Opinion

Felix Salmon

The AIG Life Insurance Numbers

Reuters Staff
Mar 12, 2009 08:50 UTC

The document itself is dated February 26, and Andrew Ross Sorkin’s column on it came out on March 3, under the headline "The Compelling Case for Saving A.I.G., by A.I.G." He begins:

Inside the corridors of power in Washington, a 21-page document has been getting a lot of attention. It is marked confidential and titled “A.I.G.: Is the Risk Systemic?”

Sorkin devoted his entire column to the contents of the document, and wrote this:

In the United States, A.I.G. has more than 375 million policies with a face value of $19 trillion. If policyholders lost faith in A.I.G. and rushed to cash in their policies all at once, the entire insurance industry could falter.

I picked up that startling number on March 3, and then dropped it on March 4, saying that it was clearly false and that there should be a correction on Sorkin’s column.

On March 9, Calculated Risk made the document public. At that point, everybody could see what it actually said, on page 9:

AIG has written more than 81 million life insurance policies to individuals worldwide
– Face value: $1.9 trillion

On March 10, the correction finally got appended to the bottom of Sorkin’s column:

The DealBook column last Tuesday, about the systemic risks posed by any collapse of the American International Group, misstated the size of A.I.G.’s life insurance business. The company has more than 81 million life insurance policies with a face value of $1.9 trillion globally, and says that a run by its policyholders to cash in policies with cash value could result in the collapse of the entire life insurance industry. A.I.G. does not have more than 375 million policies with a face value of $19 trillion; that is the total of all policies held by insurance companies in the United States.

It strikes me as a little odd that the correction didn’t appear until after the document was made public, when the document is crystal-clear about both numbers: if Sorkin actually had the document, it’s hard to see how he would have made this mistake in the first place, and even harder to see why he wouldn’t have corrected it immediately, after simply looking at the document to see if it really said what he said it said.

So did Sorkin write an entire column about a document he didn’t actually have posession of? Or did he just think that any correction could wait a week until the next time his column appeared?

Reprinted from Portfolio.com

Felix Moving

Reuters Staff
Mar 11, 2009 22:30 UTC

As of April 1; Jeff has the story.

I’ll do my best to answer any questions you might have, but nothing much should change about the blog bar the URL, and in no way should this reflect badly on Portfolio.com, which has been an absolutely wonderful home to me for the past two years and which I’m genuinely sad to be leaving. Some things, however, are just too exciting to resist. More anon.

Reprinted from Portfolio.com

Extra Credit, Wednesday Edition

Reuters Staff
Mar 11, 2009 17:06 UTC

How the USSR gave us Wall Street’s quant craze: If the cold war hadn’t ended, the quants would still be doing physics.

U.S. Oil Fund Finds Itself at the Mercy of Traders: "’It’s like taking candy from a baby,’ said Nauman Barakat, senior vice president at Macquarie Futures USA in New York."

The silliest Republican economic proposal yet: This one’s from South Carolina governor Mark Sanford; see also Chait on Shlaes.

Credit Protection Madness? Alea has a theory on US CDS: that it’s the sellers of protection, not the buyers, who are taking all the counterparty risk.

And finally, you can either read "Why is Jim Cramer shouting at me?", Gabriel Winant’s story of spending a whole day watching CNBC, or you can just sit back and enjoy Jon Stewart putting the boot into the guy:

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Reprinted from Portfolio.com

Bank Funding Datapoint of the Day

Reuters Staff
Mar 11, 2009 16:10 UTC

Bloomberg reports:

Contracts on the Markit iTraxx Financial index of credit-default swaps linked to the senior debt of 25 banks and insurers were more expensive today than the Markit iTraxx Europe corporate index. That hasn’t happened since Lehman Brothers Holdings Inc. went bankrupt in September and, before that, JPMorgan’s takeover of Bear Stearns, according to BNP Paribas. It reflects “systemic stress” in the financial system.

So much for rallying confidence in the banking system. This is senior debt we’re talking about here, not subordinated debt (which often doubles as regulatory equity). Another word for senior debt is "wholesale funding": if a bank doesn’t have a large deposit base, then it makes its money on the spread between its senior debt and the rate at which companies and other clients borrow from it. If that spread is now negative, then it’s hard to see how the banking system as a whole can be nearly as profitable as the likes of John Hempton seem to think. (Yes, I know I’m conflating CDS spreads with actual funding costs. I suspect that the actual funding spreads are if anything wider than the CDS spreads.)

