Felix Salmon

I’m discussing Treasury’s bank bailout plan with Brad DeLong, Mark Thoma, and James Kwak over at Seeking Alpha right now; I’d embed the discussion here, but the column width makes it uncomfortably cramped. So come on over and join in!

Reprinted from Portfolio.com

Ezra Klein quotes a distraught commenter, in the wake of the news about Treasury’s latest nominations:

There’s no one in the top tier of Treasury who’s ever spent a day working on Wall Street. That’s amazing.

How rare is this, really? Obviously there was Wall Street experience in the Rubin and Paulson years. But in the Summers and O’Neill and Snow years, how many of the top-tier technocrats had Wall Street experience? Robert Steel doesn’t count: he only ever worked for Paulson.

Remember, pace Wolin, the soon-to-be deputy Treasury secretary, that working at a Wall Street law firm or a big insurance company doesn’t count: the commenter clearly thinks that it’s experience at a bank which really matters. (And not the Federal Reserve, either, or Geithner himself would count.)

Reprinted from Portfolio.com

I have a bloggingheads diavlog with William Cohan, who’s out plugging his new book on the collapse of Bear Stearns. Of course we talk about subsequent collapses too, like Lehman and AIG, and what caused them, and whether it’s possible to prevent them. At least we know from Lehman and AIG that the Bear collapse wasn’t entirely a function of the fact that Jimmy Cayne spent too much time playing bridge.

Reprinted from Portfolio.com

Tyler Cowen singles out this datapoint from Paul Collier’s new book:

Anke and I have estimated the proportion of Africa’s private wealth that is held outside the region. By 2004 it had reached the astounding figure of 36 percent: more than a third of Africa’s own wealth is outside the region.

If I’m astounded by the 36% figure, that’s because it’s so low, not because it’s so high. It makes sense for anybody with wealth to diversify geographically; it makes much more sense for Africans, where domestic wealth can be arbitrarily frozen or confiscated at any time. Indeed, an entire industry of Nigerian 419 scammers has arisen on the back of the existence of precisely such policies.

Alan Stanford, too, made his billions largely thanks to the risk of confiscatory domestic policies: the plurality of his deposits came from Venezuelans fearful that Hugo Chávez would freeze or repurpose any of their wealth held domestically, and in general the customers of Stanford International Bank were people who thought that its offshore status was a feature, not a bug.

The middle classes in developing nations often face enormous practical difficulties — not to mention foreign-exchange risk — if they want to diversify internationally. It’s not easy for the average Brazilian to open a brokerage account in Miami, although it’s commonplace for the Brazilian elite. But in Africa, of course, the middle class is tiny: the overwhelming majority of the country’s investable wealth is held by a very small elite class of individuals. Those individuals have every incentive to park their money abroad, especially in no-questions-asked jurisdictions.

None of this is good for African development — high domestic savings rates are a key driver of domestic growth, and sending one’s money off to Switzerland or Cyprus isn’t going to help the development of the Ivory Coast. It’s a tragedy of the commons: it makes sense for any given individual to keep his money abroad, but when everybody does that, it harms the country enormously. So color me cautiously upbeat about the fact that 64% of Africa’s private wealth is still invested inside the region. One can hope that number will grow, of course, but I don’t think it’s at present devastatingly low.

Reprinted from Portfolio.com

One further thought about the Geithner bailout plan: a lot of relatively small and new public-private investment partnerships are going to be issuing debt with an FDIC wrap. In pratice, that’s likely to mean bonds with no credit risk but with a large illiquidity premium. If you’re a risk-averse retail investor who doesn’t want to take credit risk but who’s also scared of the Treasury bubble, this could be a sensible investment. You get none of the upside, none of the downside, and a large part of the implicit subsidy. It’s just a pity that it’s so hard for retail investors to buy bonds in the US.

