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Big Bank Hit With Criminal Charges

Mark Gongloff   |   May 19, 2014   10:11 AM ET

The U.S. government has finally backed up its boast that no bank is too big to jail, if by "jail" you mean "vigorously slap on the wrist."

The Justice Department on Monday filed criminal charges accusing Swiss banking giant Credit Suisse of conspiring to help U.S. customers dodge taxes. The bank pleaded guilty to the charges, breaking from a recent tradition of letting banks defer prosecution. Credit Suisse also agreed to pay about $2.6 billion to settle the claims brought by the Justice Department, the Federal Reserve and New York State.

"This case shows that no financial institution, no matter its size or global reach, is above the law," Attorney General Eric Holder said in a press release announcing the settlement.

Though the government is undoubtedly proud of itself for successfully managing to prosecute a large bank -- with the first guilty plea for a big financial firm since 1989, The New York Times notes -- this by all accounts is turning out to be the most toothless criminal plea imaginable. It's hard to imagine it will deter future crimes.

Prosecutors and regulators have done everything they could to make this criminal case easy on Credit Suisse. The bank will not lose its ability to do business in the United States, The Wall Street Journal has reported. Its top executives, including CEO Brady Dougan and Chairman Urs Rohner, will keep their jobs.

Meanwhile, there is no indication that any more people will be criminally charged in the case beyond the small handful of lower-level bankers who have already been indicted. Dougan has claimed that bank management was unaware of what these underlings were doing and did not encourage tax evasion. The U.S. government could always bring more charges. For now, though, it has apparently decided to punish the bank's shareholders instead of its managers.

The settlement comes a little more than a year after Holder confessed that some banks are just too huge and interconnected and important to the global economy to threaten with criminal prosecution. Criminal charges have been death blows for other companies, like the accounting firm Arthur Andersen, and prosecutors have long feared that taking down a big bank that way would bring down the entire economy.

Holder, realizing too late what a horrible message he had just sent to the big banks -- they can get away with anything, basically -- soon recanted his remarks. He and other prosecutors have since repeatedly claimed that, in fact, no bank is too big to prosecute.

Prosecutors have been searching ever since for a bank to serve as an example. Credit Suisse won the lottery, though France's BNP Paribas may soon follow, according to the NYT and other reports. The long arm of the law does not yet reach American banks, apparently.

But Credit Suisse will apparently not be an Arthur Andersen-style prosecution. As The New York Times reported last month, prosecutors have been canvassing other regulators to make sure a big bank could plead guilty without any sort of life-threatening consequences. Credit Suisse is reportedly not going to lose its charter to do business in the U.S. and seems unlikely to face any other serious business repercussions as a result of this plea.

So what we have, in the end, seems to be a version of the anemic civil settlements and deferred-prosecution agreements that banks always get when they commit crimes. As usual, it is little more than the cost of doing business: Credit Suisse will make that $2.5 billion back with just a couple of quarters' worth of profits.

For now, the government's message to banks remains the same: Go ahead and break the law. If worse comes to worst, your low-level bankers will take the fall, and your shareholders will pick up the tab.

This post has been updated with additional facts and comments from the Justice Department.

Reason No. 567,397 The Market Is Rigged

Mark Gongloff   |   May 14, 2014   12:50 PM ET

For at least the past 16 years, stock market traders have apparently been profiting from sneak peeks at the most important monetary policy decisions in the world. But the markets are not rigged! No, sir.

Interest rate decisions by the Federal Reserve's policy committee between 1997 and 2013 were regularly leaked, generating hundreds of millions of dollars in profits for traders who got the information ahead of the rest of the market, according to a new study by Gennaro Bernile, Jianfeng Hu and Yuehua Tang of Singapore Management University, first reported by Bloomberg.

"Consistent with information leakage, we find robust evidence of informed trading during lockup periods ahead of the Federal Open Market Committee (FOMC) monetary policy announcements," the authors wrote.

Reporters at Fed headquarters in Washington have long gotten Fed policy statements before they are released to the public, giving them some time to write stories. They're under orders not to leak the data, obviously, but people have suspected for a while that the information was getting out anyway. The Fed tightened its controls in October, including blocking lines that connected reporters to the Internet in the Fed "lockup" room.

On a brighter note, the study found no evidence of traders getting leaks of government economic data, like the monthly inflation or jobs reports. But there are clearly holes in that system, too, and it's the subject of an FBI probe that launched last year.

The study's findings come in the middle of a heated debate about whether the stock market is "rigged" against small investors, as Michael Lewis recently claimed in his book Flash Boys. The high-frequency traders profiled in that book routinely take advantage of their speed, and occasional early peeks at news and data, to run ahead of slower traders to make big profits. Some, like me, call this rigging the market in favor of some traders over others -- although it has no impact on individual investors who just keep their money in index funds and forget about it (my preferred approach).

