Felix Salmon

Closing the Beetroot Arbitrage

Reuters Staff
Mar 23, 2009 10:34 UTC

Joe Wiesenthal is a well-known finance blogger. But he will surely go down in history as the person who used the internet to close what he calls "the biggest arbitrage of all time", with the earth-shatteringly groundbreaking website that is beetswap.com.

The problem?

Some people like beets and don’t eat the greens. And some people love those iron-rich greens, but have no use for the sugary roots.

The solution?

Buyers and sellers of beet and beet greens can swap the part they don’t like with internet-speed efficiency.

This, my friends, is the true upside of the financial crisis. If the entire global economy hadn’t imploded, beetswap.com might never have seen the light of day. And then where would we be?

Reprinted from Portfolio.com

Geithner’s Doomed Bailout Plan

Reuters Staff
Mar 23, 2009 08:45 UTC

Finally, the bank bailout plan has been released. There are still details to be filled in, especially as regards its second leg, the expansion of TALF. But the big-picture takeaway is simple: the government needs at least $1 trillion, and probably much more, just to make a dent in the problem of the banks’ toxic assets. (The term of art is now "legacy assets", actually.) But there’s no way in hell that Congress would agree to spend even $100,000 on a bank bailout right now. So the government has to come up with some way of taking the $350 billion in already-approved TARP money and multiplying it.

This plan is the government’s preferred solution. It decrees the TARP money to be "equity", and then goes off to the FDIC to provide "debt". Both of these sources of funds are US government risk capital which will be used to buy up toxic legacy assets. There’s no economic reason to make the debt/equity distinction. But there is a political reason: Congress would have to approve any more equity spending, but FDIC guarantees can be issued to an unlimited degree without Congressional approval.

The problem with this approach is that it’s needlessly expensive. What kind of yields will investors demand on FDIC-insured debt from a Public-Private Investment Fund? My guess is that they’ll be at least 100bp and possibly much more than that more than the yields on Treasury bonds. But because of all the political sillybuggery involved here, the government can’t just issue debt to fund this program, and needs to come up with a way of pretending that it’s in fact Public-Private Investment Fund debt being issued with no more than an FDIC guarantee. (I think that the FDIC will not charge any money for this guarantee, but that’s unclear.)

Why is the FDIC being dragged into this? You might well ask: I always thought that the job of the FDIC was deposit insurance, not guaranteeing loans to Public-Private Investment Funds. But I suppose that the government can’t be too picky right now about where it’s getting the necessary billions.

What’s more, there’s no indication whatsoever that this whole scheme will, you know, actually work. Private-sector investors want to pay as little as possible for these "legacy assets", in order to maximize their returns. But the banks will not sell any of their legacy assets unless they can do so at a price close to the level to which they’ve already been marked down. Is there any reason to believe that there’s a private-sector bid out there for legacy assets at their current marks? Not really. But if there isn’t, the banks will simply refuse to sell, and there won’t be any money or assets changing hands at all.

So color me highly disappointed in the whole thing. Here’s Tim Geithner himself:

The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.

Does the plan as presented today pass this test? In a word, no. Sadly.

Reprinted from Portfolio.com

Revolution in the Air

Reuters Staff
Mar 22, 2009 22:39 UTC

It’s getting impossible to keep up with the rhetoric and political noise surrounding AIG, the banks, and executive bonuses. Will the government try to rein in executive pay generally, rather than just at AIG? Is this an example of the kind of misguided policy and mass hysteria which results when you try to put politicians in charge of for-profit businesses? Will it wreck the economy outright? Or is the real problem that "the administration’s officials are too marinated in the insiders’ culture to police it, reform it or own up to their own past complicity with it"?

I don’t have any answers, but I do have a question: might we might be seeing the first real rumblings of class warfare — the genuine article, not the Republican talking-point — in this country?

In one corner are the technocrats not only in finance but also in government and the media: people who can understand the importance of distinguishing between a $250,000 base salary, a $2.5 million bonus, a $250 million bonus pool, a $2.5 billion bonus pool, a $250 billion bailout package, a $2.5 trillion monetary stimulus, and so on.

In the other corner are the real people, the angry people, the unemployed people — and with them their elected representatives in Congress. They’re not interested in such distinctions any more, they’re not interested in what’s fair or what’s sensible. They saw their real wages stagnate for decades as the orgy of plutocratic self-congratulation reached obscene levels only to keep on growing. All they ever had was the American Dream: the idea that they, too, might one day become dynastically wealthy and join the overclass.

