Ethics – Page 16 – The Aleph Blog

IFRS: Incomparable Flexible Reporting Standards.

Posted on 11 October 200812 October 2008 by David Merkel

One housekeeping note before I start.? I made a small enhancement to the blog today.? I added a little link on the upper right, just below the banner that reads “Aleph Blog.”? If you click it, it brings you back to the home page.? I know that is how my banner is supposed to work, but I have not been able to get it to do that.

My first topic this evening is the SEC’s move to IFRS.? If you would like to protest this, the form is here.? Here is what I am submitting to the SEC:

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Sirs,

I strongly oppose adopting IFRS in place of US GAAP.? I am not an accountant, but something more important, a user of financial statements.? I am a life actuary and a financial analyst.? I have been on both the preparation and use sides of accounting statements over the last 20+ years.

My first critique is that there is nothing that is that big of an improvement over US GAAP in IFRS, and many areas that seem less accurate.? I will handle those later.? My point here is that in order to justify the costs of retraining accountants and financial analysts, what ever is put into place needs to be a large improvement over GAAP.? IFRS is not that.? It will impose big costs on US corporations to re-tool their accounting, and the small corporations will be disproportionately affected.? In the end, I don’t think we will have materially better financial statements.

Perhaps accounting consulting fees will rise in the short run from the conversion, but that it not a reason to put the rest of us through the wringer.? Just as laws are too important to be left to lawyers only, in the same way, accounting standards are too important to be left to accountants only.

Second, there have been a number of studies done that show that US GAAP confers an advantage of lower capital costs on companies that use it versus IFRS.? Why raise capital costs on US corporations?

Third, IFRS will not unify accounting standards around the world, because the national implementations of IFRS are significantly different.? Here’s an idea, though:? Call US GAAP an implementation of IFRS.? WHo knows, it might become the preferred IFRS because of its relative strictness.

Fourth, IFRS is more squishy than GAAP because it is “principles-based.”? We use rules-based systems in the US because they offer legal protection regarding fraud in securities laws.? I would argue that IFRS is actually rules-based also, but with a less-tested set of rules.? The rules of US GAAP are large because they have grown to meet the complexities of accounting in the modern economy.? More below.

Fifth, the additional squishiness/flexibility will make it more difficult to compare results across companies, making the job of securities analysts more difficult.

Sixth, US GAAP is more investor-focused than IFRS. That’s why it lowers capital costs.

Seventh, value investors will benefit from IFRS because the income statements and balance sheets will be less reliable, which will force more investors to the cash flow statement, which is harder to fuddle.? Average investors will have a harder time investing, to the extent that they look at financial statements.

Eighth, does Congress really want to give up its sovereignty over US accounting rules?? I think not; all it will take is one significant scandal, and Congress will move away from IFRS.? The pressure toward globalization is weaker than most think.

Ninth, IFRS is weaker when it comes to revenue recognition, joint ventures, and accounting for fixed assets and intangibles.? In general, the ability to revise asset valuations up should be limited or nonexistent.? The ability to be flexible in recognizing revenue should be similarly limited.

In the American context, where we have dispersed ownership, we need conservative accounting rules that are comparable across companies.? The proposed move from US GAAP to IFRS is a step backward.? Please do not sacrifice our relatively good accounting standards for something less accurate and applicable to the needs of our nation and its securities markets.

Sincerely,

David J. Merkel, CFA, FSA

Blame Game

Posted on 10 October 200810 October 2008 by David Merkel

Some people don’t like the concept of blame.? They view it as useless because it wastes time in looking for a solution.? I will tell you differently.? Blame is useful because it identifies offenders, which is the first step in eliminating the problem.? The trouble is that few have the stomach to get rid of the offenders.

So, as I traveled home from prayer meeting with my children last night, we listened to a radio show discussing the current credit crisis.? This was a good discussion, unlike many that I hear.? But the discussion (on NPR) eventually focused on “who should we blame?”? Okay, here is my incomplete version of who we should blame:

1) The Federal Reserve, especially Alan Greenspan.? For the past 20 years, we couldn’t let the economy have a severe, much less a moderate recession.? Rates were reduced before significant pain was felt by those who had borrowed too much.? The 1% Fed funds rate in 2003 was the pinnacle of that effort.? It created the ultimate bubble; there is nothing left to reflate in 2008 from easy monetary policy.