This particular study, however, focuses on a different, more old-fashioned kind of rigging. It's trading on material information you get in a non-kosher fashion. Even in this instance, some might consider this a victimless crime -- trading of this sort only makes markets more efficient, after all.

But it also contributes to the erosion of investor faith in markets. Again, that may or may not be a bad thing, depending on your perspective. To the extent it gets people to stop foolishly trying to trade against professionals who probably have an information advantage, it's a good thing.

The Government Just Made It Easier To Buy A Home

Mark Gongloff   |   May 13, 2014   11:26 AM ET

The U.S. government is about to make it easier for you to get a mortgage.

Mel Watt, the new head of the Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac, said on Tuesday that he had told the government mortgage giants to make more credit available to home-buyers, instead of retreating from the mortgage market as they have been doing since the financial crisis.

Watt made some changes to Fannie and Freddie policy that could get more housing credit flowing, at a time when many first-time buyers are still shut out of the market. Fannie and Freddie don't make loans, but they buy them from banks, giving them government backing. They guarantee about half of all the mortgages in the U.S.

In order to get banks to lend a little more, Watt ordered Fannie and Freddie to give banks more protection against the risk of being forced to buy back mortgages that go bad. That could make banks a little more willing to lend to riskier borrowers.

Watt also decided not to lower the size of the mortgages Fannie and Freddie can buy from banks, saying lower limits could hurt housing credit.

"[O]ur overriding objective is to ensure that there is broad liquidity in the housing finance market and to do so in a way that is safe and sound," Watt said.

The announcement is a big change from Watt's predecessor, Edward DeMarco, who had focused mainly on trying to shrink Fannie and Freddie.

This news should be a nightmare for Republican critics who have tried for years to kill Fannie and Freddie. Both companies have been in "conservatorship," a kind of temporary government control, since nearly collapsing in the crisis. President Barack Obama has joined Republicans and some Democrats in trying to pass laws that will end Fannie and Freddie and replace them with a private system. All such efforts have failed so far, and there's little chance of anything like them passing any time soon.

Republicans often claim that Fannie and Freddie caused the housing crisis by lowering their standards too much and taking on too much risk. But the agencies merely followed Wall Street and other major housing players in taking bigger risks, and were certainly not the worst actors ahead of the crisis. The agencies needed a $188 billion bailout, but have since returned $213 billion to the government.

In fact, they have played a major role in helping the housing market claw out of the pit of the crisis. A recent analysis by Credit Suisse found that ending Fannie and Freddie and forcing private lenders to take on more housing risk would raise mortgage rates and crimp housing credit, especially for first-time and low-income buyers.

Nobody wants to see a return to the dumb, old days when borrowers could get a mortgage just by fogging a mirror. But nobody wants to snuff out the housing recovery, either.

Geithner Accused Of Lying In New Tell-All Book

Mark Gongloff   |   May 12, 2014   11:24 AM ET

Tim Geithner did not exactly become America's Sweetheart during his tenure as our financial-crisis Treasury secretary. And his new memoir isn't winning him many more friends.

In fact, two people discussed in Geithner's new book, Stress Test, out on Monday, say Geithner is lying about them: conservative Harvard economist Glenn Hubbard, a former Mitt Romney adviser and massive weasel in the film "Inside Job," and Neil Barofsky, former head of the watchdog agency that kept an eye on the government's bank bailout.

"Mr. Geithner stands by his accounts in Stress Test," Geithner spokeswoman Jenni LeCompte wrote in an email to The Huffington Post.

Hubbard told Politico that a passage in Geithner's book, in which Hubbard is quoted as saying "of course we have to raise taxes" in order to balance the federal budget, is a big lie.

“Geithner is making it up,” Hubbard told Politico. “It’s pretty simple. It’s not true."

According to Geithner's book, he and Hubbard had a chat, which must have had all the warmth of a dead python in a meat locker, in the heat of Romney's presidential run in early 2012. Geithner claims that Hubbard whined to him about President Barack Obama not supporting the Simpson-Bowles deficit-reduction plan. Geithner says he shot back that "you guys" -- meaning maybe Romney, or conservatives generally -- had to agree to some tax increases first. Geithner claims that Hubbard responded with the conservative heresy that "of course" taxes would have to go up.

And Geithner is standing by that story, according to spokeswoman LeCompte, who told Politico and HuffPost: “Mr. Geithner’s memory on this exchange is crystal clear.”

Geithner's story sort of makes Romney look like a hypocrite, given that he had signed an Americans For Tax Reform pledge never to raise taxes, no matter what. Then again, it was only his adviser suggesting that taxes would be raised, and a no-tax-hike-ever pledge is ludicrous in any event.

In fact, the Simpson-Bowles plan, which Hubbard has endorsed repeatedly, calls for raising tax revenue, Vox's Matt Yglesias points out -- which would seem to make Geithner the winner of this particular argument.