Reprinted from Portfolio.com

I had a brief discussion with Jesse Eisinger yesterday about the stock market reaction to the Geithner plan. The central question: do you look at the level of the index, or do you look at the amount that it moved over the course of the day? Geithner’s first attempt at introducing the plan resulted in the Dow falling 382 points to 7,889; Geithner’s second attempt saw a 497-point rise to 7,776.

If you ignore the direction and just focus on the Dow as a snapshot of how the market feels about the prospects for the economy, you could make a case for investors being more optimistic the first time round than than they were yesterday. That’s true even if you look at a sensible index like the S&P 500, which closed yesterday at 823, down a smidgen from its February 10 close of 827, rather than looking at the silly but ubiquitous Dow average.

There are good reasons to look at the day-to-day movements. If the stock market simply priced in this public-private buy-up-the-toxic-assets plan on February 10, it wouldn’t have rallied so much on February 23. But the technicals matter too: yesterday’s rally had more than a whiff of short-covering to it, while in hindsight the fall on February 10 is barely noticeable when looked at in the context of the massive drop between September and March.

In general, I think it’s ill-advised to use day-to-day movements in the stock market as much of a barometer of anything; and if you are going to look to the Dow in order to gauge market sentiment, make sure to round it off to the nearest thousand points first. Anything more than that will give you a false impression of specificity. All the same, by that criterion we managed to rise from 7,000 to 8,000 yesterday. Which is worth at least a little smile.

Update: Yves Smith makes the very good point that although stocks rose sharply, there was little movement in the bond market, which tends to be a much better barometer of such things.

Reprinted from Portfolio.com

Inside Obama’s Economic Brain Trust: How Geithner got his job, and other stories from inside the White House.

The Big Takeover: You know you want to read Matt Taibbi’s take on the financial crisis.

Why Advertising Is Failing On The Internet

AIG starts makeover, changes sign at NY office: A large part of AIG will now be known as AIU.

Cuomo Says Half of AIG’s Bonus Money May Be Returned

Finally, posting at this blog will be light for most of tomorrow, but there will be a live discussion of the Geithner plan at 2:30pm, with James Kwak of the Baseline Scenario and hopefully a couple of other boldface names. Hope you can join in!

Reprinted from Portfolio.com

John Hempton says that I’m misrepresenting his views. He doesn’t think that the banks should just be allowed to muddle along indefinitely: they should be subjected to price discovery (eg the Geithner plan) and then nationalized if they’re found to be insolvent:

I never advocated that muddle through is the right policy. I just happen to think that muddle through will work for most banks because most banks are not that insolvent.

I’m not convinced that the Geithner plan will be particularly great when it comes to price discovery, because correlation is at 1 right now, meaning that differences between good and bad assets get elided, and also because the plan is structured so that you can make a profit even when you overpay. I’m also not convinced that the biggest banks are as solvent as John thinks they are, but he and I have been back and forth on this already, and there’s no point in repeating all that.

On the other hand, Ezra Klein has five excellent reasons why it’s a good idea to bring in private investors all the same, including this one:

Getting private investors to buy-in to this stage of the recovery plan might make it easier to ensure their cooperation with later stages. It may effectively co-opt the participants. Nationalization is one example. If TIAA-CREF vouches for insolvency, the market is likelier to think nationalization an act economic necessity than political capriciousness.

Brad DeLong says something similar:

I suspect that at least one of the reasons the Obama administration is not nationalizing the banks right now is named "Voinovich": getting 60 votes in the Senate for bank nationalization is no easy task with this Senate until the administration can demonstrate that it has gone the extra mile.

I’m not sure I buy it: this plan is not a necessary precursor to nationalization, and the government has given no indication whatsoever that nationalization is its last resort. Yes, it might be a tiny bit easier if this plan fails. But that can’t possibly be a good way of getting there from here.

Reprinted from Portfolio.com

It’s the invite everybody wants to have gotten: were you invited to join Treasury’s econoblogger conference call? Clusterstock, Dealbreaker, and Paul Kedrosky found the golden ticket in their inboxes, and Brad DeLong asked a question — although one would hope that Treasury would be talking to him informally anyway.

