Felix Salmon

Justin Fox has an interesting breakdown of global stimulus packages by country: the US, China, and Spain have big ones, while the rest of the world just doesn’t seem to be trying so hard. He writes:

The concern is that if we in the U.S. do lots of stimulating and other economies don’t, much of the money will just leak out overseas as we spend on imports but others don’t buy our exports.

He’s right, and no amount of "buy American" provisions in the bill will prevent money from leaking overseas in a globalized economy. Liquidity, you might say, always finds its level. At the margin, it does seem that countries such as the UK are freeloading on the US bailout — both in terms of the stimulus package and in terms of the bank bailout.

Here in London, the streets are still vibrant and the restaurants still full: there’s lots of talk of massive pain, and the stock market is down a whopping 64% or so from its highs, in dollar terms. But somehow none of this is obvious, at least to my eyes: the main thing I’m feeling here is just relief that finally I can afford to visit my home country again, after being priced out for years when the pound was worth about $2: it’s now $1.40.

At those levels, Brits aren’t going to be buying much in the way of US exports with or without a stimulus package. On the other hand, it’s worth noting that the main British export of late has been financial services, and there’s not a huge amount of demand for that Stateside at any exchange rate. But maybe Britain can start working on its tourist trade: I can highly recommend Wheelers Oyster Bar in Whitstable if you want to eat some astonishingly wonderful seafood at a quintessentially English seaside town. Make sure to reserve in advance: it fills up quickly, and the pound is weak!

Reprinted from Portfolio.com

The government’s plans for bailing out the financial sector are, according to the WSJ, getting "fleshed out", although the ideas in the graphic above are hardly new.

The WSJ story is worth reading in conjuntion with Steve Waldman, who explains that financial institutions are always subsidized by taxpayers in one form or another, and that this kind of explicit subsidy might actually be a better option than the implicit subsidy we’ve had in the recent past:

Banking-as-we-know-it is just a form of publicly subsidized private capital formation. I have no problem with subsidizing private capital formation, even with ceding much of the upside to entrepreneurial investors while taxpayers absorb much of the downside when things go wrong. But once we acknowledge the very large public subsidy in banking, it becomes possible to acknowledge other, perhaps less disaster-prone arrangements by which a nation might encourage private capital formation at lower social and financial cost. Rather than writing free options, what if we defined a category of public/private investment funds that would offer equity financing (common or preferred) to the sort of enterprises that currently depend upon bank loans? Every dollar of private money would be matched by a dollar of public money, doubling the availability of capital to businesses (compared to laissez-faire private investment), and eliminating the misaligned incentives and agency games played between taxpayers and financiers who would, in this arrangement, be pari passu. Also, by reducing firms’ reliance on brittle debt financing, equity-focused investment funds could dramatically enhance systemic stability.

What Waldman is talking about here isn’t exactly the Treasury plan: the main difference is that the financing coming from the Treasury plan is essentially refinancing of old deals, rather than new financing for future projects. But by the fungibility of money, perhaps that comes close.

Waldman’s argument also implies that highly-paid bankers are to a very large degree being paid by governments. They might look like they’re operating wholly within the private sector, but in reality the private sector has what Waldman calls "low frequency, high amplitude breakdowns" in which government has no choice but to step in and pick up the pieces. The WSJ reports that

issuers of asset-backed securities that benefit from Fed financing must be willing to submit themselves to new Treasury Department limits on executive compensation. Some issuers could be reluctant to travel down that road.

The answer to this problem lies with Treasury, and whether it can credibly promise not to bail out financial institutions who don’t sign on to the new scheme. I doubt that it can; right now I think that it’s relying on "moral suasion" (a/k/a arm-twisting) for its plans to bring financial-industry pay levels down to sensible levels. Are bankers’ arms that weak? We’ll see.

Reprinted from Portfolio.com

The Mother Of All CDOs: Is owned by the UK government.

Wanted: A Smart, Gregarious Octopus: Could they really do worse than current bank CEOs?

Revealed: The secret of Sir Allen Stanford’s three ‘outside wives’; Receiver says Stanford finances "dire"; Stanford Drama: Who Will Rep the Top Two Execs?: "Brent Baker, a partner at Parsons who worked at the SEC for 15 years, says people who can’t afford $1,000 per hour white-collar defense lawyers come to him and pay about a third of that price. ‘Laura [Pendergest-Holt] falls into that category,’ Baker says."

Reprinted from Portfolio.com

While I was stuck for most of today in areas of London which seemingly had no wifi coffee shops, AIG managed to contrive to lose $61 billion in a single quarter ($670 million a day!) and the stock market finally gave up any hope of staying above Dow 7000; S&P 700 is only six points away.

It’s fascinating to me that AIG is still a publicly-listed company: the official Treasury statement goes to great lengths to perpetuate the fiction that AIG and the US government are two separate and distinct things, and to empasize that this period of "public ownership" (they don’t use the word "nationalization") will come to an end "as rapidly as possible".