Barofsky, the former Treasury Department special inspector general overseeing the Troubled Assets Relief Program (TARP), the $700 billion bank bailout, has a longer list of problems with Geithner's book.

Barofsky published his own book in 2012, Bailout (full disclosure: I have a blurb on the paperback edition), which roundly trashed Geithner as being more worried about protecting Wall Street than taxpayers or struggling homeowners. Barofsky described some unpleasant encounters with Geithner, including one that devolved into an f-bomb testing ground.

Geithner gets even in his own book. He claims that Barofsky was unqualified for the job of running the watchdog agency, also known as SIGTARP. He also claims that SIGTARP hurt the government's efforts to sell the bailout to the American people (as if the Treasury wasn't already hurting itself on that front) by warning the government faced potential losses of $23.7 trillion.

"Barofsky's desire to prevent perfidy was untainted by financial knowledge or experience," Geithner writes. "He assumed our motives were self-evidently sinister, as if we had helped banks for fun and profit rather than to cure a metastasizing financial crisis."

Barofsky disputes those claims and many others. In a post on LinkedIn on Friday, Barofsky wrote that Geithner is being misleading about that $23.7 trillion warning. He suggested that Geithner might be lying when he claims that another former Treasury secretary, Hank Paulson, apologized to Geithner for "bequeathing me Barofsky."

"Mr. Geithner refuses to allow facts to get in the way of good hyperbole," Barofsky wrote, repeating his assertion that Geithner cared more about helping Wall Street than Main Street.

Geithner, in the book and in many interviews, has maintained that rescuing Wall Street and preventing a run on the banks was necessary to stop a meltdown that might have consumed Main Street. It's been a brutally tough sell, given that the real economy suffered a grueling recession and dismal recovery, bank profits have rebounded nicely, and only one banker has gone to jail for wrongdoing during the crisis.

Piketty Is Right: These Wealthy Men Make Billions For Basically Doing Nothing

Mark Gongloff   |   May 6, 2014    9:38 AM ET

In the future foretold by French economist Thomas Piketty, the rich will keep getting richer by doing basically nothing, living off the income generated by their already massive wealth.

For many hedge-fund managers, that future is now.

The world's 25 best-paid hedge-fund managers took home more than $21 billion in 2013, mostly for charging enormous fees for keeping an eye on huge piles of money, according to a new tally by Institutional Investor's Alpha magazine.

It's a job most hedge funds do quite badly: The industry returned just 7.4 percent last year, according to Bloomberg, badly lagging the Standard & Poor's 500-stock index, which gained 30 percent.

But such poor performance doesn't come cheaply to investors, with hedge funds typically charging fees of 2 percent of total assets under management and 20 percent of profits. Last year was the fifth straight year that hedge funds trailed the S&P 500, by Bloomberg's tally. But fund managers probably don't give a damn one way or another: They get their significant cut whether they beat the market or not.


Take Steven Cohen. (Please!) The No. 2 manager on Institutional Investor's best-paid list took home $2.4 billion last year, even as he and his firm, formerly known as SAC Capital, battled insider-trading allegations, and even though his main fund lagged the market with a 20.5 percent return. Cohen had better returns in the old days, which helped justify his unusually steep 50-percent cut of investors' profits. Cohen, who was not personally charged with insider trading, from now on will just manage his own substantial wealth, estimated at about $11 billion.

Some managers did a better job earning their keep: Last year's No. 1 earner, David Tepper of Appaloosa Management, enjoyed returns of 42 percent and took home $3.5 billion for his troubles. Still: $3.5 billion dollars!! That is the benefit of managing a $20 billion mountain of money. No. 3 on the list was John Paulson of Paulson & Co. -- famous for making billions betting against mortgages ahead of the financial crisis. He took home more than $2 billion last year. He made some good bets, but it helped that he did so with a $20 billion cash pile.

Even when these people aren't managing money, they're still taking home grain silos full of cash: Renaissance Technologies founder James Simons was fourth on the pay list with $2.2 billion, despite not managing any of Renaissance's $25 billion since 2010.

"Those with sizable fortunes -- even people who are no longer managing money on a day-to-day basis -- can qualify for the ranking based simply on gains on their own capital invested in their own funds," Institutional Investor wrote.

This is pretty much the sort of thing Thomas Piketty warned us about. In his blockbuster book, Capital In The 21st Century, the economist points out that returns on capital typically outpace economic growth. That means the already wealthy will just keep getting wealthier without really having to do much, while the rest of us will fall further and further behind.