Now, of course, that dream is shattered — and, what’s worse, it turns out that very overclass is responsible for the working classes’ own present straits. While the talking heads in New York and Washington throw around their millions and billions and trillions before commuting home to their comfortable middle-class-and-better lifestyles, the rest of the country is mad as hell, and ain’t gonna take it any more. They’re not interested in constructive solutions or in leveraging private capital or in the sanctity of contracts: fuck that shit. Those days are over. They want to see jail time, confiscatory policies, and worse.

As inequality grew in America over the past 30 years, there was always the risk that it would snap back violently and dramatically. That day is not yet here, but it’s closer than it has ever been, and its possibility cannot be discounted. Barack Obama smells the public mood, and is trying to respond to it in a grown-up and non-incendiary way. Congress smells it too, and is being rather less grown-up about things. And Wall Street still largely remains inside its bubble, watching the tour buses on the outside with fear and incomprehension. But unless some very senior executives start smelling the coffee sharpish, they might end up facing the biggest tail risk of them all.

Reprinted from Portfolio.com


I don’t think plutocrats have anything to worry about. When the going gets tough, they’ll just move.

Posted by corvus | Report as abusive

The NYT’s Blogophobia

Reuters Staff
Mar 22, 2009 22:00 UTC

What’s with the sudden blogophobia at the NYT? Between Craig Whitney’s astonishingly tone-deaf memo on how to write a blog, and the legal department’s heavy-handed nastygram trying to shut down Apartment Therapy, it seems that one of the most web-savvy media companies in the world has finally reached the point at which it reckons that the web-savvy types can’t be entrusted with the website any more, and the grownups need to step in and screw everything up.

Here’s Whitney:

Blogs on the news side of NYTimes.com are not the personal, private blogs of the contributors, but blogs of Times employees, whose reputations depend on readers’ trust in their impartiality…
As in print, our headlines on analysis should try to capture the debate rather than taking sides in it. (One recent lapse: ‘Amazon Plays Dumb in Sales Tax Debate.’)

Yes, this is the blogs they’re talking about. That was a great headline, on a great blog entry: it should have been getting plaudits, not brickbats. The whole concept of "impartiality" is problematic enough in a straight news story; trying to maintain it on a blog does rather defeat the purpose of setting up the blogs in the first place. And does the NYT really want its editors to deliberately make the blog headlines as boring as possible?

As for the DMCA takedown notice, here’s Apartment Therapy’s Maxwell Gillingham-Ryan:

What is so surprising about this is that we’ve heard NOTHING from them at all about this, and would not only have complied with their request if they’d asked us, but we’d also have liked to discuss how we could work WITH them in the best way, continuing to cover them and drive traffic. This is totally indirect and out of the blue…
This also seems to signal a bit of a war by the Times on blogs in general, as we can’t be the only ones. By going after the host and bypassing the sites, they have chosen to threaten someone who is hardly responsible and asking them to put pressure on us.

The details aren’t clear — Maxwell didn’t post the notice itself. But the gist seems to be that the NYT was upset about Apartment Therapy using its images in blog entries linking back to the NYT. Which is something which can nearly always be worked out with a friendly email; there’s no excuse for reaching straight for the nuclear option of sending DMCA notices to a website’s hosting service.

On the web, it’s pretty important not to needlessly piss off the people who drive you traffic; it’s also pretty important to stand out with interesting and provocative content. The NYT used to grok this, and I’m sure that its web team still does. But clearly someone higher up has decided to start fixing a site that isn’t broken. I fear for the consequences.

Reprinted from Portfolio.com

Ben Stein Watch: March 22, 2009

Reuters Staff
Mar 22, 2009 00:51 UTC

Business trips: they’re horrible things. "An incredibly heavy burden of work lies on the shoulders of those who attend", says Ben Stein in this week’s column:

At the gatherings I attend, men and women fly coach, stay in immense, boxy hotels, start their meeting days at breakfast at 7 a.m. and work through the day until far later than seems reasonable to me. Then they do it again the next day and the day after that, finally enduring the torture of waiting at the airport, next to screaming children, in order to get home.

Truly, the lot of the business traveller is a gruesome one. Wouldn’t we all be better off if we just did away with these ridiculous excursions altogether? As Stein himself says,

it’s hard to see what business purpose is served by punishing the most productive employees at a company, who are often the ones at business gatherings.