2) Congress and the Presidency — they encouraged undue leverage in a variety of ways:

a) Fannie, Freddie, the FHLB, and more: Everyone has gotta live in a single family home.? Gotta do that.? Thomas Jefferson’s ideal was that we should encumber future generations so that marginal buyers could live in houses beyond their means.? They compromised lending standards more and more, along with private lenders as the boom went on.

b) The SEC: in a fiat currency world, controlling the currency means controlling leverage of financial institutions.? The SEC waived leverage restrictions on the investment banks in 2004, leading to a boom, and a bust. Big bust.? Ginormous bust — how many large standalone investment banks are left?

c) Particularly the Democrats in Congress defended the GSEs as their own pet project.? I am not bashing the CRA here; I am bashing the goal of having everyone live in a house beyond their means.

d) We offered a tax deduction on mortgage interest, and a limited exemption on capital gains from selling a home.? There is no good reason for these measures.

e) And, the Republicans in Congress who favored deregulation in areas for which it was foolish to deregulate.? Much as I favor deregulation, you can’t do it if you have fiat money (unbacked paper money).? In that case you must restrain the growth of credit.

f) The Bush Jr. Administration — they did not enforce regulations over financial institutions the way that the law would demand on a fair reading.? Again, I’m not crazy about regulation, but unless you have a gold standard, or something like it, you have to regulate the issuance of credit.

g) Their unfunded programs with promises to the future; the states and Federal Government always promise today, and don’t fund it.? Hucksters.

3) Lenders steered borrowers to bad loans.? There was often implicit fraud, and in some cases, fraud.? The lenders paid their staff to do it.

4) Borrowers were lazy and greedy.? What? You’re going to enter into a transaction many times your income or net worth, and you haven’t engaged helpers or friends to advise you?? Regardless of the housing price mania, you should have gone slower, and done more homework.? Caveat emptor — you neglected that.

5) Appraisers were slaves of the lenders who wanted to originate and sell.

6) Those that originated MBS did not check the creditworthiness adequately.? They just sold it away.? Investment banks did not care where a profit was coming from in the short run.

7) Servicers did not demand a high price for their services, making it hard for them to service anything but solvent borrowers.

8) Realtors steered people into buying more than they could rationally afford; I’m not saying they did that on purpose, but their nature was to sell to get the highest commissions.

9) Mortgage insurers and financial guarantee insurers — because of the laxness of accounting rules, they were able to offer guarantees significantly in excess of what they could pay in the deepest crisis.

10) Hedge funds, investment banks and their investors — they demanded returns that were higher than what was sustainable.? They entered into businesses that would not survive difficult times.

11) Regulators let themselves be compromised by those following the profit motive.? Many hoped to make money after joining private industry later.

12) America.? We let ourselves become short-term as a culture, encouraging short-term prosperity, regardless of the cost.

13) Neomercantilists — they lent us money, because they wanted they export sectors to grow for political reasons.? This made our interest rates too low, encouraging overinvestment and overconsumption.

14) Average people who voted in Congress, and demanded perpetual prosperity — face it, we elect those that govern us, and there is the tendency in America to love the representative that brings home the pork, while hating Congress as a whole.? Also, we need to bear with recessions, and let them do their work, and not force our government to deal with them.

15) Auditors that did a cursory job auditing financial entities.? As the boom went on, standards got lower.

16) Academics who encouraged a naive view of diversification, and their followers who believe in uncorrelated returns.? In a bad economy, everything is correlated, and your statistics from a good economy don’t matter.

17) Pension and other funds that believed the academics.? It is amazing what institutional investors will fund, given the mistaken idea that correlation coefficients are stable.? Capitalistic economies are unstable by nature!? Why should we expect certain strategies to workallo the time?