The exorbitant paychecks of men like Cohen and Tepper help explain how the top 0.01 percent of earners in this country are leaving even their fellow 1 percenters in the dust, widening an already yawning income gap. The chart below, from the World Top Incomes Database, which Piketty helped compile, tells the story:

unequal top

To make matters even worse, some of this vast income is being taxed at just the 15 percent capital-gains rate. Piketty has called for a global tax on wealth to slow down runaway inequality. Simply doing away with the loophole that lets hedge-fund billionaires keep so much of their often poorly gotten wealth could be a good start.

The Big Problem With Your Paycheck Is Not Your Fault

Mark Gongloff   |   May 5, 2014    1:47 PM ET

Stock prices and corporate profits are setting records, jobs are growing, and yet most Americans think the recession never ended. How can this be? Because in the one place it counts -- your paycheck -- the recovery never happened.

We at The Huffington Post have been writing about this ad nauseum, but now science agrees: A new academic study says the best measure of the recovery is probably the complete awfulness of wage growth, The New York Times reported on Monday.

Here's a look at just how lame the recovery in wages has been. The red line is the year-over-year growth in hourly wages, which are still bumping along around multi-decade lows. The blue line is inflation, showing how much of your raises are being eaten up by higher prices.


The study, by Dartmouth economist David Blanchflower and Peterson Institute for International Economics President Adam Posen, has an answer for the mystery of why so many people are fleeing the labor force. The percentage of working-age Americans either working or looking for a job has tumbled to its lowest level since 1978. This mass departure for the sidelines is a big reason why the unemployment rate has tumbled to 6.3 percent. Many economists think this is because of Baby Boomers retiring en masse, leaving the work force permanently smaller.

But this new study points out that, if the work force were suddenly shrinking because of retirements, then wages should be rising as companies scramble to hire from a shrinking pool of workers. Instead, wages have been flat. That suggests companies are having little or no trouble hiring, which also suggests that there are millions of workers still on the sidelines just waiting for the chance to go back to work before they rejoin the labor force.

Now, at the very end of the red line in the chart above, you do see a little bump higher. This might be the beginning of a longer-term acceleration in wage growth. The Wall Street Journal had a competing story on Monday suggesting that companies are seeing all kinds of pressure to raise wages.

The problem with the WSJ story, though, is that none of the numbers these companies are throwing around -- 2 percent wage growth, 3 percent wage growth -- are really much different than what we're already seeing. That sort of growth is still basically keeping up with inflation. Here's hoping the WSJ story is right in the longer run and that wages are about to really take off. But there's no convincing evidence of that so far.

Mark Gongloff   |   April 28, 2014   12:33 PM ET

In these days of political strife, of Cruz v. Warren, Bush v. Clinton, Sterling v. Humanity, it is nice to know that at least one thing can still bring us together to hold hands and eat casserole: Hating banks.

In fact, one of the most radical anti-bank schemes you're ever going to see comes from a conservative economist, John Cochrane of the University of Chicago Booth School of Business, who is also affiliated with the Hoover Institution and the Cato Institute, two conservative think tanks. In a recent paper, "Toward a run-free financial system," Cochrane proposes a dramatic change in the way banks do business, forcing them to back every single thing they do, every loan they make, every bond they sell, with either some kind of stock or relatively safe Treasury debt.

Such a plan would certainly end banking as we know it, and might end our need to worry about a huge bank collapsing and setting all of our money on fire. It will probably not become reality any time soon: It is a variation of an idea, known as "The Chicago Plan," that has kicked around since the Great Depression and has enjoyed flashes of interest almost every year since the Great Recession, without leading to anything.

The Chicago Plan would stop banks from essentially "creating money" by making loans or taking other risks without a pile of government-issued cash to back it up. Banks now must have a tiny bit of capital, stuff like stock or cash, to back up their risk-taking. The Chicago Plan, and Cochrane's, would make them back up everything, 100 percent. This would stop "runs" on banks, when everybody scrambles to dump bank debt all at once, as happened to Lehman Brothers in the most recent crisis. If all bank debt were backed with cash or stock, then creditors would have no reason to worry.

Cochrane floated his own idea last year, in the form of a Wall Street Journal op-ed piece, shortly after some other economists had lobbed their own versions, leading people to briefly take the idea seriously again. It is suddenly a lukewarm topic again these days.

You will not be shocked to learn that banks do not love it. More surprising is the idea's bipartisan support, which has made strange bedfellows all over the place. The sort-of-liberal Martin Wolf of the Financial Times recently called for an end to banks' ability to create money, echoing The Chicago Plan and Cochrane. And liberal economist Paul Krugman, typically a bête noire of bankers, has suggested all of these ideas might be too radical.

"Cochrane’s proposal calls for a remarkable amount of government intervention in finance; it makes liberal proposals for a transactions tax look like minor nuisances," Krugman wrote. Once again, that's Paul Krugman, of The New York Times.