As for the list of people who didn’t get an invite, they include John Hempton, Yves Smith, and me; rumor has it that obvious names like Mark Thoma,* Nouriel Roubini, Tyler Cowen, and Calculated Risk weren’t invited either, but I haven’t checked. Certainly the call seems to have been very short; if many econobloggers did get the invites, they quite possibly — like Kedrosky — didn’t get them in time.

Still, a golden star goes to Brad DeLong: going by Dealbreaker’s timing, he received the email at 5:19am his time, and was on the call at 7am his time. There’s the kind of conscientious econoblogging which gets you the coveted invitations!

*Update: Mark emails to say he got an invite. Abnormal Returns got one too. As did Steve Waldman.

Reprinted from Portfolio.com

Having too much cash is something of a luxury problem these days: the worst that can happen is that you find yourself subject to the occasional snarky column telling you to up your dividend. Meanwhile, the opportunities presented by having a large cash pile have never been greater. So I asked the friendly people at Gridstone Research to help me put together a list of the companies with the most cash. The very smart Sandeep Shroff came up with two spectacular spreadsheets: this one, which looks at net cash and cash flow from operations, and this one, giving the sector averages.

In case you’re not an Excel jockey, however, I’ve broken out the highlights. Here’s the top of the table, showing the companies with the most cash; it features most of the world’s triple-A companies. Apple, the one company everybody associates with the phrase "cash-rich", is indeed high up the list; what’s even more impressive is the amount by which its cash holdings increased over the past year — almost $7 billion.

Meanwhile, here’s the bottom of the table:

This possibly helps explain why General Electric stock has done so badly of late, and also why GE is not like all those other triple-A companies. But it doesn’t shed much light on things like car companies: I don’t think the fact that Ford has lots of cash and rising necessarily makes it a more solid automaker than Toyota, which has a negative cash position and falling.

But those cash-rich companies certainly have a very broad and attractive opportunity set facing them right now. They can return their cash to shareholders, in the form of buybacks or dividends; they can buy back their own debt at a discount; they can try to acquire a competitor, make fill-in acquisitions, or expand into a new area of business; they can up spending on R&D; they can expand headcount; or they can just continue to do what they’ve done until now, which is happily sit back on their cash pile and simply wait for the perfect opportunity to arise.

The one thing I’m sure of is that none of these companies are in any hurry to spend their cash. I’m sure they all have a steady stream of underemployed M&A bankers showing them ideas every week; they’ve got to be used to saying no by now.

On the other hand, there are risks to holding cash — credit risks, counterparty risks, currency risks, and many other risks which a good CFO can try to minimize, but which never really go away. Maybe it really is better just to buy back your own debt, if you can do so at less than the price at which you issued it.

Reprinted from Portfolio.com

Nemo at Self-Evident has a great post on what he’s calling the "Geithner Put", explaining how banks could buy assets with a long-term value of 50 cents on the dollar, pay 84 cents on the dollar for them, hold them to maturity, and still make a healthy 16% profit. Which does help explain why Geithner is convinced that the banks will want to sell their toxic assets under this plan.

Reprinted from Portfolio.com

Why do you need to pay money to read WSJ.com? The former managing editor of the site, Bill Grueskin, has a telling anecdote:

One day last month, a Columbia Journalism student asked me in class why WSJ.Com had started as a paid site. This moment reminded me of the scene in Annie Hall (about two minutes into this), where Woody Allen produces Marshall McLuhan to refute (OK, I get the irony) a pompous Columbia instructor pontificating about the media.
At the class, I turned to my co-instructor, Peter Kann, former CEO of Dow Jones and the person ultimately responsible for the paid strategy.
“I made the site paid because I was ignorant, ” Kann told the class. “I didn’t know any better. I just thought people should pay for content.”