18) Governmental entities that happily expanded government programs as the boom went on.? Now they are talking about increased taxes, rather than eliminating programs that are of marginal value to society.? Governments should not rely on increased taxes from capital gains, or real estate tax assessments.

19) Those that twitted “doom-and-gloomers,” and investors who only cared if markets went up.? It is hard to write about what could go wrong in the markets.? Many call you a wet blanket, spoiling their fun, and alleging that you are a short, or some sort of misanthrope.? The system is biased in favor of happy talk.? Just watch CNBC.

20) Me, and others who warned about the current crisis. Perhaps we weren’t clear enough.? Maybe our financial interests made us look like we were talking our books.? I know that I spent a lot of time on these issues, but in the short run, I was still an investor, trying to make money in the markets, hoping that what I feared would not occur.? Now I am getting my just desserts.

This is an incomplete list.? I invite you to add others to the list in your comments.

Rethinking Insurable Interest

Posted on 10 October 200820 June 2017 by David Merkel

Let’s take a short break from “all credit crisis, all the time.”? I want to talk about an issue that troubles us in a number of ways.? The legal doctrine of “insurable interest” [II] is critical to the life insurance industry.? II states that only those with a direct economic or (sometimes) sentimental interest can seek to buy life insurance on another person.? The sentimental interest is limited to close family, and sometimes friends, if approved by the insured.

This protection exists for several reasons:

Insurance exists to reduce risk, not promote gambling.
The tax-favored nature of life insurance relies on the idea that it is helping people who would be harmed by the death of the insured.? Absent that, the IRS will eliminate those favors.
We don’t want to raise the risk of murder by allowing anyone to take out insurance on another person.? Even though murder by the policyholder would invalidate the claim, that can be hard to catch.

Now, those who know me as a life actuary know where I am going next.? I’m going to complain about stranger-owned life insurance, viatical settlements, premium financing and the like.? Good guess; I’ve written about those before.? I’ve turned down job offers in that area for ethical reasons.? You only get one reputation in the business, so you better guard it carefully.

But, that’s not what I am going to write about, much as I think that many of those practices should be outlawed.? I’m going to write about credit default swaps.

Wait.? What do credit default swaps have to do with insurable interest?? Legally, nothing at present.? This article will suggest that there should be a link.

Insurable interest exists to protect the insured, a natural person, against increased risk of death from policyholders seeking to do him harm.? Corporations are corporate persons under the legal code.? Should they not get the same protection?

Credit default swaps pay off when a corporation “dies.”? I know there are additional complexities here, but play along with me for now.? There are parties that get hurt when a corporation dies:

Suppliers
Employees
Sponsored pension funds
Debt/loan holders
Stockholders
And maybe more…

They have an insurable interest in the continued well-being of the corporation.? They should be allowed to issue credit default swaps to the degree that it allows them to hedge their exposure, and no more.? Any excess exposure is gambling, not insurance, and should be forbidden by law.

Yes, like Charlie Munger, I believe that gambling should not be legal on public policy grounds.? Credit default swaps are not insurance as the regulators define today, but they should be regulated as insurance, and only financial guarantee insurers should be allowed to insure it, and those seeking insurance should prove insurable interest, or the contract is null and void.

Now, if you see my logic, forward this article to your Senators and Congressmen.? Let’s change the dynamic that has introduced so much speculation into the bond markets, where there is more credit default swaps than there are bonds available.

At a time like this, when many things are coming unhinged, this is just one more thing to set right, so that we can have a more stable financial system.

A Proposal for Money Market Funds, and More

Posted on 4 October 20085 October 2008 by David Merkel

Unlike many, I have long felt that money market funds possess credit risk.? Does that mean that I don’t own money market funds?? I have a lot of money in money market funds, but I review the holdings of my funds to make sure that there are no “yield hogs” in the funds that might imply unreasonable risk.? I don’t go for the treasury only funds — I am willing to take ordinary high quality risk, so long as the managers aren’t doing anything to weird with structured products, ABCP, etc.

Money market funds break the buck when the market value of the instruments drops below 99.5% of par.? That rarely happens, though in this environment it is a risk, if a fund hasn’t availed itself of the cheap insurance offered by the US Treasury.

