Felix Salmon

Larry Summers made a lot of money last year, and boy is it voyeuristically impossible to resist looking through his disclosure to see who paid him what. The really big money, unsurprisingly, came from DE Shaw: a salary of $1,432,497 (weird amount, that), along with partnership distributions of $3,756,126, for a total of $5,188,623. But just because he was earning $100,000 a week from DE Shaw doesn’t mean he wasn’t earning lots of money elsewhere, too: his speaking engagements alone came to another $2.8 million or so.

Of particular interest to me is the amount that Nouriel Roubini was paying Summers to sit on the advisory board of Roubini Global Economics, where I used to work: $147,500 a year. Somehow I doubt that fellow board member Marc Uzan was pulling down a similar amount.

But Summers’s speeches are interesting too, especially the foreign ones: $67,500 from Tata Conultancy Services; $90,000 from the Asociation de Bancos de Mexico; $103,500 from the Universidad Autonoma del Estado de Baja California; $112,500 from Centro de Liderazgo y Gestion in Colombia; the same amount from IESE Business School in Spain; $135,000 from the American Chamber of Commerce in Argentina; and a whopping $225,000 from Leaders and Company, the publishers of This Day newspaper in Nigeria.

Is Larry Summers the only person in history to reply to an email from Nigeria saying “we have hundreds of thousands of dollars we would like to give you; you need to do very little to receive it” — and actually get the money?

What’s sure is that Summers has made so much money during his time in the private sector that he can easily afford to spend the foreseeable future in public service, should he be so inclined: you don’t need to make $8 million a year for very many years before your net worth becomes so large that money simply ceases to matter any more. After all, it’s not like he’s spending it all on clothes.

Update: The NYT adds that Summers earned his $5.2 million from DE Shaw working just one day a week.

Tom Hicks’ Sports Group Defaults On $525 Million In Loans: Another private-equity legend in difficulties.

G-20 and mark-to-market: Two blog favorites: Bob Teitelman concedes that blogs are “particularly suited” to covering this financial crisis — more than newspapers are.

Pimco Mortgage Fund: No Wonder It’s Slow Going: A $2.8 billion Pimco distressed mortgage fund is down 40% over the past year. So much for buying “beaten-down mortgage securities on the cheap“.

Dani Rodrik spots a particularly bright bit of the G20 communiqué:

We agree that the heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based selection process.

This is spectacularly good news: as Dani says, it “may mean that the era of the World Bank and the IMF being run by Americans and Europeans, respectively, is over. And good riddance too”.

Might Ngozi Okonjo-Iweala become the next World Bank president? Might Mohamed El-Erian be the next managing director of the IMF? Suddenly, there are all manner of tantalizing and exciting possibilities. It’s taken long enough, but I’m very happy this day has finally arrived.

Beth F left a comment on my blog entry about this morning’s payrolls report:

Even though the unemployment rate hit 8.5%, 91.5% of the population is still working.

Actually, this couldn’t be more wrong; the true number is 59.9%. Heather Boushey runs the scary numbers:

The average work week fell by 0.1 hours to 33.2 hours per week in March—the lowest level since 1964 when the Bureau of Labor Statistics began tabulating this data…

The share of the U.S. population with a job is now at 59.9 percent, which is lower than any time since 1985. This is especially striking since so many women have entered the labor market since then. The fall off in the employment rate has been larger among men than women, and there are fewer men at work than at any point since the BLS began tabulating this data after World War II: 68.2 percent of U.S. men age 20 and over had a job in March, down 4.1 percentage points from a year ago.

A decade ago, the big news on the employment front was the way in which demand for labor was so great that people who had considered themselves to be out of the the labor force for years ended up getting dragged back into it. Now it’s the other way around — people who really want jobs are ceasing to look for work because they consider the job hunt to be pointless.

At some point in the next few months, it’s entirely probable that fewer than two in three working-age men will have a job. Which is why the stimulus is so necessary: if nothing else it will help with the desperately-needed task of job creation.

(HT: Yglesias)

There’s been a lot of speculation about banks gaming the PPIP system by setting themselves up as investment funds and buying the very assets they’re meant to be selling, only this time with lots of government subsidy. I thought such worries were laid to rest with the explanation that very few people would be allowed to bid on the toxic assets. But now here comes the FT, reporting:

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system…
Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ”gaming the system to reap taxpayer-subsidised windfalls”.
Mr Bachus added it would mark ”a new level of absurdity” if financial institutions were ”colluding to swap assets at inflated prices using taxpayers’ dollars.” …
Public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.
Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity – such as pension funds – are the same entitites that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.

