Paddy Hirsch is a Senior Editor at Marketplace. He is the author of the book Man vs Markets, Economics Explained, Pure and Simple, and he is the creator and host of Marketplace Whiteboard, a video explainer of financial and economic terms.
Hirsch joined Marketplace in 2007, just as the credit crunch that preceded the 2008 financial crisis began to take hold. As editor of the New York Bureau and the entrepreneurship desk, he spearheaded Marketplace’s financial markets coverage throughout the crisis and as the economy fell into recession. He was awarded a Knight Fellowship at Stanford University in 2010, and he returned to Marketplace in July of 2011, when he was appointed Senior Producer of Marketplace Money. He published his first book, Man vs Markets, in August 2012.
Hirsch got his start in journalism with an internship at the BBC in Glasgow, Scotland. He became a field producer for CNBC in Hong Kong and later was a consultant to the Open Broadcast Network in Bosnia. He has been an editor for Direct Capital Markets, Institutional Investor Newsletters, Standard & Poor’s, and the Vietnam Economic Times. Prior to becoming a journalist, he served as an officer in the Royal Marines.
Hirsch attended Campbell College in Belfast and received a bachelor’s degree in French and International Studies from the University of Warwick. He is a Knight Fellow and was a Webby honoree in 2009.
Features by Paddy Hirsch
News of the theft of tens of millions of credit and debit card numbers and associated data is causing confusion amongst customers and prompting lots of questions:
Q. How many cards have been affected?
Roughly 40 million.
Q. I shop at Target. Has my data been stolen?
It depends when you shopped there. The breach appears to have occurred over the Thanksgiving weekend. If you shopped at Target between Nov. 27 and Dec. 15, yes, your data may have been stolen.
Q. OK, now I’m worried. I bought a pack of onesies for my cousin’s new baby. What do I do now?
1. Don’t panic.
2. Check your credit card statement. Most card companies will call if they see unusual spending on your account. But because it’s the holidays, they may miss something. So check. Either call your card company and ask them to run down any expenditures since Nov. 26, or go online and check there.
3. Pay attention to the details. Thieves often run a test on a stolen card, charging a small amount to see if the card works and if you notice.
4. Call your card company.Let them know you shopped at Target during the time in question. Ask them what their policy is. My card company has a recorded message telling me right up front that they’re aware of the data breach, that I’m not liable for fraudulent charges and that they’re tracking my card spending.
5. ...But don’t rely on your card company. Keep checking your account. If you don’t have online access, get it. That way you can check your account every couple of days or weeks. Make it a routine.
Q. OMG! There’s a charge for $6,000 worth of gasoline bought in Alaska! I live in Chicago! What do I do now?
1. Don’t panic!
2. Call your card company. Inform them about the charge, and ask for your account to be reviewed, and the charge reversed.
3. Call a credit bureau. You don’t have to call all three. Just get one of them to put a fraud alert on your account.
Q. Does a fraud alert mean my card is canceled?
No. A fraud alert makes it harder to extend credit to you. Anyone wishing to take out a loan under your name will have to prove they are you. The alert lasts 90 days, and the credit agency you notify will call the other agencies.
Q. I’m still kind of wigged out about this. Should I just say 'to hell with it!', and cancel my card?
Before you do this, speak with your credit card company. They will talk you through your situation. If after that you’re still feeling squirrely, then go ahead and cancel your card. Your card company will send you a new card in a few days and then you can spend the holidays changing your account details with everyone you do business with.
In a word, no.
At least, not yet. And even then, not by much.
The Federal Reserve announced today that it's tapering off its quantitative easing program: Buying just $75 billion of bonds, instead of $85 billion, starting in January. But it also committed to holding interest rates down, saying it will keep the "exceptionally low" target range for the federal funds rate to between 0 and 0.25 percent. What's more, the Fed said it expects to keep rates that low rate:
"[W]ell past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal."
This means that the interest rate that banks charge to lend to each other will stay low.
But what does it mean for you and I?
It means that the interest rate that lenders charge people like us to borrow money to buy cars, houses and educations will not move by very much for quite some time. Even if unemployment drops below 6.5 percent, which some observers reckon could happen next year, the Fed will keep those rates low.
Fidelity Investments contradicted a report today that said the company was offering customers the chance to put bitcoin into their IRAs.