The real risk comes when a fund “breaks the buck” and allows withdrawals at par for a time, leading to a “run on the fund.”? My proposal says this: When a fund “breaks the buck,” it announces a credit event.? It tells shareholders that they have lost money, and to protect the interests of all shareholders, all shareholders will suffer a small capital loss.

Whatever the fairly calculated NAV is when a capital loss is announced, the new NAV would be 100.25, and the number of shares reduced to the level that supports that NAV.? If the value of the assets has been accurately calculated, and there are withdrawals, the premium to NAV should rise, not fall, for the remaining shareholders.

No one will like the concept of a credit event in money market funds.? That said, the idea would have many salutary effects on money market funds:

It would eliminate runs on the funds.
It would get people used to the idea that there is some risk in money market funds, though limited.
It would eliminate the need for the government to intervene and insure money market funds.
It would allow some money market funds to take more risk, and offer more return.
The cost would be minimal, most of the time losses would be 1-2%, which would be paid for through interest in less than a year.

Now, my main application was money market funds, but there are two other areas to consider.? Area one: short-term income funds.? Here is my poster child.? Under my proposal, instead of freezing redemptions, units are eliminated for the capital losses to the degree that it is not in the interests of anyone to liquidate assets.? A run on the fund would increase the NAV relative to the price.

Here’s area two: stable value funds.? I’ve written about this before, but stable value funds possess more levers to continue operating, even when the NAV drops below 99.5% of par.? Stable Value funds don’t typically reveal the NAV, and when the NAV is lower than the price, they lower the credited rate relative to the earnings rate in order to bring the two back into balance.

But what if a Stable Value fund is in a deep hole?? What if the credited rate is nearing zero, and investors are fleeing, worsening the problem?? My view is that at some threshold for NAVs the Stable Value funds have to announce a credit event and reduce units.? That value might be 96-97% of par, with a revaluation of units around 101-102% of par.? Even if there is no fleeing, the excess would be amortized into the credited rate over time.

On the negative side, this could lead money market funds, short-term income funds, and stable value funds to be more aggressive.? That said, it would encourage invest to analyze these funds that are not riskless, because they could undergo devaluations.

For those who hold pseudo-cash through money market funds, short-term income funds, or stable value funds, you need to be aware that they are not riskless, and that in their present form they may deliver capital losses, and more so if withdrawals are not limited.? My proposal provides an orderly way for recognizing and dealing with those losses in a way that does not require the government to step in with guarantees.

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Capitalism <> Greed — Capitalism = Service

Posted on 25 September 2008 by David Merkel

I had to take a decent amount of time off this evening to get our harp restringed.? Beautiful instrument, but it requires a lot of maintenance.? While talking with the fellow who travels the East Coast restringing and retensioning/regulating harps, I made the comment, “Capitalism isn’t about greed, it is about service.”? He stopped for a moment, and said (something like), “More people need to hear that.”

Well, I’ll say it now, while Capitalism is at low ebb.? Capitalism at its best is run by idealists who have great ideas about how to make the world a better place by offering more and better choices to individuals.? They love their work, and are passionate about what they do.? They are lifelong learners, trying to better themselves and what they offer others.

The value proposition is simple: Capitalism offers more than you previously could have done with your resources.? For those willing to make the effort and run their own businesses, the principle can shine.? Serve others well.? There is no shame in service, as the Protestant Reformation taught, rather, it is the normal life for all people — we must do our duty in all of life, whether because of non-negotiable ties (Family, Church, State), or negotiable ties (Business Agreements).

Capitalism maximizes choice for those that study hard and work hard.? By meeting the needs of others, there is a reward.? The more people you help, and the greater the help offered, the better you can do.

Capitalism derives its moral legitimacy from service.? The idea that greed makes Capitalism legitimate should be discarded.? Greed is evil; it places personal well-being ahead of ethics.? Service places other people in front of our own interests, and promotes harmony.

I’ve been in the financial world for 22 years — I’ve seen real service.? I’ve seen greed.? I’ve seen managements that motivate to excellence, and those that cheat the customer (and employees — the two phenomena are correlated).? I have also succeeded in serving customers, and sadly, failed them (less often, thankfully).