I doubt it’ll happen: under any ownership but that of the government, the ratings agencies would never have been so happy to pre-approve today’s deal, and any sale by the government will be almost impossible without jeopardizing those all-important ratings. Besides AIG does something only the government can ever do, as Justin Fox explains:

Essentially, AIG got into the business of insuring much of the world’s financial system against the consequences of a global financial meltdown. It turned out to be incapable of delivering on that insurance–no private company could deliver on it, which is one reason why AIG’s business of selling credit default swaps was a scam. And so government has stepped has stepped in as the ultimate insurer.
Providing insurance where private institutions can’t is one of the most important and essential roles of government.

The scandal here is not the size of the losses from the global financial meltdown — those are losses which sooner or later, in one form or another, would have had to be borne by the government anyway. Rather, the scandal is that AIG could have earned billions of dollars by selling insurance against a meltdown, even as it was wholly incapable of paying out on those policies. I wouldn’t be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It’s time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG’s total losses, but it would feel very right.

Reprinted from Portfolio.com

Tyler Durden has a vision for Citigroup which seems to conform quite well to reality. First, the share price plunges; second, preferred stock is swapped for common stock. And that’s just the beginning:

What is becoming more and more obvious, is that while the government is unlikely to wipe out the common stock tranche in Citi and other banks ever, it will continue a forced creeping dilution of higher and higher tranches of the balance sheet into Citi common stock. Yesterday the preferred, today the convertible stock, tomorrow unsecured and lastly secured bonds. At some point the common may actually be worth something.

I’m with him all the way to secured bonds: that’s not going to happen, because secured bondholders are senior to depositors, and Geithner’s going to make sure that depositors are untouched. It’s entirely logical, however, that if the preferred-for-common stock doesn’t work (and I have yet to see an independent observer who thinks it is going to work), then the senior unsecured is next in line for conversion into some kind of equity.

Meanwhile, the debate over Citigroup’s Mexican subsidiary, Banamex, rumbles on. Under Mexican law, no government can own more than 10% of a Mexican bank, which is obviously a problem if the US government takes a 36% stake in Citigroup. The Mexican SEC is investigating, while Banamex is unconvincingly saying that Nafta somehow overrides Mexican law and makes the stake fine.

Otto over at Inca Kola reckons this story is a very big deal, and from what I know about Mexican politics I’m inclined to agree: no government can allow an illegal partial takeover of Banco National de México without kicking up an almighty political storm.

Finally, Tyler has a theory that Monday is going to see a huge short squeeze in Citigroup shares, as the preferred-common arb turns out not to be possible after all. If you own Citi preferred, you can’t convert that stock into common shares at the government’s rate: some preferred shares, it turns out, are more preferred than others.

Citi stock is so volatile and trades at such a low price that I’m not sure how you’d even notice a short squeeze among all the usual noise. But the company is definitely a short-term speculative trading vehicle now, rather than a long-term store of value.

Reprinted from Portfolio.com

The day that the SEC filed its complaint about Allen Stanford, Tzvee’s Talmudic Blog immediately worried, and put up a blog entry titled "Is Robert Allen Stanford Jewish?". You can see where the concern would have come from: to have one multi-billion-dollar Jewish Ponzi artist might be considered a misfortune, but to have two looks seriously bad.

Turns out that Tzvee had nothing to worry about. The West Orlando News has one of my favorite headlines of the whole Stanford saga: "Small-Town ‘Christians’ Ran Stanford Dynasty". Turns out that Stanford and his CFO, James Davis, met at the Christian Baylor University, while Davis met Laura Pendergest-Holt at church. The newspaper reports:

One focus of the SEC investigation is the relationship between Ms Pendergest-Holt, James Davis, chief financial officer of Stanford Financial, and a small group of associates – a number of them apparently committed Christians – who were dubbed the “Baldwyn set” by other Stanford employees.

I’m reminded of these line from William Burroughs’s "Words of Advice For Young People":

If you’re doing business with a religious son-of-a-bitch,
Get it in writing.
His word isn’t worth shit.
Not with the good lord telling him how to fuck you on the deal.

Of course, Madoff and Stanford were more than happy to promise — in writing — that their investors would get their money back. Sometimes it’s best just not to do business with certain people at all.

Meanwhile, the case against Stanford is moving along in a predictably slow manner, with Davis pleading the Fifth and remaining silent on all matters so as not to incriminate himself. Stanford will surely do the same, as soon as he gets himself squared up with a defense lawyer.

And in another delicious twist to the Stanford saga, it turns out that the most powerful art dealer in the world, Larry Gagosian, decided to use Stanford Coins & Bullion when he needed $3 million of gold blocks for a Beverly Hills art installation. Naturally, he now has neither the money nor the gold. Whether the lack of a solid-gold art installation at Gagosian Beverly Hills counts as a downside of the Stanford scandal, of course, is a matter of opinion.

Reprinted from Portfolio.com