Indeed, far from seeing profits, the markets seem to be forecasting outright defaults, certainly on the subordinated debt, and possibly on the senior unsecured as well:

“The current prices imply that the companies’ equity is worthless, the government’s investment is worthless and subordinated debt holders will lose some of their investment,” said David Darst, an analyst at FTN Equity Capital Markets in Nashville, Tennessee.

What’s more, if bank-debt spreads stay at their present level for any length of time, they’re likely to become increasingly self-fulfilling. Right now, these prices represent significant unrealized losses for people who bought at par. But increasingly they’re going to start representing significant potential gains for people who are buying at today’s levels and hoping to be paid off at par — paid off, that is, essentially by taxpayers. Since those people can be broadly characterized as hedge-fund managers, one can foresee a lot of Congressional pushback if a large number of hedgies start pulling in tens of millions of dollars just by playing the moral hazard trade. Or, to put it another way, it’s a lot easier to impose a haircut when a haircut is priced in than when it isn’t.

I still think that senior unsecured debt of most major banks is probably safe, although the WaMu precedent does give me pause. But anything which can be considered equity is increasingly looking like fair game.

Reprinted from Portfolio.com

Mark-to-Market Datapoint of the Day

Reuters Staff
Mar 11, 2009 15:52 UTC

David Reilly crunches the numbers:

Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data. General Electric Co., meanwhile, said last week that just 2 percent of assets were marked to market at its General Electric Capital Corp. subsidiary, which is similar in size to the sixth-biggest U.S. bank.

Given that loan-loss reserves haven’t remotely kept up with mark-to-market writedowns, it’s no wonder the market has serious doubts about the solvency of most US banks.

Reprinted from Portfolio.com

Understatement of the Day

Reuters Staff
Mar 11, 2009 15:40 UTC

From Paul Kedrosky:

It does not seem to be good if you are a Luxembourg-based Icelandic banker used to selling swiss franc denominated mortgages to hungarian farmers.

The crazy thing is that this kind of thing seemed to make a certain amount of sense as recently as a couple of years ago. But hey, Luxembourg isn’t only about finance. The Luxembourgeois can always fall back on those steel plants.

Reprinted from Portfolio.com

Blogonomics: APIs

Reuters Staff
Mar 11, 2009 13:26 UTC

Jeff Jarvis takes note of a very important development among some of the biggest and most successful news websites in the world: they’re publishing APIs.

The Guardian just announced that it is releasing all its content through an API as well as making available many different data sets through a data store, all of which can be mashed up into others’ sites and applications. They join other organizations – the BBC, National Public Radio, and The New York Times – in releasing APIs; note that it’s the creme of news that sees the wisdom in APIs. The Guardian’s offers more than headlines: articles, video, galleries, everything. It also adds one more important element to its offering: a business model, creating an ad network for users of the API.

This is hugely important, and I think it’s much more likely to be the way of the future than any kind of collusion in smoke-filled rooms.

Up until now, websites have been thinking about the web using a metaphor from other media: different news sites are competing for readers, and the way to attract readers is to provide great content. If you do that, and if that content is only available on your own website, then the readers will have to come to you in order to read it. Once they do that, you can monetize them by selling ads.

Today, however, we live in a remix culture where it’s hard to persuade a huge number of people that what they all want is the exact same website, featuring a small subset of the world’s news, all of which was written by the same group of people.

It’s still pretty much impossible to construct a viable business model for a news organization the size of the NYT or BBC or NPR or Guardian where the costs of the newsroom are covered by the revenues of the website. But that doesn’t mean that the internet is killing newsrooms, it just means that we need to rethink the way in which newsrooms get their information online.

The first hints of this came with RSS, which is a fabulous technology. I rarely get my news from websites any more; instead I have it pushed directly into my RSS reader, where I can read it in the way I like, as it arrives. I’ve explained before that full RSS feeds ultimately result in increased web traffic; Jarvis corroborates that by telling us that the Guardian’s web traffic continued to rise after it switched to full feeds.

But RSS has never really caught on among the web-browsing public: it’s a tool for geeks who are willing and able to do their own customization. APIs, by contrast, promise to be able to do something RSS-like but for a much broader audience.

In a fragmented, heterogenous, and long-tailed world, there are billions of people who will want to read some of your content, a much smaller number who will want to read a lot of your content, and a much smaller number still who will make the effort to visit your website in order to do so.