It does not change my conclusion: Capitalism has moral legitimacy because it causes businessmen to deliver high-quality service to customers, not because it is the best way of channeling the energy of greedy men.

Our Manic Markets

Posted on 23 September 200823 September 2008 by David Merkel

The markets are manic.? It is rare that we have so many large moves in a short time.? Consider these graphs:

Gold is rising since the bailout announcement.

So are crude oil prices.

And the US Dollar falls.

Swap spreads rise.

And mortgage rates rise also.

Forces larger than the US government are acting on the world economy, leading to a partial repudiation of the US Dollar by some foreign entities.? This leads to higher implied volatility in the equity markets, and higher credit and swap spreads.? Commodity prices rise also. Would you want to own the securities of a country that overpromised what it would deliver in terms of debt repayment?

I think not, and the present economic environment is decidedly hostile to fixed US Dollar denominated assets.? Play in the US dollar with care… the short trade has much to commend it in the intermediate term, though the short term is cloudy.? Also, be careful on the long end of the US fixed income market… it could deliver some significant negative surprises.

We Need Oversight, and Compensation to the Taxpayers

Posted on 23 September 2008 by David Merkel

Here are the issues as I see them in the bailout:

The Treasury can’t do it as if they are autocrats.? The powers of the other branches of our government should not be curtailed here.? The Treasury should submit to oversight from Congress and be subject to the Judiciary.? Fortunately, it seems like that is happening.
Second, if you are going to bail out firms that are still alive, you must ask them for equity stakes that are somewhat punitive.? The Dodd bill does that, and though there are areas where I might disagree, it is a lot fairer to the American taxpayer than the original Treasury proposal.? Bailouts should always be painful, making the rescue a last resort.? (Note, in the Dodd plan, the key weakness is that the finances of the firm selling distressed assets to the government might will likely see its stock price weaken after the purchase, leaving not enough protection by the time of sale.? But it is better than the Treasury proposal.)
Third, the bailout still needs a way to deal with insolvent institutions.? The Resolution Trust Corporation was a way to deal with those problems.? It’s possible that a new entity could absorb the assets of failed financial institutions, but given the nature of regulated companies, deciding on the proper transfer price is difficult.

We are on slippery ground here, and I’m not sure that the market would react badly if no plan were put in place.? A bad plan is worse than no plan, and I believe the market fell on Monday because the original Treasury plan was horrid.? If something like Dodd’s plan were enacted, I think the market would rally, even with its deficiencies.? We need oversight, and compensation to the taxpayers.

To all my readers, I still say, contact your Congressmen and Senators, and tell them to stand up to the Treasury, and demand compensation for any bailout, and if no compensation, we only bail out insolvent firms.? Bailouts must hurt.

PS — For an entertaining view of one possible future as we socialize the financial system, read this piece from the ever-wise Caroline Baum.

Oppose The Treasury’s Bailout Plan

Posted on 20 September 200820 September 2008 by David Merkel

This is not a political blog.? I have political views, but I try to keep them out of my writing here, because they aren’t relevant to my readers.? This is a rare point where the two worlds collide, and I have to take a political stand.

Let me state this plainly at the beginning of my piece, so that you know where I am going: I am asking all of my readers, and all of the financial bloggers that read me (whether here or at Seeking Alpha) to call their Congressmen, and ask them to oppose the Bailout Plan as currently structured.? I am also asking the financial bloggers to ask their readers to do the same thing. I don’t do things like this often, so understand that I think that this bailout plan is very ill-conceived.? I also think that opposing the bailout should appeal to all, regardless of party affiliation.

Okay, now let me explain why, and propose an alternative.? Some links to begin:

Here is the proposed bill
Here is a summary of the main points of the bill
Here is a relatively neutral article from the Wall Street Journal on the issue.
And another from Marketwatch
Finally, a blog post from Paul Krugman, opposing the bill. (If Paul Krugman and I agree on something, there is something weird going on.)

