Felix Salmon

The Dangers of Listening to David Swensen

Dan Golden profiles David Swensen for Portfolio magazine:

On the other hand, Swensen points out, he’s still beating the stock market, which has slid by an even greater amount. When critics deride the performance of alternative investments, “they aren’t asking, ‘Relative to what?’ Hedge fund returns are negative. That’s very disappointing, but they’re still far superior to equity returns,” he insists, spinning the numbers like a campaign manager.

Taxing the $5 Million-a-Year Brigade

David Leonhardt wants to hike taxes on the very highest earners:

Today’s tax code makes no distinction between income above $373,000 and income above, say, $5 million. Both are taxed at 35 percent.
That is a legacy of the tax changes of the early 1990s, when far less of the nation’s income went to millionaires. Today, you can make a good argument for a new, higher tax bracket on the very largest incomes. In the past, the economist Thomas Piketty says, higher marginal tax rates tended to hold down salaries and bonuses, because executives had less incentive to angle for multimillion-dollar pay.
Do these ideas stem in part from anger and bitterness? Of course they do. How can you not be a little angry and bitter about the role that huge, unjustified pay played in causing the worst recession in a generation?
In fact, that’s sort of the point. Given the damage that’s been caused by our decidedly unmeritocratic system of paying executives, the most irrational course of all would be the status quo.

Kanjorski Meme Update

The Investment Company Institute, the mutual-fund industry group, today released a massive 228-page report on what has happened to the money markets over the course of this crisis and how they should change in future. There are lots of recommendations, most of which make perfect sense to me. But I’m particularly interested in Section 6 of the report, which gives a very detailed 22-page history of what exactly happened to the money-market industry in September 2008.

Sorkin Smackdown Watch, Anna Gelpern Edition

Andrew Ross Sorkin used his column yesterday to push "the sanctity of contracts" in general — and of AIG guaranteed-bonus contracts in particular. Lawyers, in general, were not impressed. John Carney responded quickly:

Extra Credit, Tuesday Edition

Should Yuppies Take Food Stamps?

Andrew Ross Sorkin: We Have To Pay The AIG Bonuses: Carney disagrees.

Betting your views, follow-up: The main reason not to bet your views, I think, is that in doing so you artificially exaggerate the overconfidence bias that all of us are already prone to.

AIG Non-Story of the Day, Hedge Fund Edition

Serena Ng has the non-story of the day, but given the general brouhaha surrounding AIG, you can be sure that all manner of noise will surround it. AIG was a net seller of credit protection on mortgages; it lost a lot of money. Credit default swaps are a zero-sum game, so that means the net buyers of credit protection on mortgages made a lot of money. Among those buyers of credit protection were hedge fund mangers like Steve Eisman, who was famously profiled by Michael Lewis.

IM Outtake of the Day, CDS Edition

From an IM conversation between me and Jesse Eisinger, in the wake of my post earlier today:

Caribbean Leverage Datapoint of the Day

Alea finds a speech from the governor of the Trinidadian central bank, which reveals that the country’s largest financial-services company, Clico, had assets of $24 billion but that local regulators required it hold just $3 million in capital. "This is what I call real leverage," notes Alea, drily: "8000/1".

The Bonus Surtax

Chuck Schumer wants to tax "virtually all" of the bonuses being paid to AIG employees. The surtax being proposed by Gary Peters is 60%; presumably that comes on top of the regular federal income tax. But why stop there? If you set the surtax at, say, 150% of all bonus payments, then that would pretty much guarantee that the recipients would decline to receive them. Seems like an elegant solution to me.