked, undetected, until they exploded into the credit crisis, at least you could take comfort in the stock market. In the equity market, common-or-garden shares trade on honest-to-goodness exchanges, where they go up and down broadly in response to investor demand, and you get a read out at the end of the day from FTSE in the UK or Dow Jones in the US.

This is the shallow end of the financial markets, where it is safe for widows and orphans to paddle. Or so you thought. Actually, in the name of "innovation" and "liquidity", Wall Street has brought complexity and a lack of transparency even here. The New York Stock Exchange and Nasdaq have lost their monopoly to private "crossing networks" with fewer disclosure rules, so that big buyers can go hunting for sellers (and vice versa) without having to reveal their hand. It makes a mockery of the claim that published stock prices reflect the balance of supply and demand at any given moment.

It is because of the sheer lack of transparency that these off-exchange trading platforms are called "dark pools". There are more than three dozen alternative trading pools in the US now, the NYSE complains.

Regulators are trying to keep up, laying down ever deeper layers of rules to govern how the trading platforms must interact, but that only creates more ways for traders to game the system. The Securities and Exchange Commission (SEC) had to move against one such cheat last autumn, when it banned dark pools from "flash trading", the practice of revealing details of a customer order to a select group of traders for a fraction of a second, giving them an unfair advantage.

The traders themselves long ago stopped being actual humans. More than half of all share trades in the US are now done by computer programmes, and the proportion is rising exponentially. These black-box programmes are designed to trade at very high frequency, using impenetrable mathematical models to spot supposed trading patterns and eke out tiny profits, multiple times a second. Even the unnoticeable amount of time it takes data to travel down a cable makes a difference, which is why hedge funds pay to install their computers on-site at exchanges.

Defenders of the new landscape say dark pools are great for institutional investors, who get better prices for their trades, and high-frequency traders are great for retail investors, who get a much more liquid market.

But that crazy move between 2.40pm and 3pm on Thursday, when the Dow plunged 998 points, was what you might call an "unintended consequence". Volatility is inherently higher in a computer-driven trading environment. It is why there have been so-called "circuit breakers" in place since the crash of 1987, the last time the robots went wild. The circuit breakers slow down or even halt trading if stocks start moving too quickly, so that new buyers or sellers can come in without fear of being trampled in a stampede.

One factor in the madness, at least according to the NYSE boss Duncan Niederauer, appears to have been the lack of co-ordination between his exchange, which has circuit breakers, and the dark pools, which carried on trading in halted stocks, causing weird price distortions, triggering computer program errors and stoking a panic.

The SEC recently – belatedly – began to review of high-frequency trading and dark pools. It is difficult to be optimistic that it will get its head round all these issues. This is the same SEC that couldn't catch Bernard Madoff when he was using an archaic computer to fabricate thousands of trades.

Complexity is, by design, the enemy of regulation. The answer, therefore, is a sweeping away of this complexity, a curb on high-frequency trading, forced consolidation of dark pools and much more transparency everywhere. The SEC needs to act boldly – or else Thursday's chaos will be just a taster of what is to come.

Take that, Paul Volcker

Posted by Stephen Foley
  • Friday, 7 May 2010 at 09:32 pm

It has become almost taboo to criticise Paul Volcker, the former chairman of the US Federal Reserve, whose sepia-tinted plan to break up the banks has unfortunately become a touchstone of the debate on financial reform. If you are against the "Volcker rule", you must be for Wall Street, so watch out for pitchforks.

The rule, you will remember, is that no bank enjoying federal deposit insurance (and therefore an implied guarantee from US taxpayer) ought to be allowed to gamble with its own money. In his version, that means spinning off proprietary trading and in-house hedge funds. The Senate looks as if it will instead ask banks to hive off their derivatives businesses.

The logic escapes me, since banks by definition put their own capital at risk, prop-trading desks did not contribute to the credit crisis, and a properly regulated derivatives business is a legitimate way for a bank to service its clients.

Tim Geithner, the Treasury Secretary, put the anti-Volcker case to the Financial Crisis Inquiry Commission this week – without naming the former Fed chairman. It was brilliantly argued and eviscerating.

Devastating runs on the traditional banking system were consigned to the past thanks to the Fed guarantee and tight regulation after 1933. The shadow banking system, made up of hedge funds, insurers and other vehicles via which some $8trillion (£5.4trn) of credit was advanced in the US at its peak, suffered its first major run in 2008. What is needed is a tough system of regulation that brings shadow banking institutions under the sort of control imposed on traditional banks – not a break-up that pushes risky activities back out into the shadows.

General Motors' deceitful ad campaign

Posted by Stephen Foley
  • Tuesday, 4 May 2010 at 04:16 pm

Excellent. Someone is calling Ed Whitacre, chairman of General Motors, on the outrageous, deceptive ads he is running on national TV here at the moment.