On the other hand, nearly all of those people will visit some other set of websites in order to get their news and analysis. So the question becomes: how do you reach the overwhelming majority of potential readers who will never visit your website? And the answer is: APIs.

The minute you publish an API, your material becomes available to hundreds of thousands of websites around the world. You no longer need to spend a huge amount of money and effort persuading readers to come to you; instead, you come to them, wherever they might alight online. Your stories will appear on websites devoted to libertarian politics, or to outboard-motor collectors, or to cat fanciers, or to inhabitants of Kalamazoo, Michigan. The editors of those websites will use your material because it’s available to them for free, and because it’s really high-quality content. And the Kalamazoo website will become much more popular because it will feature a broad range of material it could never produce on its own. Everybody wins.

But it gets better. With everybody else free to use your content, you also become free to use other people’s content. No news organization in the world always has the single best story on every subject, but they also feel the need for their websites to feature all the most important stories. With APIs, they can play to their own strengths, and run the stories of other news organizations when those are better. From a reader’s perspective, the value of the website improves, and so the website gets more visitors.

If you’re looking for a web-based business model which can scale and succeed, this is it. If somebody reads your content on a third-party website, you haven’t lost a reader, you’ve gained one. How do you monetize that reader? Well, RSS feeds now include ads, and there’s no reason why APIs shouldn’t do so as well. Or you could take a leaf out of the people who allow their video to be embedded: add links back to your own products within the embed code or the API.

The old-media mindset can be seen in this story by the NYT’s Brian Stelter, which talks a great deal about websites "defending their turf" against competitors which "are shaving away potential readers and profiting from the content". But rather than fight those competitors, why not embrace them? Tell them to shave away and to profit away, since the internet is the world’s best-ever example of a positive-sum game, where if your competitor does well, you’re more likely, not less likely, to do well too. In fact, give your competitors all the tools they need to embed your content directly into their websites, without having to worry about fair use or lawsuits. And that way, reach their readers as well as your own.

One of the smartest decisions that the Portfolio.com publishers ever made was to allow Seeking Alpha to republish my blog entries on their website, with no money changing hands. Seeking Alpha has a large audience of stock traders and other people who love the one-stop shop for investment ideas but who have no desire to navigate away to Portfolio.com just to read my stuff.

Since that decision was made, I’ve become one of Seeking Alpha’s top ten contributors, and have been included in emails which Seeking Alpha has sent out millions of times to some of the most valuable readers in the world — many of whom are not only potential readers but are even potential advertisers on Portfolio.com. In a way it doesn’t really matter how much direct traffic Portfolio gets from Seeking Alpha: the ancillary benefits alone make the deal worthwhile.

Now imagine that instead of doing deals on a website-by-website basis, Seeking Alpha could simply use an API to embed any piece of commentary it found and liked on a website like Portfolio or nytimes.com. It would happily do so, I’m sure, even if that API included an ad unit or other means of driving revenue to the content creator.

Moving to a world of APIs does mean that websites will need to scale back the hubris: the idea that they can be all things to all people, and that if they only try hard enough and have great enough content, they can get to a place where anybody who might want to read their content will navigate to their website and read it there.

But that mindset has already come to an end, as can be seen in the resurgent debate about putting up subscription firewalls: the whole point of those firewalls is to artificially restrict your universe of readers in a desperate attempt to maximize short-term revenues. Much better that you expand your universe of readers, to include people who would otherwise never visit your website at all. And the best way of doing that is through APIs.

Reprinted from Portfolio.com

Adventures in Foreign Exchange, Booze Edition

Reuters Staff
Mar 11, 2009 10:35 UTC

I’m back from England, which is clearly a country where the populace is highly aware of international exchange rates. The pound has imploded of late, which is why you see ads like this at Heathrow’s Duty Free shop ("At current exchange rates, it pays to buy before you fly"):

champagne.jpg

But some currencies have done even worse, which is why you see ads like this on the London Underground ("Take advantage of the best exchange rate in years!"):

icelandair.jpg

Incidentally, my local NYC wine merchant sells Piper Heidsieck for $33 a bottle; if you spent £35 on two bottles at Heathrow, that works out to about $24 apiece. And when it comes to my favorite Duty Free purchase, Scotch, I can tell you that after years of finding the Heathrow prices significantly higher than NYC prices, they’re now signficantly lower again. Bowmore cask strength was being sold at £31 per liter or £57 for two liters: that’s equivalent to less than $30 for a 750cl bottle here in the US. Cheers!

