Felix Salmon

Extra Credit, Tuesday Edition

Felix Salmon
Apr 1, 2009 00:25 UTC

Usury: It’s a bad idea to give banks an incentive to drown individuals in debt.

The injustice of pricing tea in dollars: Always good to see the denomination fallacy applied to something other than oil.

Pension insurer shifted to stocks: At the top of the market. More billions of dollars of losses for the government.

H-1B Visa Window Opens Amid Recession: The quota will still run out in a matter of days, starting tomorrow.


“Pension insurer shifted to stocks: At the top of the market. More billions of dollars of losses for the government.”

Didn’t expect you to believe this silly meme; for extensive debunking read Tom Maguire here:
http://justoneminute.typepad.com/main/20 09/03/prof-krugman-meet-prof-krueger.htm l
Or read Justin Fox here:
http://curiouscapitalist.blogs.time.com/ 2009/03/31/the-pension-benefit-guaranty- scandal-that-isnt-at-least-not-yet

Or go to primary docs (cited by Maguire) and read PGBC head Mr. Millard’s testimony to Congress on Oct 24 2008:
http://frwebgate.access.gpo.gov/cgi-bin/ getdoc.cgi?dbname=110_house_hearings&doc id=f:45030.pdf
page 118-119:
“Mr. MILLARD. No. The investment performance for fiscal year
2008, which concluded September 30th, and these are, again, I
want to emphasize unaudited numbers, is based principally on the
prior policy. We have made very small changes so far in
transitioning into the new policy because as we went into manager
selection and as we talked to transition managers and we saw
what was happening in the fixed-income markets, we saw things
like the liquidity crisis, et cetera; it made sense to not only have
a long-term strategy, we are not market timers, we are not trying
to be a market timer, have a long-term strategy that is designed
to pay our bills over time without having to turn to Congress for
a multibillion dollar bailout, and at the same time as we transition,
to do so in a deliberate and measured way.
Mr. COURTNEY. Then your testimony is then that this loss was
not the result of any new policy?
Mr. MILLARD. Correct. The decline in our portfolio, the portfolio
was approximately 70 percent [corrected to 30%] equities in September a year ago,
and other than the fact that equities have dropped, we have not
changed our allocation yet. We have interviewed managers. We
have prepared to make transition, but we haven’t moved anything
yet. We will do so very, very deliberatively.”

Posted by Bob Montgomery | Report as abusive

H1-Bs in the Firing Line

Felix Salmon
Mar 31, 2009 19:21 UTC

As the annual scramble for H1-B visas kicks tomorrow, an interesting wrinkle has appeared in the usual proceedings. Here’s an email sent to foreign employees by Wells Fargo:

“Due to the fact that we have and will be displacing numerous U.S. citizens in your same positions Wells Fargo has decided to enforce a policy that prohibits lines of businesses to file visa sponsorships for foreign nationals that would hold positions that could otherwise be held by qualified U.S. citizens.”
“As a recipient of these funds we feel as a company we could not justify to our political officials the need to provide sponsorship,” the email added.

The rule that H1-B visas can only be issued for jobs where no US qualified citizen can be found to perform the role is a rule which is honored almost entirely in the breach. Everybody pays lip-service to it, and there’s quite a trade in job advertisements for positions which have already been filled by a foreigner but which need to be advertised all the same so that the necessary visa can be obtained.

Still, it does make perfect sense that Wells Fargo is disinclined to perpetuate such deceptions in the wake of receiving $25 billion of TARP funds. If you’ve just fired a bunch of US citizens doing the same job, it’s not very easy to claim with a straight face that no US citizens can be found to do it. And so when an employee’s H1-B visa expires after three years, the normally-automatic renewal process has now turned into something much more drastic for foreign Wells employees.

Those employees will now automatically be out of status as soon as their present visas expire, and will very likely have to leave the country. Now remember that these are skilled and valuable employees who have deliberately been kept on by Wells in the face of layoffs, precisely because they presumably contribute in important ways to the bank. But never mind all that — there’s no way that Wells Fargo is going to be caught in yet another media gotcha moment.

Interestingly, Goldman Sachs remains defiant:

Goldman Sachs, another TARP recipient, is renewing existing H-1B visas and continues to offer jobs to foreign workers who need new temporary visas to join the investment bank.
“We will make offers to the best people regardless of where they live,” said Ed Canaday, a Goldman spokesman.

Good for them. But taking that position takes some cojones, in the present environment.