I’m particularly disappointed at the way this issue seems to have become politicized already, with Baucus (rightly) calling the idea of banks swapping their toxic assets at inflated prices absurd, and “Administration officials” going so far as to actively defend the idea.
The administration defense seems extremely thin to me: for one thing, there’s still a big disconnect between bond investors and equity investors, so it’s really not true that the owners of bank equity — especially the owners of common stock — are the same people who are going to be investing in toxic assets anyway.

But insofar as it is true, then that only serves to ratify the dark musings of Steve Waldman, who reckons that the biggest fund managers will be perfectly happy to deliberately overpay for toxic assets so long as that prevents them from having to take large losses on all the bank debt (and even equity) that they own.

Looked at this way, the combination of letting banks bid on each others’ toxic assets, along with the weakening of mark-to-market rules, will serve to maximize opacity, minimize the chances that insolvent banks will be revealed as such, and render the government’s stress tests an exercise in rubber-stamping utterly unrealistic balance sheets. The risks of a Japan-style lost decade seem higher than ever.

Preethika Sainam of Indiana University, along with two colleagues from Chapel Hill, has an interesting paper suggesting that sports organizations shouldn’t sell tickets to big sporting events, like the finals of the Final Four, where the teams who will be playing are unknown. Instead, they say, they should sell options to buy tickets at a certain price once it’s known who’s going to be playing. This system, they say, will raise more money in ticket sales, will make fans happier, and will reduce scalping.

The interesting thing is that reading between the lines of the paper, it seems that selling options is actually the second-best solution to these problems. The best solution would be to replace some (but not all) of the tickets with team-specific forwards, which expire worthless if that team doesn’t make the finals. That would allow the “team-oriented” fans to buy forwards rather than tickets which they might not want if their team fails to make it to the finals; it would allow “game-oriented” fans to buy tickets to the finals just like they can right now; it would mean that many more tickets could be sold in total (for the final match-up, you can sell 32 times as many forwards as there are seats), which would reduce the supply/demand imbalance which often drives scalping.

Professor Sainam, however, reckons that the forwards idea is a non-starter, for reasons of optics: she worries, she tells me, “that fans could perceive the league as profiting unduly from the situation”. And so the options option is the next best thing. She explains why even when you only sell as many options as there are seats, scalping should still be reduced:

The league can insist that the fam buying the option is the same as the one exercising it. So, until a point fairly close to the game, the fan retains the ticket. Beyond that, if the ticket is of little value to the fan once the uncertainty is resolved, the fan has two choices: (a) Let the option expire, and (b) Buy the ticket and take responsibility for scalping it (assuming that there is no “policing at the entry gate”). We note here that fans scalping tickets is a different issue from professional scalpers scalping tickets. Many fans would not want to undertake the risk of exercising the option and then not being able to scalp the ticket successfully. The league can also enhance the incentive to let the option expire (if the fan is not willing to see the game) by reimbusing a small fraction of the option price to the credit card of the fan in case the option was left to expire.

Expired options, of course, then become empty seats, which can be sold directly by the league rather than by scalpers.

Personally I’m a big fan of the forwards idea — especially for big international competitions like the World Cup or the European Cup. But if the likes of FIFA don’t want to go there, that shouldn’t stop local hotels from adopting the idea. Why sell all your rooms only once for the night of the big match? Instead, sell forwards, which expire worthless if a certain team doesn’t make the final. Hotels are struggling these days — this seems like an easy way to make a lot of money, if you’re lucky enough to be in a city hosting a major cup final.

Paul Singer, the ardent Bush supporter and laissez-faire capitalist who runs the $13 billion Elliott Associates hedge fund, has an astonishing op-ed in today’s WSJ:

Now we must create a new regulatory infrastructure that will meet three fundamental tests… finally, it must bring all investors and traders — regardless of whether the risk holder is a hedge fund, bank, private equity fund, individual or government agency — under the regulatory umbrella…
I understand the inclination among free-market conservatives to dismiss the government’s regulatory efforts as misguided. Some government actions over the past year have been reactive and incomplete. Yet these actions have been large and reasonably fast, which were the critical elements for the survival of the system.

The op-ed comes in the wake of the G20 meeting which agreed that hedge funds should be regulated, so maybe Singer is simply bowing to reality here. But this is still something of a watershed moment. Singer is one of the most politically astute hedge-fund managers in America, and where he goes the rest of the industry is probably likely to follow.
So if you thought there would be a lot of pushback from the hedge-fund industry against proposals to regulate it, think again. The industry will want a say in how any legislation is worded, of course. But it has also lost hundreds of billions of dollars over the past couple of years as a result of insufficient regulation of the global financial system. Maybe the hedgies are finally realizing that the only thing worse than too much regulation is too little.