As I stated in my last blog post:“The possibility of a new RTC could be a good or a bad idea.? The main criterion is whether it is proactive or reactive.? My answer my surprise many: reactive is good, proactive is bad.

What we don?t want to do is provide a place for companies to dump lousy assets at inflated prices.? Instead, a new RTC should be a last resort place that the assets of failed companies go to until they are disposed of.? Common and preferred equity should be wiped out, and bondholders should take haircuts.? New loans should be senior to all old loans, similar to the situation with AIG.

Anyone going to the new RTC should feel pain, and a lot of it.? It should be the last resort for companies that are failing.? It should not try to keep companies alive, but merely conserve the value of assets, and prevent contagion.? Remember, if the risk is not systemic, the government should not try to bail it out.”

The current proposal is proactive.? Proactive solutions are expensive, and do not fairly distribute the losses to those who caused them through their shoddy lending practices.? The owners of bad assets should risk their equity before taxpayers put up one red cent.? The government should not try to prevent financial failure, but prevent financial failure from spreading as a contagion.? Common and preferred stockholders of failed institutions should be wiped out.? Subordinated debtholders should take a haircut.? But depositors and senior debtholders should be guaranteed, in order to protect other financial institutions that invest in those instruments, thus avoiding contagion effects.

Second, the proposed bill is vague, and offers the Treasury a “blank check” to do pretty much what it wants.? Section 8 states: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Who are we kidding here?? I don’t care how great the emergency may be, the other branches of government should be able to act as needed.

Third, there is nothing to assure that fair market value will be paid for assets.? If an investment manager is hired, who could tell if he plays favorites or not?? Clever investment firms will take advantage of the government and its agents, and only sell overpriced assets to the government.

Fourth, there is no easily identifiable upside for taxpayers here.? If we bail out a firm, it should be painful, as it was for the GSEs and AIG, where most of the equity gets handed over to the government in exchange for a senior loan guarantee.

Fifth, though the name of the Resolution Trust Corporation has been invoked here, this is nothing like the RTC.? The RTC only dealt with insolvent S&Ls.? It did not try to keep existing S&Ls afloat.

This proposal is an expensive boondoggle and should be opposed by all.? As one bit of evidence here, how many noticed that mortgage rates went up on the day the deal was announced?? Here is a graph for Fannie 30-year fixed-rate mortgages:

The announcement of a bailout may have caused mortgage credit spreads to shrink, but it caused Treasury yields to rise even more. The announcement was not a positive for the mortgage market, and my guess is that it will get worse from here.

My Solution

Bring back the Resolution Trust Corporation, for real.? Don’t do deals with solvent institutions.? Let them figure out how to best maximize their financial positions on their own; after all, it was their great decisionmaking skills that got them into this.

But do do deals with insolvent companies.? Take in their illiquid assets, reposition them, and auction them off once they are more saleable.? To the extent that we bail out whole firms, make it so costly to the firms that it is clearly a last resort, as with Fannie, Freddie, and AIG.

I am willing to testify before Congress on this issue, not that I think that will happen.? If anyone from Congress happens to read this and wants me to testify, please contact me here.

Finally, to any readers or financial bloggers that take me up on my request, I offer you a hearty thanks. 🙂

Government Policy Created Too Hastily

Posted on 19 September 2008 by David Merkel

I have been no fan of naked short selling; I have long argued that the brokers must locate shares before a short sale can be done.? Anything less than that is fraud.? But I do not support eliminating shorting, even though I almost never do it.? What would be the effects of eliminating shorting?

No more merger arbitrage funds.
No more statistical arbitrage funds.
Wait, no more arbitrage?
130/30 funds go away.
Other quant funds go away.
Barbarian hedge funds that do real research go away.
Put option implied volatility goes way up.? (A lot depends on whether specialists/market-makers can still short…)
Because of put-call parity, call implied volatility goes up as well.
Players move to credit default swaps, oh wait, might those get banned as well?
Those relying on securities lending income lose out.

Eliminating shorting is stupid.? Enforcing getting a locate is smart.

Now for something that could be smart or dumb, depending on how it is done.? The possibility of a new RTC could be a good or a bad idea.? The main criterion is whether it is proactive or reactive.? My answer my surprise many: reactive is good, proactive is bad.

