Slate Money – The Hogmanay Edition

Date: January 2, 2016
Host: Felix Salmon
Guests: Kathy O’Neill, Jordan Weissmann
Producer: Zach Dynastine

Episode Overview

This “Hogmanay Edition” of Slate Money kicks off 2016 with Felix Salmon, Kathy O’Neill, and Jordan Weissmann exploring the business and financial stories that surfaced during a notably slow news week. The panel discusses the economics of New Year’s Eve parties in Times Square, the intricacies and pitfalls of financial derivatives, and damning investigative reporting on Warren Buffett's predatory lending in the manufactured homes business. The usual light banter and sharp critical analysis are in full swing as the team looks back, looks forward, and, as always, brings biting humor to complicated topics.

Key Discussion Points and Insights

1. New Year's Eve and Times Square Pricing Outrage

(Starts at 04:05)

• Topic: Outrage over expensive tickets (up to $1,700) for New Year's Eve at Times Square chain restaurants, notably Olive Garden and Bubba Gump Shrimp.

• Context: Media, especially the New York Post, spotlighted these rates, though this has been an annual occurrence, not breaking news.

• Economic Rationale:

  • Felix highlights consumer logic:

    “Given the choice between spending New Year's Eve in Times Square with a million other people with nothing to eat, drink ... and spending 400 bucks to have a chair and a toilet and an open bar ... it would take me a fraction of a second to sign up.” (06:22)

  • Jordan points out pricing inefficiencies:

    "When you see something selling out, that's usually a sign that's underpriced." (09:42)

  • Lottery vs. auction: Bubba Gump sells tickets via lottery due to excess demand, which led Jordan to suggest they could capture more value by auctioning tickets to the highest bidders.

• Sociocultural Observation:

  • Kathy muses on the commercial (never public) nature of the Times Square celebration, using a fun historical tidbit:

    “It's actually a completely consistent arc ... about commercialism, about selling ridiculous food.” (08:50)

• Memorable Quote:

  “If chickens were treated like this, that would be considered, like, inhumane, and no one would want to eat them.” – Felix Salmon, on being penned in during Times Square celebrations (11:25)

2. Derivatives & The Illusion of Financial Control

(Starts at 13:11)

• Kathy’s Explainer:
  Kathy O’Neill demystifies options and the Black-Scholes formula—a central tool in pricing financial derivatives.

  • Options Primer: An option gives holders the right to sell (or buy) an asset at a certain price; the Black-Scholes model provided a standardized way to price these contracts.
  • Limits of the Formula:
    • Black-Scholes relies on faulty assumptions (e.g., constant volatility, continuous markets).
    • Felix notes:

      “Basically, the Black-Scholes formula gave people a scientific benchmark ... but it didn't actually change the pricing at all.” (16:34)

  • Enter the Human Factor: People placed too much trust in mathematical models, resulting in false confidence and potentially disastrous risk-taking.

• Real-World Case: Mexico’s Oil Hedge

  • Discussion of Bob Henderson’s multi-billion dollar derivatives deal hedging Mexico’s Maya crude oil.
  • Kathy recounts:

    “He ended up having to sell and sell and sell fuel oil at a huge loss ... he was the one huge seller in the market. And he was driving the price down just by dint of selling all of this.” (20:03)

  • Felix highlights the break from mathematical hedging to outright speculation:

    “He more or less gave up on that and just [placed] a prop bet on the oil market and made a fortune.” (22:39)

  • Critical Takeaway: Models fail especially when "stress testing" is based on previous crises—leaving out the unprecedented.

• Lesson:

  “People tend to think they have more ability to influence what are actually random events than they really do.” – Jordan Weissmann (23:36)

3. Predatory Lending and Warren Buffett’s Mobile Home Empire

(Starts at 29:46)

• Investigative Reporting:

  • BuzzFeed and Seattle Times expose on predatory lending to minorities by Clayton Homes (a Berkshire Hathaway subsidiary).
  • Focus on “reverse redlining”: targeting minorities with worse mortgage terms.