The manager of Bitcoin Investment Trust said in an interview that Fidelity customers would now be able to invest their retirement money in his fund.
I'm a Fidelity customer, so I called to ask about this, and was told the company does not have any such arrangement.
A few hours later Fidelity announced: "On an individual basis, we allowed an investor to invest in that Bitcoin Investment Trust. We are no longer allowing that.”
Never mind. Still interested in buying a little bitcoin?
Q. You betcha! How can I get some of that action?
A. Well, before we get to that, do you understand what bitcoin is?
Q. Ummm….? [silence]
A. Fortunately, there are a lot of good explainers of what bitcoin is and how it works out there.
Try this video:
This written explainer:
"A Bitcoin is a unit of currency, launched in 2009, that only exists online and isn't controlled by any kind of central authority, like the US Federal Reserve. You can send Bitcoins to anyone who has a web connection (or hand someone your hard drive containing the currency.)"
Q. OK, so I'm ready dip my toe in the waters. What's the first step to buy some?
Well, there are a number of ways:
1. You can sell some stuff and ask for bitcoin in return, instead of dollars.
2. You can buy bitcoin "over the counter," which means buying them with cash from another party in a face-to-face transaction, in the same way that you might buy baseball cards. Or diamonds.
4. You can use your phone to buy bitcoin. Definitely a fee.
5. You can use a gift card. Most definitely a fee.
6. You can sign up for Second Life and use Second Life Lindens (that’s the virtual world currency) to buy bitcoin.
7. You can buy Bitcoin through an exchange like Coinbase.com, Blockchain.info and MtGox.com. If you do it this way, you have to pay the exchange a fee, just as you pay a stock exchange when you trade securities.
8. You can make Bitcoin part of your retirement account by investing in SecondMarket’s Bitcoin Investment Trust. But there’s a $25,000 investment minimum, and you have to pay a bunch of fees – as much as 5 percent – just as you do in any fund.
Stanley Fischer is the man tipped as the leading candidate to succeed Janet Yellen at Vice Chairman of the Federal Reserve when she ascends to replace Ben Bernanke.
Q. Great, that's why I'm hearing his name today. But who is he, really?
A. Mr. Fischer is the former governor of the Bank of Israel. He’s been a deputy head of the IMF, a vice chairman at Citigroup, chief economist at the World Bank, a professor of economics at MIT, and an advisor to many central bankers, including Bernanke. He’s 70 years old.
Q. Okay, former Israeli central banker. Does that mean he's Israeli, and does that matter?
A. Indeed he is. He was made an Israeli citizen when Prime Minister Ariel Sharon asked him to head Israel’s central bank in 2005, but he has retained his American citizenship. And besides, nationality doesn’t seem to matter much when it comes to heading central banks these days: The governor of the Bank of England, for example, is Canadian.
Q. So, Fischer's stepping into the fiscal fire. What's his leanings: Is he a devotee of Keynes or Hayek?
A. Neither. A profile in the Washington Post says he identifies with both sides, and is an architect of so-called “New Keynsian” economics.
Q. So what does that mean he thinks of the taper and quantitative easing?
A. It’s hard to say. Fischer has stated that he thinks the financial crisis proves that Keynsian economics is still very important. That includes the aggressive use of monetary policy, which is what all this bond-buying is about. But during the financial crisis, he moved aggressively to raise interest rates in Israel, so it’s possible that he might, were he appointed to the Fed, argue for an aggressive tapering of the program.
HENRY is back. And he's worrying retail analysts who keep an eye on consumer spending.
Who is Henry?
HENRY is a classification of consumer. It stands for High Earners, Not Rich Yet. It covers people who earn between $100,000 and $250,000 a year. Not too shabby, but not Fortune 500 CEO, either.
Why are HENRYs such a big deal?
Because they support a key part of the retail market. They don’t patronize super high-end boutiques or stores like Barneys, and they’re not such a problem for stores like Target or Wal-Mart, or even Macy’s. But HENRYs do a lot of shopping at mall stores like Bloomingdales, Nordstrom and Tiffany, and they’re the mainstay of the "modest luxury" market, which includes brands like Coach, Ralph Lauren and Cole Haan.
OK, so they’re important. What are they doing that’s bothering investors?
It’s what they’re not doing: shopping. Mall traffic is way down over the last month; big chains like Saks and Nordstrom have been marking products down by 40 percent since before Thanksgiving, and analysts are worried that HENRYs will stay frugal through the key holiday shopping season.