Reprinted from Portfolio.com

COMMENT

Although we are accustomed to the multicurrency international monetary system, and to the unpredictable fluctuations of exchange rates, we need to pause and take a look at the absurdity of the system. There is no logical reason why the wealth of countries and monetary unions, as measured by their currencies, should fluctuate from day to day. What is needed is a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union.
The success of the euro shows that monetary union is the best way to ensure monetary stability. The primary problem with the euro and currencies of other monetary unions is that they still must co-exist within the international multi-currency system itself where the value of those common currencies must still fluctuate in value against each other.
With a Single Global Currency, there are no such fluctuations, by definition. What the people of the world want is stable money.
If 16 countries can use the same currency, why not 192?
In addition to eliminating currency fluctuations, the use of a Single Global Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate currency risk, eliminate
current account imbalances, eliminate the need for foreign exchange reserves (now totaling more than $4 trillion); and bring other benefits worth trillions,
such as reducing the impact of global financial turmoil such as we are now experiencing.
The Single Global Currency Assn. (www.singleglobalcurrency.org) promotes the implementation of a Single Global Currency by 2024, the
80th anniversary of the 1944 conference. That’s only 15 years away.
The world is moving toward a Single Global Currency through the creation, expansion and merger of regional monetary unions. Another route is through international monetary conferences proposals and agreements,
such as were seen at Bretton Woods.
The challenge now is to reach that goal deliberately, as soon as possible, with as little cost and as few crises as possible. Yes, as you note, it will be a “massive, complicated undertaking”, but so was the creation of
the euro, and the world now knows that it can be done.
See the book, “The Single Global Currency – Common Cents for the World.”
Morrison Bonpasse
Single Global Currency Assn.
Newcastle, Maine, United States

Steve Schwarzman’s Exaggerated Numbers

Reuters Staff
Mar 11, 2009 09:59 UTC

There have been some scary figures about the destruction of global wealth being bandied about in the past couple of days. First the Asian Development Bank put out a report by Claudio Loser along with an associated press release headlined "Global Financial Market Losses Reach $50 Trillion, Says Study". And then Steve Schwarzman said that "between 40 and 45 percent of the world’s wealth has been destroyed in little less than a year and a half".

Can we trust these figures? My feeling is that the former smells roughly right, but that Schwarzman is way off base.

Loser’s report doesn’t actually spend any time totting up global financial market losses. He finds $2.2 trillion of losses in Latin America, or 37% of the end-2007 levels, and $9.6 trillion of losses in Asia, a 35% fall. But if you follow his footnotes, you eventually end up at Table 3 on page 185 (page 204 of the PDF file) of the IMF’s 2008 global financial stability report. That’s where Loser is getting his end-2007 figures, and that’s where we can see that the total value of the world’s bonds, equities, and bank assets was $230 trillion at the end of 2007.

If Loser is right and that figure has fallen by $50 trillion since then, the total decline in global wealth would be about 22% — just half of the numbers that Schwarzman is bandying around.

Since Loser doesn’t say where the $50 trillion number is coming from, though, we’ll have to make some guesses. Let’s say that global stock-market wealth — which was $65 trillion at the end of 2007 — has fallen by about $30 trillion. Let’s also say that public debt securities, in aggregate, haven’t fallen in value at all: while the value of emerging-market debt has fallen, the value of Treasury bonds has risen. Then there would need to have been a reduction of $20 trillion, or about 15%, in the value of all private bonds and bank assets, which totaled $136 trillion at end-2007.

That 15% number seems a little high to me, but given the amount of asset-backed debt which was being carried at overinflated levels, it’s within the bounds of possibility.

So my feeling is that if you’re being charitable to him, Schwarzman is actually doubling the extent of global wealth losses. But in fact it’s worse than that, because he probably was mentally including property values as part of "the world’s wealth". And while property values globally have fallen, they haven’t fallen anything like 40-45% on a global aggregate basis.

Schwarzman’s own wealth, of course, has suffered greatly: it’s largely tied up in Blackstone stock, which ended 2007 at about $21 a share, and his now somewhere around $6. But the world in general hasn’t suffered nearly as much — on a percentage basis — as Schwarzman has.

Reprinted from Portfolio.com

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