Audit Notes: CDS Ban, WSJ v. NYT, A No-Layoffs Policy

Wolfgang Munchau asks in the Financial Times why it’s still legal to buy credit-default swaps when you don’t own the underlying asset:

A naked CDS purchase means that you take out insurance on bonds without actually owning them. It is a purely speculative gamble. There is not one social or economic benefit. Even hardened speculators agree on this point. Especially because naked CDSs constitute a large part of all CDS transactions, the case for banning them is about as a strong as that for banning bank robberies.

Economically, CDSs are insurance for the simple reason that they insure the buyer against the default of an underlying security. A universally accepted aspect of insurance regulation is that you can only insure what you actually own. Insurance is not meant as a gamble, but an instrument to allow the buyer to reduce incalculable risks. Not even the most libertarian extremist would accept that you could take out insurance on your neighbour’s house or the life of your boss.

Yves Smith agrees, as does Gretchen Morgenson, who has an interesting quote here, but doesn’t follow up on it:

Credit default swaps are “a way to increase the leverage in the system, and the people who were doing it knew that they were doing something on the edge of fraudulent,” said Martin Mayer, a guest scholar at the Brookings Institution and author of 37 books, many of them on banking. “They were not well-motivated.”

How so?

— John Hempton of Bronte Capital uses Wikipedia numbers for circulation data to make the case, contra Paul Krugman, that The Wall Street Journal is growing, while The New York Times is declining. True to a certain extent, but his comparison doesn’t put in needed context.

First, the NYT’s circulation has not declined from 1.63 million to 928,000 over the last two years. The larger number appears to be for Sunday only.

Second, the Journal charges people online, and the Times does not (yet). Meantime, the NYT’s web site, in large part because it’s free, is much more popular than the Journal’s.

And The New York Times charges real money for its newspaper, while it’s possible to get the Journal for peanuts. My NYT subscription here in Seattle costs some $800 a year. My WSJ subscription cost me 3,000 airline miles or the equivalent of about $40 for nine months. A regular Journal subscription costs about $120.

That’s how the Times has been killing itself with a free Web site. It incentivizes its best customers to save real money by dropping the paper, where they’re worth hundreds of dollars a year to advertisers and reading online, where they’re worth a few dozen at best.

The Journal has a fascinating review of a book about Lincoln Electric Company, a 115-year-old firm that has a no-layoff policy.

Mr. Koller contends that layoffs deprive companies of profit-generating talent and leave the remaining employees distrustful of management—and often eager to find jobs elsewhere ahead of the next layoff round. He cites research showing that, on average, for every employee laid off from a company, five additional ones leave voluntarily within a year. He concludes that the cost of recruiting, hiring and training replacements, in most cases, far outweighs the savings that chief executives assume they’re getting when they initiate wholesale firings and plant closings…

Mr. Koller attributes the enduring appeal of layoffs to deeply ingrained notions about the creative destruction that drives capitalism, though layoffs, he notes, might just as well be seen as an indictment of corporate leadership.

This is no pipsqueak. Lincoln Electric is a publicly traded company with $1.7 billion in annual revenue.

Matthew Goldstein of Reuters has an interesting look at a 20-year-old interest-rate swap AIG did with Brookfield Asset Management. Brookfield is suing to get out of it since it looks like it will owe AIG more than a billion dollars. And:

The five-month-old lawsuit also sheds light on some of the 16,100 derivatives contracts remaining on the books of AIG Financial Products, more than 17 months after other, far less profitable deals involving derivatives called credit default swaps nearly plunged the insurer into bankruptcy.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.