In the commercial, he says:


I’m Ed Whitacre from General Motors. A lot of Americans didn’t agree with giving GM a second chance. Quite frankly, I can respect that. We want to make this a company all Americans can be proud of again. That’s why I’m here to announce we have repaid our government loan, in full, with interest, five years ahead of the original schedule. But there’s still more to do. Our goal is to exceed every expectation you’ve set for us. We’re putting people back to work, designing, building and selling the best cars and trucks in the world... We invite you to take a look at the new GM.


In full? Excuse language, but that's bull.

The US taxpayer put $49.5bn into General Motors between December 2008 and June 2009. The amount that the carmaker has paid back to the Treasury in installments over the past six months totals just $6.7bn.

Mr Whitacre knows the toxic public attitude to government bailouts, which is why this ad campaign is running. But he has chosen his words specifically to mislead. Contrary to the impression given, GM is still a majority-owned ward of the state.

The reason Mr Whitacre is able to appear on camera with a straight face is that the $49.5bn was split into different kinds of investment in the so-called "New GM" that emerged from last year's complicated bankruptcy proceedings. Yes, $6.7bn of the money was converted into a formal loan, but there is still $2.1bn in preferred shares outstanding, and the rest was converted into a 61 per cent equity stake in the new company.

So three cheers, maybe even more, for the Competitive Enterprise Institute, a campaign group, which has put a complaint in to the Federal Trade Commission. It calls on the regulator to intervene, so as to "serve the American public on this issue of major consumer and taxpayer importance" and "discourage other beneficiaries of government bailouts from falsely misrepresenting their status".

Which is the party of awful bigots?

Posted by Stephen Foley
  • Wednesday, 28 April 2010 at 06:21 pm

Only one of the three main UK political parties had NOTHING positive to say about the contribution of immigrants to the UK in their manifestos this election.

Can you match the paragraph with the party?

“Britain has always been an open, welcoming country, and thousands of businesses, schools and hospitals in many parts of the country rely on people who’ve come to live here from overseas.”

“Immigration has enriched our nation over the years and we want to attract the brightest and the best people who can make a real difference to our economic growth.”

“We understand people’s concerns about immigration – about whether it will undermine their wages or job prospects, or put pressure on public services or housing – and we have acted.”


Speaking as a Brit enjoying the welcome of another country, it's been depressing to watch UK politicians falling over themselves to sound toughest on immigration this campaign. At least when Gordon Brown put his foot in his mouth, he showed where his heart is.

But you'd never know it from the manifesto. The third of the paragraphs above is how Labour starts its section on immigration policy.

The top paragraph is from the Lib Dems, the middle one from the Conservatives. They both have a "but" in their next sentence.

Goldman Sachs just got hit where it really hurts

Posted by Stephen Foley
  • Friday, 16 April 2010 at 07:20 pm

Every way you look at it, the fraud charges laid against Goldman Sachs are devastating for the investment bank.

While the public took up pitchforks against the company, and the media labelled it a "vampire squid wrapped around the face of humanity", Goldman maintained that its reputation with clients – the reputation that really matters – has only been strengthened by the credit crisis.

Not any more. The deception of which it was accused yesterday was no fraud on the American people, it was a fraud whose victims were some of its biggest clients. That was why its shares slumped more than 12 per cent, as officers from the Securities and Exchange Commission painstakingly set out their allegations.

Goldman is no stranger to sniping about conflicts of interest, particularly as it has become more and more active trading on its own account. Conspiracy theories about the firm are common currency on rival trading desks, but these never seem to dent its powerhouse franchise. Goldman plausibly counters that the sniping is motivated by jealousy, and that its traders simply do a better job for their clients. Well, not in the case of Abacus 2007-AC1 they didn’t.

Lloyd Blankfein, the Goldman chief executive, took an impatient, schoolmasterly tone when he appeared before the Financial Crisis Inquiry Commission in January. To questioners that he clearly thought were idiots, he explained how his firm simply brought together sophisticated investors who reasonably wanted to bet against the sub-prime mortgage market with equally sophisticated investors who reasonably wanted to bet on its continued growth.

Now it stands accused of allowing one of its big hedge fund clients to secretly manipulate the make-up of a mortgage portfolio at the heart of one of these transactions. While Paulson & Co was stacking the decks on the downside of the deal, the hapless European banks on the other side were about to get stuffed with securities that tanked in value almost immediately. It’s not even possible to dismiss Abacus as an insignificant, rogue deal, since one of the big victims was IKB, the German bank whose difficulties in July 2007 were the first sign that Europe had been poisoned with toxic US housing debt.

Goldman has always been wrong to dismiss the impact of its dreadful reputation with the wider public. We are already seeing Wall Street’s lobbyists losing battles on Capitol Hill over regulatory reform because of the political capital that has been lost.

But the impact of being singled out by the SEC yesterday will be of even greater import to the balance of power within Wall Street. Goldman responded to the charges last night by saying that they were completely unfounded, but the legal niceties will be less important than the clear impression that the bank favoured a major hedge fund client over others.

It is the worst thing that can happen to an investment bank, that it becomes seen not as an honest broker, but as a dishonest one.



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