One ultimate, admirable goal of all of these plans is to prevent future financial crises like the one triggered by the Lehman run. Almost everybody (some bankers excepted) agrees that banks need more capital. The news that Bank of America and its regulators failed for years to notice that the bank was screwing up its capital accounting speaks to the importance of building better buffers to protect us against these sprawling, complex monstrosities.

But The Chicago Plan and its cousins have some serious flaws. For one thing, ending traditional banking might only cause the "shadow banking" system -- hedge funds, brokerage firms, finance companies and other creatures less regulated than banks -- to get bigger and more powerful and more crash-inducing. We'd have all kinds of fun stuff to bail out in the next crisis. Making the U.S. government the sole provider of cash for the economy, as these plans would basically do, could mean putting the levers of growth in the hands of our politicians, who frequently can't get their act together long enough simply to raise the debt ceiling and pay old bills. Conservatives are still having conniptions about the government "taking over" health care; imagine how they'll feel about taking over the entire banking system.

Maybe more importantly, as other critics have pointed out, some of these plans could dramatically squeeze the availability of credit, dealing a death blow to the economy. This is of course the standard bank objection to any sort of regulation or curb on their ability to make money. But in the case of The Chicago Plan and its ilk, the banks might actually be right.

Mark Gongloff   |   April 10, 2014    2:59 PM ET

The stock market got completely kerslammered on Thursday, and the kerslammering might not be done.

The punishment started on the Nasdaq, which sank 3.1 percent, its worst day since November 2011. The selloff metastasized and took down the Dow Jones Industrial Average, which fell 1.6 percent, and the Standard & Poor's 500-stock index, which fell 2.1 percent. Here's a look at the day's trading in the Nasdaq, courtesy of Yahoo Finance:

nasdaq plunge

Update: The Nasdaq tumbled again on Friday, closing below 4,000 for the first time since February 3. It fell 1.3 percent on the day. It's down 8 percent from its peak on March 5. Here's a longer-term view of the Nasdaq, courtesy of Google Finance:

nasdaq long

There's been lots of yammering in the market for a while now about how tech stocks are in a bubble that is due for bursting, and we could be witnessing the start of that. Funny enough, tech stocks actually weren't the worst performers in the Nasdaq on Thursday. That unwelcome honor went to biotechnology stocks: The Nasdaq Biotech index was bulldozed 5.6 percent.

Still, this bloodshed comes just a month after the Nasdaq hit a 14-year high and the other major stock measures hit new records. Venture capitalists are handing out billion-dollar valuations to any brogrammer with half a dream, and the market for new stocks is hotter than it has been since the end of dot-com boom.

Thursday's rout was the resumption of one that started about a month ago, but has picked up speed lately, sending investors scurrying for safe havens like Treasury bonds. The Nasdaq has lost 8 percent in that time, led by former high-flying stocks like Facebook, Google and Tesla. The big debate now is whether this is The Big One, the long-awaited correction to a bull market that has been carrying on with only minor interruptions since March 2009. Or maybe something worse, something crash-ier.

Or maybe it's just temporary agita about the Federal Reserve's long-stated desire to stop pumping quite so much cocaine into the financial system, along with the start of corporate-earnings season, which is not expected to be very good. A near-record number of companies have warned of disappointing profits in the first quarter, according to data tracker FactSet.

Mark Gongloff   |   April 4, 2014    9:20 AM ET

In what must be history's strangest socialist dictatorship, hiring by private companies just hit a record high. Meanwhile the government is still not hiring anybody.

Private employers added 192,000 jobs to nonfarm payrolls in March, the Bureau of Labor Statistics said on Friday, making up all of the economy's job growth for the month. Federal, state and local governments added nada. There are now 116 million people working in the private sector, topping the previous peak set in January 2008. Federal, state and local governments, meanwhile, employ 21.8 million people, down from a high of nearly 23 million in May 2010.

The two charts below tell the whole story: The first shows the rebound of the private sector. The second the non-rebound of the public sector. (Story continues after charts.)

private sector

public sector

That's pretty much how it has gone throughout the grinding recovery from the Great Recession: Private hiring has been slow but steady -- despite right-wing warnings that the private sector will collapse under the weight of President Barack Obama's allegedly socialist policies -- while austerity has led to government job cuts that have helped keep the recovery frustratingly slow.

Both private and public hiring are still far too low. If the economy were living up to its full potential, there would be about 5.7 million more people on private payrolls, according to the Economic Policy Institute, a think tank that focuses on labor issues. The chart below, from EPI, is based on jobs data through February. It doesn't include March's 192,000 jobs, which closed the gap just a smidgen. (Story continues after chart.)

missing jobs

Some conservatives blame Obama for the weak recovery, saying uncertainty about government regulations and Obamacare have hurt hiring. Most economists, though, agree that the recovery has suffered from the huge overhang of private-sector debt that built up ahead of the financial crisis and recession, which has taken years to work off. Austerity and a too-timid approach to stimulating the economy haven't helped.