The astonishing thing is that Stein seems to think that this is an argument for having these meetings. Ben, you can’t have it both ways. Either going to the meetings is some kind of punishment, in which case it surely makes sense that we’re radically cutting back on the things. Or else cancelling the meetings is the real punishment, from the point of view of those who would otherwise have attended, in which case they can’t really be as grim as you’re making out.

Then again, it’s worth remembering that Ben Stein is someone who managed to write, without any visible sarcasm, as recently as last month, that "flying on a private plane is not a decadent act". So maybe he isn’t the most unbiased of observers.

It seems to me that the decadence or otherwise of these gatherings might be gauged by taking a look at their cost. The median price of a single-family home in a metropolitan area is $180,100. With 20% down and a 5% mortgage, that works out at $773.45 a month, or about $25 a night. Meanwhile, the swells at the business conference at the local luxury hotel are racking up bills in the $400 to $500 per person per night range, or more. When two nights in a hotel cost more than the average family’s monthly mortgage payment, I don’t think it’s that hard to see where the outrage is coming from — especially not when it’s taxpayers footing the bill.

Stein lives in a world where flying commercial is always a chore; where few hotels are as well-appointed as his own homes; where every day he spends in a vaguely public place is a day he risks being accosted and held to account for the uncountable gallons of extremely harmful drivel that he has inflicted on his readers and viewers for years. Well, Ben, most of us aren’t like you. We’re actually curious enough to quite like travelling to new places, staying in luxury hotels, and participating in interesting conferences. But doing so isn’t cheap, and there’s no reason at all why the US government should subsidize our boondoggles.

Reprinted from Portfolio.com

How will the Geithner Plan Ever Get Approved?

Reuters Staff
Mar 21, 2009 23:49 UTC

I do hope the Geithner bank bail-out plan, when it’s announced, doesn’t attempt any rhetoric along these lines:

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending…
Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

Every dollar of private equity is being matched by 32 dollars of other people’s money? What could possibly go wrong?

Krugman elucidates:

Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

This plan, as announced, has not come as much of a surprise, and neither has the outrage in the blogosphere. But won’t this plan need Congressional approval? If so, how on earth do Geithner and Obama think they’re going to get it? We’re way past the point at which lawmakers trust Treasury to know what it’s doing: they’ve done that in the recent past, with disastrous results, and they’re not going to do it again. And it’s equally clear that this plan would be hard to defend by the most silver-tongued of Treasury secretaries; Geithner simply doesn’t have the political prowess to sell this to Congress. So I do wonder how he thinks he’s going to get the funding to get this plan off the ground.

Reprinted from Portfolio.com

Whining Rich Person of the Day, NYC Real Estate Edition

Reuters Staff
Mar 21, 2009 23:04 UTC

It’s become something of a running joke that everybody wants a bailout these days. But really:

“That’s a lot of money that we can’t afford to lose,” Dr. Beitler said. “It’s just so unfair that with all the bailouts and other stuff going on there’s no relief for people in our position. And we didn’t do anything wrong — an unfortunate confluence of events is causing us to have this misery.”

The misery of Dr Martin Beitler is a function of the fact that he put a nonrefundable 10% deposit down on a $1.73 million condo in Chelsea, in the expectation that he would be able to get a no-income-check mortgage for $1.557 million when time came to close.

Dr. Beitler, an internist in Manhattan, said he had bought and sold property before and had always qualified for no-income-check mortgages.

And so, rather than accept the $35,000 he’s being offered as a goodwill gesture by the developer, Dr Beitler has filed a lawsuit for the return of his entire deposit — despite the fact that the developer upheld his side of the contract in full.

Every time I come across another one of these stories of rich peoples’ innate sense of entitlement it riles me a little more. Dr Beitler is obviously smart enough to know what a deposit is — but somehow he reckons that a nonrefundable deposit should, in fact, be refundable if and when he can’t get a 10%-down, no-income-check mortgage any more. What’s more, if he doesn’t get his deposit back, he thinks it would be a jolly good idea were US taxpayers to club together to give him back his $173,000 (or more than three times median household income in the US). After all, he did suffer "an unfortunate confluence of events", the poor dear.

I do wonder whether Dr Beitler, who has bought and sold property before — in what was surely a healthy up market — might be willing, in return for $173,000 from taxpayers, to return to those selfsame taxpayers all of the profit he made on flipping property in the past. After all, the "confluence of events" which caused property prices to rise was no more his doing than the confluence of events which caused property prices to fall. But somehow I doubt he sees it that way.

Reprinted from Portfolio.com