This is a debate which won’t die. But it’s certainly the case that publishers in general have for years been fighting a rearguard action against the open-access remix culture that thrives online. Because some people will pay, and because other people are willing to pay, they conclude that all their readers must pay. And even when you don’t pay in cash, you must certainly pay in attention: if you want to read the publisher’s content, you must navigate to his website, and read it in exactly the way he wants you to read it, even if that means clicking through umpteen different pages, or sitting through flash ads, or otherwise being distracted and annoyed.

Now on the one hand it’s obvious why publishers behave like this online: they want to make as much money as possible, and the two biggest sources of online revenue are advertising dollars and subscription fees.

But on the other hand, this whole way of looking at the world is actually a major departure from how publishers have historically behaved. They’ve made their newspapers and magazines as easy to read as possible; they’ve charged as little money for them as they can, often distributing them at a loss, in order to maxmize readership; and in general they’ve bent over backwards to create a consumer-facing product which pleases, rather than annoys, the reader.

Elizabeth Jensen has an interesting article today about a different and quite promising new and alternative business model: one which plays to the strengths of the online world rather than fighting against its weaknesses (like the fact that it’s not well suited to display ads). GlobalPost.com makes substantially all of its content free, but then charges for a product which takes advantage of some very high-touch interactivity:

Called Passport, it offers access to GlobalPost correspondents, including exclusive reports on business topics of less interest to general audiences, conference calls and meetings with reporters, and breaking news e-mail messages from those journalists.
Passport subscribers, who pay as much as $199 a year, can suggest article ideas. “If you are a member, you have a voice at the editorial meeting,” although the site will decide which stories to pursue, said Charles Sennott, a GlobalPost founder and its executive editor. He said Passport is meant to “create a feeling of community” for subscribers who might otherwise see newsrooms as “impenetrable and fortresslike.”
GlobalPost correspondents, who include the former Washington Post writer Caryle Murphy in Saudi Arabia and a Time magazine correspondent turned novelist, Matt Beynon Rees, in Jerusalem, are paid extra for Passport work.

In order to maximize Passport revenues, both GlobalPost and its writers are going to want GlobalPost’s stories to reach as many people as possible: the website is no longer just a vehicle for selling advertising, but also a marketing vehicle for the broad dissemination of the content, which in turn bolsters the reputation of the journalists in the field.

So if I were GlobalPost, I’d publish lots of full RSS feeds for the entire website, and positively encourage any other websites to republish as much of the content as they like, with the restriction that credit must be prominently given to GlobalPost, along with links to both the GlobalPost home page and the original article. After all, the art of marketing is to go out and reach readers, not to sit back and wait for the readers to come to you. Essentially the articles become a free advertisement for the website, driving traffic there — at which point it can become monetized, and readers who like the website will stay, and possibly subscribe to Passport. You can’t ask more than that.

Setting your information free in this way violates much of the early history of internet publishing — but it’s very much of a piece with the history of publishing more generally. And I think it’s a much more hopeful business model than trying to jealously guard your content as much as possible. After all, on the internet, publishers don’t really compete with copies of their own content: they compete with all the other content online for readers’ attention. Trying to clamp down on copies is very often very silly: it only serves to reduce and annoy your readership. So maybe the solution is to encourage copies, instead.

Reprinted from Portfolio.com

Jeremy Denk notes the crisis spreading:

In what is now a familiar story, Lee Ellen Jo Public, of Loma Vista Boca Loca, AZ, found herself at a piano recital, where the pianist had just concluded the exposition of the G major Schubert Sonata. Having invested some 7 minutes of very serious listening, she felt she could not abandon the equity she had built up, even though the prospect of paying off the rest of the development and recapitulation was daunting. Fellow audience member Ronald McGrumpy was much less sympathetic. "After the first two bars, I said to myself, are you kidding me, what kind of sucker do you think I am, I’m not going to stick around and wait for Schubert to develop that. If she got caught upside down on this deal, it’s her fault and her fault alone." Commenter Claude D., mainstay of the well-regarded financial blog Prelude to the Afternoon of a Fund, suggests many people are wondering whether to accept the damage to their listening credit and walk out. "Now, you see, Mozart’s solution to this problem, which is introducing a new theme in the development, carries its own risks; but Mozart seems to think you should look at the crisis as an opportunity and innovate your way out."