Meanwhile, most of the private-sector jobs in the recovery have been low-paying, keeping wage growth anemic even as corporate profits have soared.

A new record high in private-sector jobs is better than nothing, but it's far from the end of the story.

Mark Gongloff   |   April 1, 2014    8:04 AM ET

Skilled Wall Street-botherer Michael Lewis has a new book out claiming the stock market is hopelessly rigged against investors, and the backlash from Wall Street has been predictably ferocious.

The backlash is not entirely wrong! It is just wrong about some of the most important stuff. To help explain what I mean, I will list some of the standard reactions to Lewis' book, Flash Boys, which claims that the stock market favors high-speed traders. These are the guys that use super-fast computers, fiber-optic cables, microwaves and frickin' laser beams to trade milliseconds ahead of the rest of the pack, sucking up kajillions of dollars for themselves in penny increments while adding little to the march of human progress.

I will grade these critiques on a truthiness scale from A to F, with "F" representing "Excuse me, but your pants are on fire," and "A" representing the chiseled-in-stone gospel truth.

Claim: The market is not rigged!!!! This was the line from Politico's Ben White and a parade of jittery New York Stock Exchange traders on CNBC on Monday.

Truthiness Grade: F Gentleman's C: The market is of course rigged in favor of people and companies who have more information and more technological prowess than other people and companies. If you think otherwise, then boy does Stratton Oakmont have a can't-miss investment opportunity for you.

Update: Ben White protested his grade. Because I am a fair grader, unlike some college professors I could name, I listened and realized I may have been too hasty with the "F" pen, maybe because I found this argument less compelling than others and because I wanted to avoid grade inflation.

White's point, like that of Yahoo Finance's Michael Santoli, is that the whole stock market is not rigged to favor high-speed traders. I agree with that, as you'll see below -- your 401(k) is probably safe from the flash traders, unless they accidentally destroy the market somehow. If you're not playing their game, you're not losing. You might even be winning. The market will always favor some players over others, but not some players over everybody else all the time. It's only fair to give some credit to this argument.

Claim: So what if the market is rigged, it has always been rigged! This was the reaction of The Reformed Broker blogger Josh Brown, FT Alphaville and, really, me (see above).

Truthiness Grade: B+: As Brown and FT Alphaville pointed out, the guys who gathered under that buttonwood tree in downtown New York in 1792 and formed what would eventually be the New York Stock Exchange did not do so out of any sense of charity. They did it because they could make a Ye Olde Fucktonne of money monopolizing the trading of stocks. Throughout the decades, market specialists of the human variety squeezed rents out of the market that were often more egregious than what the high-speed traders do.

So why does this reaction not get a Truthiness grade of A? Because the near-permanence of a bad thing -- herpes, say, or the New York Mets -- does not necessarily make it acceptable.

Claim: Bah, this is old news! The Wall Street Journal has been writing about this stuff for years. The WSJ's Scott Patterson wrote his own book nearly two years ago, Dark Pools, which made pretty much the same case Lewis is making. The hero of Lewis' book, Brad Katsuyama, called Patterson's book a "Must Read."

Truthiness Grade: B+: It is indeed quite old news. So old, in fact, that slowpoke regulators have already gotten around to launching years-long investigations into some of high-speed trading's shadier practices. Nearly a year ago, Bloomberg Businessweek declared the robots had lost, that flash trading was in retreat along with profits. It is telling that the vampire squid itself, Goldman Sachs, has joined other Wall Street banks and hedge funds in getting on the right side of history to back Katsuyama's new exchange, IEX, which purports to make it impossible for flash traders to skim money on trades.

But just because high-speed trading is old news, and even if it is in retreat, that doesn't mean we shouldn't shine a light on its worst practices and try to fix them. Then Goldman and the hedge funds and the flash traders can find a way to work around the reforms, and the cycle of life continues, hooray.

Claim: So what if the market is rigged, high-speed trading doesn't hurt the average investor. This was the reaction of New York magazine's Kevin Roose and, again, me.

Truthiness Grade: C+: High-speed trading mainly hurts the other traders who are competing with the high-speed traders. If you quietly invest in low-cost index funds and aren't trying to make a killing in the market, then high-speed trading is not a problem for you. I'm finding it difficult to work up very much outrage about hedge funders like David Einhorn or the artist formerly known as SAC Capital -- two of the flash-trading "victims" mentioned in Lewis' book -- losing money on trades. Individual investors trying to day-trade against these firms, meanwhile, are like windsurfers taking on the U.S. Navy's Third Fleet. Michael Lewis has done those people a great service by reminding them that they are hopelessly outmatched.

So, again, why no A+ for this reaction? Because not everybody is investing quietly in low-cost index funds. A lot of us are, by accident or design, invested in actively traded mutual funds. Institutions might be eating the extra costs of high-speed trading or starting to use countermeasures like IEX. But these costs could be getting passed on to you, the consumer.