But these people make a lot of money. What’s stopping them from shopping?
In a word: uncertainty. Consumers in this class of earners tend to own their homes and are invested in the stock market, so they’ve seen the value of their assets rise as stocks have gained and the real estate market has come back. But the "wealth effect" of that recovery hasn’t translated into increased confidence in the economy. These people got poorer on paper during the downturn, and now that their net worth is about back to where it was before the Great Recession, they’re going to do everything in their power to make sure that doesn’t happen to them again. They’re not confident that the economy is going to stay on the upswing, so they’re being extra conservative, saving more and spending less, and steering clear of luxury unless it’s being offered at a steep discount.
What does that mean for retailers?
It means this is going to be a tough holiday season for them. They’re going to have to work hard to get the attention of HENRYs, via email and social media, and snail mail, of course. HENRYs can expect a barrage of advertising, touting this discount and that price cut, right through the holidays. We’ve already heard that companies have in general stocked up on too much inventory during the last quarter, so getting rid of the stuff they have on hand will be a priority. That means they’ll be selling it cheap, and as quick as possible.
Sounds like a recipe for some great holiday and New Year sales.
Count on it.
Q. What? Sisqo’s having trouble in his private life?
A. No, I'm not referring to rap musicians who have no faith in others; I'm talking about the merger of two food distribution companies, Sysco and US Foods.
They're the two biggest firms in their industry, which means their merger is likely going to encounter the antitrust police.
Q. The antitrust police? What is this, "Minority Report?"
A. OK, they’re not really police. A bunch of regulators from the Federal Trade Commission are likely to examine this merger, to make sure that a Sysco/US Foods behemoth isn’t going to take over the whole food distribution business and cut everyone else out of the picture.
Q. That sounds fair. Is this standard operating procedure in a modern capitalist society?
A. Actually, antitrust law, also known as anti-monopoly law, has been around in some form since Roman times at least, and it’s used to make sure that the markets are places where both buyers and sellers can do business fairly. The idea is to make sure that smaller businesses won’t get unfairly squeezed out by a monopoly that’s cornered the market, and consumers won’t get gouged by a seller because there’s nowhere else to buy.
Q. Is this like my annual physical -- a quick process? Or more like open-heart surgery?
A. It depends. Sometimes the process is very quick, but the Sysco/US Foods merger could be under antitrust scrutiny for a while. The American Airlines/U.S. Airways merger, which formally happened today, spent several months under the regulatory microscope before it was cleared for takeoff, and Sysco’s CEO said he fully expects the FTC to scrutinize the deal.
Q. What are the chances of the deal going through?
A. Pretty good. The new company would have a 30-35 percent market share, but there are as many as 15,000 food distribution companies in the U.S., so the pie is still pretty big. Reuters spoke with several antitrust experts who said the FTC may insist Sysco sell some parts of its business before it gives the deal the green light.
Quiznos isn't making enough money to afford the interest payments on its debt.
QIP Holdings, as the company that runs Quiznos is formally known, bought some breathing room today, by coming to an agreement with its lenders, to whom it owes roughly $600 million. Those talks were sparked by Quiznos failure to make an interest payment on one of its loans, an event that could have led to those lenders calling its loan and taking possession of the business.
And unless Quiznos can find a way to keep current on its debt, the company could go under.
If that happens it won't be the first time. The company nearly went bust in 2012, and was only saved by the involvement of a private equity company and its lenders' willingness to take a haircut on their investment. Specifically, the lenders forgave $305 million of the company's debt, reducing it to $570 million from $875 million. And they only agreed on the condition that the company go through a turnaround process, with a new executive in charge.
But the turnaround hasn't worked. The Wall Street Journal reports that the company has whiffed on a number of performance targets, also known as covenants. The company's lenders could put the company into bankruptcy, if they wanted to, but bankruptcy is a messy business, involving all sorts of lawyers and judges and court reporters, all of which can get very expensive.
So Quiznos gets to soldier on, but with the odds stacked against it. It's competitors' sandwiches are often cheaper; it's franchises fail at a high rate; and that hudge debt burden has to be serviced every month. That's a lot of money going out the door before anything else can be paid for.
Some of the investors in this deal must be thinking Quiznos is toast.