When Scots-Educated Econobloggers Debate

Felix Salmon
Mar 31, 2009 19:03 UTC

Allison Schrager of the Economist (who went to Edinburgh), Simon Constable of Dow Jones (St Andrews), and I (Glasgow) appeared on a panel at the British Consulate in New York Thursday, moderated by Nick Wapshott. My back-and-forth with Constable over natural sellers of CDS didn’t make the final edit, but here’s the stuff which did:

Equity-Eschatology Correlation of the Day

Felix Salmon
Mar 31, 2009 19:00 UTC

If you think the world is about to come to an end, you’re not likely to be particularly worried about saving money — in fact, you will probably be quite keen to spend it while you can. Even on houses:

Mr. Crowe investigated how changes in the index matched up with home prices and found that up to 90 percent of the difference in price changes between evangelical and non-evangelical areas could be correlated with the Rapture index.

Zubin Jelveh gets the credit for the find; it’s great to see him back in the blogosphere. The same research finds that house prices in predominantly-evangelical areas tend to be less volatile, because “unchecked greed and speculative frenzy are seen as undesirable in the evangelical community”, and because, as the abstract puts it, evangelicals “interpret otherwise negative events as containing positive news, dampening the response of house prices to shocks”.
By these lights, evangelicals should also be more disposed towards interest-only mortgages: there’s no point in paying down principal if you’re going to be Raptured in the near future.

Ecuador Gold Reserves Datapoint of the Day

Felix Salmon
Mar 31, 2009 17:18 UTC


Matthew Turner points me to this rather interesting datapoint from the IMF’s International Financial Statistics for Ecuador. The country’s has had 845,000 ounces of gold for as far back as the statistics go — until January 2009, when they jumped to 1.76 million ounces, and then February 2009, when they rose further to 1.93 million ounces. That’s an increase of 1.085 million ounces (or about 37 tons of gold) in the space of two months — which at present prices is worth almost exactly $1 billion.

Curiously, the national valuation of the gold reserves hasn’t risen much — from $734.7 million in December to just $804.2 million in February. Which implies that the huge jump in gold reserves might just be some kind of data-input error. But on the other hand, it coincides exactly with Ecuador’s decision to default on its foreign debt. Might the Ecuadorean central bank be trying to convert attachable assets into something it can safely store at home? And if the country’s gold reserves have soared this year, why hasn’t Ecuador’s valuation of those reserves increased proportionally? It’s all most peculiar.

Update: The IMF says that indeed this is “a simple data mistake that is being corrected”.


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GM’s Whining Bondholders

Felix Salmon
Mar 31, 2009 14:35 UTC

Andrew Ross Sorkin takes aim at GM’s bondholders today:

Not three hours after the president spoke on Monday I received an e-mail message from a group representing G.M. bondholders — people who are likely to have an enormous influence over the future of the Detroit carmakers…
By the end of the e-mail message, they were complaining that they were “very disappointed that the government and company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan.
The e-mail message came from the same group that two weeks ago grumbled that “G.M. bondholders have been asked to make deeper cuts than other stakeholders,” and threatened to send G.M. into bankruptcy…
I called Gabe Roth, the spokesman listed at the bottom of the message, and asked if I could speak with some of the bondholders the committee represents. The answer: “No. We’re not making them available.”
I followed up by asking which investors were members of this ad hoc committee. “We’re not making that public,” Mr. Roth said.
I reminded Mr. Roth that government money was at stake, and that we taxpayers might end up bailing out the bondholders. Doesn’t the public have a right to know whom they are negotiating with — or against? He demurred.

Sorkin does mention that Pimco is one of GM’s largest bondholders; what he doesn’t mention is that as recently as January, the head of Pimco, Bill Gross, was saying this, as he unilaterally withdrew from the GM negotiating committee:

“We have the interests of our clients more at heart than the interests of particular corporations or even the government, I guess, so it’s best that we simply look at the situation from afar as opposed to from inside.”

When Pimco’s GM’s largest bondholders behave like that, is it any surprise that they haven’t had much in the way of “real dialogue” over the restructuring plan? After all, it’s not as though their demands would come as any surprise: they want more money. And if they want to, they can force GM into bankruptcy — which is a pretty likely outcome in any event. But so long as they’re moaning from behind a cloak of anonymity, there’s really no reason to give them any sympathy at all — they’re asking for a government bailout just as much as GM’s management is, but they have a much weaker case for getting one.


Like the font :)

The next step is to deal with th bondholder of the the big banks and AIG the same way.