And more importantly, we still don't fully understand the potential for market disruption (the bad kind of disruption, not the Silicon Valley happy kind) high-speed trading can cause. It has already led to scary flash crashes and botched IPOs, which have already caused investors to lose faith in the capital markets, surveys have shown. That is generally not healthy for the economy.

Claim: High-speed trading is a net good for the markets and the economy. You can't make an efficient market without breaking a few Facebook IPOs.

Truthiness Grade: C: High-speed trading has lowered trading costs, even if it does still extract some cost. You could argue, as Bloomberg View's Matthew Levine did, that it makes markets more efficient. A stock price is whatever the market says it is, even if that price changes a zillion times per second.

But as Lewis notes, we also need to consider the costs to the economy of some of our best and brightest minds working on how to milk a little bit more money out of stock trading instead of on stuff like cold fusion or flying cars.

There's also a potential cost here of making our markets even more complex and more opaque, as Quartz's Matt Phillips pointed out. Financial innovation is always awesome right up until the time it stops being awesome, at which point it occasionally destroys the economy.

Mark Gongloff   |   March 26, 2014   10:27 AM ET

Monopoly's new "house rules" will probably not be popular in the houses of Ron Paul or Rick Perry. Many of those rules are straight out of their Fed-hating nightmares.

Hasbro, maker of the Monopoly board game, has proposed a bunch of new "house rules," the most popular of which will be officially adopted as optional rules. Here's a sampling:

Free Parking, Fast Cash: All taxes and fees will be collected in the middle of the game board, if you land on Free Parking, it's your lucky day: collect all the money from the middle of the board.

Dash for the Cash: Landed on Go! Amazing, you get to double your salary - 400M dollars instead of 200M Dollars.

Lucky Roller: Did you just Roll Snake Eyes (double one's)… odds are in your favor, collect 500M Dollars.

3's a Crowd: Are there 3 players in a row on 3 unique properties? Well done, each player gets an extra 500M Dollars.

Break The Bank: At the start of the game, leave half the money in the bank. Then mix up the other half of the money in the center of a board. On the count of 3 every player grabs what they can! Free For All!

Look at all that cash flying around! That last rule is straight out of former Fed Chairman Ben Bernanke's playbook: In 2002, he proposed that one way to stimulate the economy would be to just dump cash out of a helicopter for people to grab.

Bernanke's Fed didn't go that far, but it did slash interest rates to zero and pump hundreds of billions of dollars into the economy in a series of stimulus measures. This enraged Texas Governor Rick Perry so much that he threatened Bernanke with lynching.

Perry, Paul and other conservatives and gold bugs hate the Fed's easy money. Fed money-printing will destroy capitalism and cause rampant hyperinflation and other perversions of nature, they have warned. Hasbro has not listened to those warnings, obviously.

The original Monopoly rules create a fake economy that "is akin to one tightly and aggressively controlled by a central bank," noted Slate writer Alison Griswold. They're more favorable to hard-money enthusiasts like Ron Paul, in other words. Looser rules will better reflect our current economy, economist Jock O’Connell told Griswold.

“People who have taken the rules into their own hands are probably trying to more closely emulate what they see happening in financial markets around the country and on Wall Street," O’Connell said.

Maybe, but these rules are also simply a lot more fun, which is why variants of them have been used by players for many decades, through hard times and good.

They could also represent fantasies of wealth redistribution. Under the old Monopoly rules, owning expensive properties like Boardwalk and Park Place is a key to success. With cash being funneled straight from the wealthy bank, even the riffraff slumming it on Mediterranean Avenue have a chance.

Soon, our living rooms may be full of little socialist Bernankes, if they aren't already.

Mark Gongloff   |   March 25, 2014   11:23 AM ET

This may sound hard to believe, but it is still possible to buy a bargain house in the United States today. You may need to be willing to relocate to Detroit or Cleveland, however.

Those cities are among the locales with the cheapest homes for sale in the United States, according to a new study by real-estate website Trulia. The homes in these cities are wayyy underpriced relative to fundamentals like income and rent, according to Trulia's estimate. Here's a look, courtesy of Trulia, at just how undervalued:


Many of those places are actually not terrible places to live. Oft-mocked Cleveland, where the median home price is $58,700, turns up on lists of the world's "most liveable" cities. And when global warming turns everything south of Allentown, Pa., into a broiling hellscape, current frozen hellscape Detroit -- where the median home price is $37,000, according to Trulia -- might be more desirable.

For the time being, however, even $1 houses in Detroit might not be the bargain that they seem.

Speaking of not-bargains: Until California sinks into the Pacific, its houses will always be the most expensive houses, because all right-thinking humanoids prefer weather that does not go to miserable extremes for several months out of every year. To make matters worse, a swelling tech bubble is helping pump up a housing bubble in Northern California, pricing all but the richest people out of San Francisco and San Jose.