Banks are bracing themselves. Next Tuesday we may finally witness the rollout of the completed Volcker Rule ... and so ...
Q. What’s the Volcker Rule, again?
Back in 2010, former Fed Chairman Paul Volcker proposed curbing excessive risk-taking by banks by banning proprietary trading. Nice and simple, he thought: A policy that should be about four-pages long.
Q. 2010? That’s nearly four years ago! Why hasn't it happened yet?
Today, the Volcker Rule looks a bit like a neutered dog: It has swollen to a tremendous size – nearly 1,000 pages covering 400 regulations – and it has lost almost all its aggression against the banks. Almost everyone complains that the rule doesn’t define two key terms: Hedging or market-making. This effectively means that there is a giant loophole in the law, through which any half-decent banking lawyer will be able to drive a battle tank.
Q. Hedging and market-making? What are they? And why are they so important?
Hedging and market-making are two key functions performed by banks of all sizes all over the world.
A hedge is essentially an insurance contract: In the same way that I make an investment (paid monthly to an insurance company) to protect myself if something goes wrong with my car (like if it gets stolen); so too do banks insure themselves by making investments (say, buying gold) that they hope will do well in the event other investments do badly (like the stock market collapses).
Market-making is what the banks do to assist their clients who want to buy or sell stocks and bonds. The banks want to be sure that they can find the securities their clients want – or find a buyer for stuff clients want to sell – and at a reasonable price. To make that happen, banks sometimes "make the market," by buying those securities themselves, in order to ensure supply or demand.
Q. How are these different from proprietary trading?
Proprietary trading is different from both hedging and market-making (also known as principal trading), because it’s done purely to generate profits for the bank. Prop trading will look similar: The bank will make an investment, but the motive will differ. The motive for hedging is insurance; the motive for market-making is to better service clients; the motive for prop trading is purely to make a profit for the bank.
Q. So if they all look the same, how can you tell the difference?
By following the money. In this story about the JP Morgan London Whale scandal, professor Andrew Lo says by looking at how the people who make these investments are compensated, you can see what their motives were, and thus determine whether they’re hedgers, market-makers or proprietary traders.
There is one very simple question that you can ask — which has a definitive answer — about the small number of individuals who were responsible for managing this group at JP Morgan and putting on the specific trades that lost these large amounts of money. That question is: How were they compensated on an annual basis? Were they paid a salary and a bonus, and was the bonus a function of the profitability of the group, or was the bonus a function of the hedging ability of the group? If you can answer this question — and it definitely has an answer to it; it’s not a metaphysical question — you will have your answer as to whether it was proprietary trading or hedging. I don’t know the answer, but I know the answer exists, and I know that certainly the government can get that answer with a single phone call.
No, Crocs is not on crack: It needs money.
The PIPE is a way of raising cash, in what's called a private investment in public equity.
Q. Sounds complicated. What does it mean?
It means a private equity fund - Blackstone, in this case - buys shares in a public company - like Crocs.
Q. Where do those shares come from?
They're shares owned by the company. When a company "goes public" in an IPO, it doesn't put all its stock on the market. A big chunk of shares are held by the company's officers, and maybe by the company itself.
Q. So if the company needs money, why doesn't it sell its shares on the open market?
It could, but that would take a long time. If it dumped all the shares it wanted to sell on the market in one go, that could send the price sinking, which would kind-of defeat the point. It could also sell the block of shares in what’s called a secondary offering. But that takes a long time -- it’s a lot like an IPO, where you hire an investment bank, go on a roadshow and jump through all sorts of regulatory hoops.
Q. So a PIPE is quicker. But is it cheaper?
Probably not. In exchange for doing the deal quickly, the private equity company usually buys the shares at a discount to their trading price.
Q. But what about Crocs. I like my plastic shoes and know lots of folks do too. So why does Crocs need the money?
The company’s not saying, but word is they’re raising the cash to buy back a bunch of their own stock.
Q. Whoah, hold on! They’re selling stock to raise cash to buy stock? How does that make sense?
Companies buy back stock for a number of reasons. Sometimes it’s because they want more control of the company; sometimes it’s because they want to be sure the value of the shares remains high. In Crocs case, there’s talk of a restructuring, which Blackstone would help with. The company could be aiming at holding as many shares as it can afford to buy, to make that restructuring as smooth as possible.