Someone (Tyler Cowen, of course) needs to teach Lee Ellen about sunk costs, sharpish.

Reprinted from Portfolio.com

Jamie Dimon has clearly decided he has no intention of ever becoming Treasury secretary:

Embattled bank JPMorgan Chase, the recipient of $25 billion in TARP funds, is going ahead with a $138 million plan to buy two new luxury corporate jets and build "the premiere corporate aircraft hangar on the eastern seaboard" to house them, ABC News has learned.

Apparently JP Morgan has promised to repay the $25 billion before it buys the two brand-new G-650s. So much for the importance of giving TARP funds to healthy banks. And what about the $30 billion in non-recourse loan guarantees that JP Morgan got from the Fed when it bought Bear Stearns?

This isn’t only about government money, though as Ryan Chittum notes:

Let’s not forget the shareholders, who bear the brunt of this kind of corporate spending with little say in it.

There’s simply no conceivable way in which these jets represent a necessary and legitimate business expense. They would have been an extremely lavish and barely-justifiable perk in good times; in bad times, they look like nothing so much as a calculated affront to JP Morgan’s customers. $138 million would fully fund $500 overdraft facilities for a quarter of a million Americans, with $13 million left over for waiving bank fees. Anecdotally, a very large number of WaMu customers are angry at suddenly banking with Chase. I’m quite sure that this news is not going to make them any happier.

Reprinted from Portfolio.com

Tim Geithner was interviewed by Erin Burnett on CNBC today. Here’s a snippet:

Sec. GEITHNER: The alternative approach is–which you have the government buying all this stuff, taking on all the risk under a balance sheet, which would be much more expensive to the taxpayer. The alternative of letting it just sit there, let these assets just sit on the balance sheets of banks who are at risk, creating a much longer, deeper recession.

BURNETT: And see, because some of the banks say to me they could do that. They could sit on the stock.

Sec. GEITHNER: They could.

BURNETT: They are making loans, but the real lending problem is in the nonbank system, which did account for half of the lending in the country. And they say, `We could sit on it. In fact, we’re not really sure we’re going to like the pricing here. And maybe we will sit on it.

Sec. GEITHNER: Well, you know, parts of our banking system are growing and expanding. We have plenty of capital. But there are other parts of the system that are going to need a bit more insurance, a bit more assistance to get through this and be able to lend. But, you know, what guides what we’re doing, again, is what’s what’s–we’re going to try to do what’s–all that is necessary…

BURNETT: Mm-hmm.

This neatly encapsulates everything that’s wrong with the Geithner plan — not least that Geithner just isn’t expressing himself clearly.

Geithner says that if the government bought all "this stuff" it "would be much more expensive to the taxpayer", despite the fact that there will be very little in the way of private funds. Then he segues straight into the Hempton plan of "letting it just sit there" on bank balance sheets, and declares that option would be dreadful and create "a much longer, deeper recession" — presumably because the banks, under that option, would be less prone to lending new money.

Yet immediately after saying that, Geithner says that the banks "have plenty of capital", before descending uncomfortably into content-free political talking points about doing "all that is necessary".

The only remotely reassuring part of this interview is the only bit that Geithner had no control over: the little picture in the bottom right-hand corner of what the Dow is doing today. It’s up sharply, which is something for which Geithner and Obama must be very grateful. If it had plunged again, in the same way it did the first time Geithner tried to reveal his bank bailout plan, the Treasury secretary’s incredibly hard job would have become all but impossible. Still, Dow 7,600 is still a very long way from the point at which it can be said that the stock market feels remotely good about the future. It’s just maybe not as apocalyptically pessimistic as it was a few hundred points ago.

Reprinted from Portfolio.com