Here, again via Trulia, is a list of the most-overpriced housing markets in America. Spot the recurring theme:


As for the rest of the country, you will be pleased to know that Trulia does not think we are in a national housing bubble:

bubble watch

The number of large housing markets in bubble territory is slowly rising, but still way below the number at the peak of the last housing bubble, according to Trulia:

how many markets

Still, in many markets, Wall Street investors have pumped home prices beyond fundamentals, pushing ordinary homebuyers out of the market. Fortunately, we'll always have Cleveland.

Mark Gongloff   |   March 24, 2014   12:38 PM ET

People tend to skedaddle out of town whenever they smell trouble. Apparently, companies do the same thing.

Companies that schedule annual shareholder meetings in unusually remote locations tend to announce bad news fairly shortly thereafter, according to a new study by Yuanzhi Li of Temple University and David Yermack of New York University. And those companies usually see their stock prices tumble, too, according to the study.

In other words, if you want to know whether a company is about to hit hard times, keep an eye on where it schedules its annual meeting. Often, the more surprising the location, the worse the news, and the harder the company's stock price falls.

"[W]e find that managers schedule long-distance meetings when the firm is experiencing adverse operating performance that is not already known to the market," the authors wrote. "Company stocks perform very poorly in the aftermath of remote meetings, and part of this result stems from disappointing quarterly earnings announcements following these meetings."

Annual meetings are where shareholders, analysts and board members get a chance to pepper corporate managers with questions. Typically, the shareholders, analysts and board members who live closest to the company know it best. So if you're a company with a nasty secret to hide, it makes sense to get as far away as you can from the people who know you best, to make it more difficult for them to ask you hard questions. It's not unlike how companies sometimes choreograph earnings calls so that only friendly analysts ask questions, in order to hide bad news.

"By moving the meeting far away, the managers might forestall shareholder or news media questioning that could lead to the early disclosure of adverse news," the study's authors wrote.

And companies aren't scheduling these remote meetings in happy fun-time places like the Bahamas or Las Vegas -- "resort" locales get surprisingly little annual-meeting business, according to this study. Instead, these companies apparently want traveling to their annual meeting to be a real chore.

Investors don't seem to have caught on to this trick yet. The study found that companies scheduling remote annual meetings have significantly worse stock performance in the months that follow. Companies that hold meetings at least 50 miles from their headquarters and 50 miles from a major airport do 6.8 percent worse than the broader market over the next 6 months, according to the study.

There are some exceptions to this rule of thumb: General Electric, for example, moves its meeting location to a new place every year, seldom coming anywhere near its Connecticut headquarters. You won't be able to get any read on GE by watching its travel schedule.

And a strange annual-meeting locale isn't always a harbinger of doom. You shouldn't mortgage your house to short every company that picks an unusual meeting spot. But it's not a good sign.

Mark Gongloff   |   March 20, 2014    8:53 AM ET

Little by little, the crazy is returning to financial markets.

Borrowing money against your overpriced home in order to gamble in the stock market is the sort of bananas thing people did before the housing bubble popped and the stock market crashed. But a story published on MSN Money and the financial-news website Benzinga earlier this week encouraged people to do just that.

Specifically, author Jonathan Yates suggested you could take out a home equity line of credit and use the money to buy shares of hotel real estate investment trusts, which pay dividends that might be higher than the interest you'd pay on your loan. Then just sit back and wait to be rich. Try not to think about how stock prices are at all-time highs after a five-year bull market, or about how home prices have been inflated by Wall Street investors, putting them totally out of line with normal incomes again.

And try not to think about this factoid, from Wall Street Journal personal-finance columnist Jason Zweig (who is obviously just jealous he didn't think of this genius idea first):

Zweig and many others denounced this terrible, terrible financial advice widely and thoroughly almost immediately after it was published.'s Herb Greenberg called it "the scariest thing I've read in a long time."

MSN wisely took the story down, though it's still up on Benzinga. It is also still available on the heavily trafficked Yahoo Finance.

But just in case you happened to see the story, missed the village stoning, and think this approach might be your ticket to riches, let me just say:


Still not convinced? Maybe this handy flowchart will help you in your decision-making process:

heloc flow

An simpler approach could be to set your house on fire and collect the insurance money. Although you could also, as MarketWatch reporter and aspiring financial planner Ben Eisen pointed out, stay in a hotel after your house has burned down, which will nicely boost the value of those hotel REITs.

There's no evidence yet that anybody has actually taken this terrible advice, or that the stock or housing markets are about to crash. But this is the sort of thing that starts to happen more and more frequently the less detached from reality markets get.

As Business Insider's Joe Weisenthal put it:

"This is the top, right?"