    “Vanderbilt typically charged black people who made over $75,000 a year slightly more than white people who make only $35,000.” – Kathy O’Neill (32:50)

  • Lending practices included:
    • Pushing in-house lender Vanderbilt, sometimes telling buyers there were “no other lenders”
    • Targeted non-English-speaking buyers with English-only legal documents
    • Retaining profitability even on defaulted loans because repossessed mobile homes could be resold.

• Ethical and Regulatory Concerns:

  • Structural racism leads to minorities facing higher effective rates due to worse credit scores/less wealth—not just income.
  • Felix and Jordan debate culpability: while lending discrimination often aligns with credit risk, aggressive and misleading targeting magnifies harm.
  • Regulatory gaps explored: Even with data on these practices, little government action had occurred before news exposés.
  • Felix’s litmus test for predatory lending:

    “Do you make money on this loan even when it defaults? And if the answer is, yeah ... that's very likely to be a predatory loan.” (36:41)

• Wider Issues:

  • Parallels drawn between mobile home finance and exploitative for-profit colleges (“American dream” is sold, not delivered).
  • Critique of mobile home ownership as a depreciating asset, often leaving borrowers worse off than if they rented.

• When Will This Reflect Poorly on Buffett?

  • Discussion about potential legal action and whether Buffett's “Teflon” reputation will weather the revelations.

  “Is there—do you think he's untouchable? ... He's such folksy charm that it’s just never going to start to erode his reputation?” – Jordan Weissmann (42:10)

Notable Quotes & Memorable Moments

• On the Ball Drop Experience:

  “Given the choice ... it would take me a fraction of a second to, you know, sign up for Olive Garden or anywhere where there was ... somewhere to sit down and booze.” – Felix Salmon (06:22)

• On Financial Mathematics:

  “People believed in the Black-Scholes formula, like it was a dictum from a God, which is a bad thing, because ... it was wrong.” – Kathy O’Neill (17:19)

• On Predatory Lending:

  “You give the person the mobile home, they live in it for a month or two, they default, they don’t make any payments, you just tow it away and then you sell it to someone else.” – Felix Salmon (36:54)

Timestamps for Segment Transitions

• 04:05 – Outrage over Times Square NYE prices
• 13:11 – Derivatives, Black-Scholes model, Mexico oil hedge story
• 29:46 – Investigation: Buffett, Clayton Homes, and predatory lending
• 44:05 – Brief sponsor mention (skipped for summary)
• 46:10 – Numbers Round: Football weekends, Fed rate predictions, Apple’s buybacks

The Numbers Round

(45:54–51:44)

• (46:10) Kathy: 511 – Estimated annual additional rapes on college football weekends, reflecting troubling social costs of campus party culture.
• (48:01) Jordan: Predicts the Federal Reserve’s short-term interest rate won’t rise above 1% in 2016, due to ongoing global economic weakness and falling oil.
• (49:12) Felix: $247 billion – The amount Apple has returned to shareholders in the past three years via buybacks and dividends.

Closing Banter

The episode concludes with lighthearted ribbing among hosts about New Year’s resolutions, podcast interruptions, and Slate’s impending move to Brooklyn. There’s even a meta moment on audience complaints about Felix’s tendency to interrupt—handled with characteristic irony.

Tone and Style

• Tone: Witty, irreverent, but serious about the topics; a blend of academic rigor and conversational accessibility.
• Style Highlights:
  • Pop culture references (Forrest Gump, Flavortown)
  • Nerdy humor and self-deprecation
  • Real-world anecdotes grounding financial theory

Final Takeaways

Slate Money’s “Hogmanay Edition” offers a sharply observed, plainspoken, and often humorous take on the intersection of business, finance, and public policy. From the price of a seat at Bubba Gump to multi-billion-dollar derivatives gone awry and Warren Buffett’s empire’s darker corners, the conversation consistently connects the abstract to the everyday, making economic stories vital and relatable.