Posted by Mike Guidry | Report as abusive

Another Reason for Banks to be Small

Felix Salmon
Mar 31, 2009 16:35 UTC

Mike at Rortybomb finds some empirical research on what happens to loan rates when banks get bigger and more consolidated. The results make intuitive sense: as competition falls, loan rates go up. The exception is loans which can be securitized, like auto loans: those rates can fall as economies of scale improve.

The lesson here is that we should keep banks small, while encouraging securitization — which of course itself helps in reducing the size of banks’ balance sheets. Bank competition is good for consumers; big banks are bad for consumers. It’s worth remembering that, as we construct a new regulatory regime.


I think we don’t want too much of either one if we’re late on a payment or bounce a check. First I think we should stop this rediculous nonsense of a ten dollar payment one day late has a $35 dollar fee added on. Or a check for even a dollar can be bounced ten times at a total of $350 dollars. Also they entice your credit accounts there with free interest hoping you will mess up and they can up it to 20%. Got them once at their own game here. It didn’t say charge cards. I put my house on it for a year then scheduled auto-pay. I could never get away with this at my local bank. On second thought let’s keep both.

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Extra Credit, Monday Edition

Felix Salmon
Mar 31, 2009 05:49 UTC

Why size matters: Steve Waldman is a fan of banks getting smaller.

In Market Cap, Google Now Bigger Than GE

The Taiwanese war against tax evasion: Clever.

The Government Crackdown on Peer-to-Peer Lending: I think it should be regulated by someone. If not the SEC, then who?

Whither This Year’s MBAs?

Felix Salmon
Mar 31, 2009 03:36 UTC

One thing drilled into every MBA student is that sunk costs are irrelevant, while opportunity costs are paramount. Which is a lesson this year’s graduating class will put to good use. Let’s say that in any given year, there’s a graduating MBA who has the choice between creating a green-energy start-up, on the one hand, or joining Goldman Sachs, on the other. Normally, the start-up loses, because the opportunity cost of going that route — all that foregone Goldman remuneration — is enormous: it probably has a present value of a good $10 million.

Today, however, the opportunity cost of starting your own company is tiny: if no one on Wall Street is hiring, then you literally have nothing to lose. To be sure, it’s not pleasant trying to make your way in the world with no steady paycheck and hundreds of thousands of dollars of student-loan liabilities. But those loans are sunk costs: there’s nothing you can do about them, and so there’s no point stressing about them overmuch. The art of any career decision is to make the best possible choice given the decision set available, rather than to kvetch about not having graduated a few years earlier, when MBAs were hot commodities.

Paul Oyer puts it another way:

There is a deep pool of potential investment bankers in any given Stanford MBA class. During the time these people are in school, factors beyond their control sort them into or out of banking upon graduation.

Never has this been truer than today: I’d wager that in any given MBA class, a very high proportion took the class with the intention of going into banking, and a much tinier proportion will actually do so.

The ones who don’t go into banking might be upset about their bad fortune, but I’m not sure they should be: there’s a case to be made that they actually dodged a bullet here. Given the choice, what would you rather be: a freshly-minted MBA with thousand of possible career paths ahead of you, or an MBA of vintage 2004 who got snapped up by a subprime mortgage origination desk and who now has an all-but-unemployable skillset?

For those of us who aren’t and never were in business school, however, the big question is what this all means for the economy. Will the best and the brightest now enter the real world, as opposed to the bizarre parallel reality of Wall Street, and put their skills to good and productive use? Or, conversely, will a cohort of finance MBAs infect the real world with their outdated and dangerous ideas about modern portfolio theory and whatnot, causing formerly well-run companies to follow the trajectory of Lehman Brothers or AIG?

To put it another way: what did this year’s MBAs really learn during their course? Was it much the same thing as their predecessors, or did the magnitude and severity of the financial and economic crash teach them a few home truths which will come in useful going forwards? I fear that the answer is largely the former: it’s hard enough just keeping up with your coursework, without trying hard at the same time to unlearn a large part of the compulsory curriculum. And certainly anybody I’ve ever talked to who’s taught a classroom full of would-be quants has told me that they tend to concentrate on formulas and algorithms to the point at which they can’t even perform a basic smell test on results, let alone look at those algorithms critically and decide to discard them.

But the optimist in me says that if there isn’t any demand for financial whizzbangery any more, then maybe the supply of it will wither quite quickly. And that today’s MBAs might yet add more value than you might think.