What we don’t want to do is provide a place for companies to dump lousy assets at inflated prices.? Instead, a new RTC should be a last resort place that the assets of failed companies go to until they are disposed of.? Common and preferred equity should be wiped out, and bondholders should take haircuts.? New loans should be senior to all old loans, similar to the situation with AIG.

Advertising, Blogrolls and Linkfests

Posted on 5 September 2008 by David Merkel

As my blog has gotten more popular, I have gotten a lot of interesting “business” propositions.

“Join our ad network.”

I am still considering a few of them, but most rake off too much to the network.

“Let us republish your content at our site.”

Sorry, no.? Aside from Seeking Alpha, no one else is allowed to regularly republish my material.? Fair use is fine, but I regularly check to see if my content is being misused.? If you are swiping it, you better put it in a place where Google can’t reach it.

Anyone taking the headers of my articles and publishing text links is fine.? Good examples of that would be newsflashr, Realclearmarkets, and a new one, tradememe.? Their objectives are consistent with mine.? I want to drive traffic flow to where good content is located for the good of my readers.

“Would you exchange links with me?”

Generally, no.? I only link to people and articles with which I am impressed.? I am not out to sell my credibility.

“I loved your article on XXX.? Please write more articles like that and link to my site.? I will pay you well.”

Sorry, no.? If you want to advertise here, buy a Blogad.? That is clearly labeled as advertising, and I am not out to bamboozle my readers with ads disguised as my thoughts.? My Blogads aren’t expensive.

“Would you link up with our site?? We are trying to promote investor education, and we could use your content.”

Most of these are not trying to promote investor education, but to maximize their fees over the long haul.

As a rule, I have tried to segregate advertising to places where it is clearly distinguishable as advertising.? I am not out to trick readers or advertisers.

“I’ll place you on my blogroll if you place me on your blogroll.”

I don’t do that, either.? My blogroll is something special for me.? It is the group of blogs that I read anytime they post.? Aside from when I started up, I haven’t asked anyone to put me on their blogroll.

My blogroll is meritocratic.? If anyone wants me to consider them for my blogroll, fine, e-mail me.? I’ll read you for a little while.? If I find you indispensible, I will add you to my blogroll.? I always have a few bloggers that I have added to my RSS reader that I am trying out before I add them to my blogroll.? If I don’t place a blogger on my blogroll, it doesn’t mean that they aren’t good.? It does mean that they aren’t consistently useful to me.? (There are a few on my blogroll that are there for personal reasons.? But only a few.)

On Linkfests

I like linkfests.? I think they can be useful. ? In my opinion, the best linkfests are:

Regular
Focused mainly on financial topics
Not pushing a political view
Of moderate length, but comprehensive (difficult balance)
Wise — They have a real sense of quality.

About a year ago, a friend of mine who is a really good credit analyst for financials asked me,

Friend: “If I were to read just one blog per day, what should it be?”

DM: Abnormal Returns.? He samples the finance blogs, and gives one concise daily post on the best of what was written.

F: Not your blog?

DM: Look, my quality varies, and what I write about is quirky.? I don’t have a narrow focus, like most blogs.? Half of what I write won’t appeal to half of my audience, and it is a different half each time.? Plus, I can’t cover everything.? I would go nuts.

Second place, but not a close second, would go to FT Alphaville.? Beyond that there is Naked Capitalism, occasional links at Alea, and a number of others, but if I had to pick just one, it would be Abnormal Returns.

Why don’t I do linkfests?? Well, I do them in my own way.? I try to write articles focused on a single topic, and then link to relevant content on the web.? It’s more work, but I think it produces a better product than those that make a few small comments and do big blockquotes.? I’m not out to overuse the content of others at my blog.? I might copy a couple graphs or paragraphs with attribution, but to paste whole articles into one’s blog violates “fair use” in my opinion.

One last bit of blog housekeeping.? I appreciate all of the feedback that I get, so feel free to e-mail me.? I read all of my e-mails, but I can’t respond to all of them.? Thanks for reading me.