The unemployment rate is now 8.5%, which is very bad, and is up sharply from 5.1% a year ago. But just check out U6, the broad measure of underemployement: people who want to get more work than they’ve got, but can’t find it. A year ago — three months into the recession — it stood at 9.3%. Today, it’s risen all the way to 16.2% — an increase of 6.9 percentage points — and no one thinks it’s peaked yet. There are now 9 million “involuntary part-time workers” in America, and rising; these people are, as a rule, spending as little as they possibly can.

It’s true that unemployment is a lagging indicator, and that if we’re looking for signs of recovery then the payrolls report is not a great place to start. But there’s nothing here to give any indication that America’s animal spirits have any reason at all to turn around. We, as a nation of individuals, increasingly have neither the ability nor the inclination to borrow money or to spend it — and there’s nothing the banking system can do about that, whether it’s recapitalized or not. So I do wonder where those people forecasting recovery this year think that it’s going to come from.

An Existential Crisis for Libertarianism: How climate change could destroy the Cato types.

Special offer for those currently unemployed: 15 free tickets to the Milken Conference in LA later this month.

Murdoch says papers should charge on Web: A complete volte-face from where he was 18 months ago.

Some Technocrats Are Ideologues: Says Will Wilkinson. While I think that the opposite of an ideologue is a pragmatist, and that most technocrats are pragmatists.

I’m no expert at reading carefully-negotiated communiqués, but the 3000-word G20 statement today seems to me to be more substantive and harder-hitting than any I can remember: it might not be as long as last November’s effort, but it packs more of a punch. Paul Krugman I think is right:

Realistically, most big-time international meetings produce nothing; this did something significant.

The point is that the G20 did what they could — which of necessity will have more impact on smaller nations reliant on IMF bailouts than it will on huge economies like that of the US. But every trillion dollars helps — that’s still a serious amount of money, especially for poorer countries, which is one reason Jeff Sachs is so ecstatic. Would a massive and coordinated fiscal stimulus have been an even better outcome? Mark Thoma thinks so, but I think the Europeans had a pretty good point when they said (a) that they were overindebted already, and (b) that their fiscal outlays would be rising substantially anyway. That’s what happens in countries with social safety nets entering a recession.

If you’re looking for disappointment, Kevin Drum notes this:

Obama was also said to be opposed to a greater role for international regulatory bodies, and he appears to have won that round. The draft section that called for regulators “to supervise cross-border institutions and to complete the establishment of colleges of supervisors for all significant cross-border financial firms” is gone.

The US regulatory agencies all failed miserably when it came to preventing or mitigating the effects of this crisis — and there’s no doubt that this crisis is global in nature. Regulation is clearly part of the solution, and equally clearly has to be globally coordinated, to prevent forum-shopping. AIG Financial Products and Lehman Brothers Europe were both based in London and were both largely unsupervised.

So it’s disheartening that the Obama administration is already taking the standard we’re-better-on-our-own-thanks approach. US regulators do not always know best. Indeed, it’s far from clear that they ever know best. And if international banking is really to be reformed going forwards, the locus of those efforts is going to have to be Basel, rather than Washington. Unfortunately, if the US is pushing back against such efforts now, it’ll continue to do so for the foreseeable future.

John Hempton has a nifty piece of logic demonstrating that it doesn’t make sense to bellyache about the implicit subsidy in the Geithner bank bailout plan. It’s worth reading the whole post, but basically he’s saying that the subsidy only really kicks in when the banks are insolvent, and since the government has promised “no more Lehmans”, insolvent banks are going to be receiving generous dollops of government subsidy in one form or another anyway.

Call it Hempton’s Law of the Conservation of Subsidy: Subsidy can neither be created nor destroyed, it can only be changed from one form to another.

I think John might be on to something here, but I still think there’s a strong case to be made for maximizing the transparency of any government subsidy to the banking system. The critics of the subsidy implicit in the Geithner plan aren’t in general critics on the grounds that it constitutes excessive government spending — we’re mostly supporters of the stimulus package, for instance. Rather, my problem with the implicit subsidy is more about the “implicit” part than the “subsidy” part. If you’re going to subsidize the banks, let’s make it very clear which banks you’re subsidizing, and how much you’re subsidizing them by.

This is all connected to the nationalization debate, of course. Every time the government throws a certain amount of cash at a bank, it’s quite easy to calculate the ownership stake that quantity of money could buy, given the prevailing share price. And so you get pro-nationalization rhetoric along the lines of “we could have bought Citigroup X times over for the amount of money we’ve given them”.

If you hide that money in some combination of PPIPs and the FDIC, however, then it’s never possible to calculate how much any given bank has benefitted from the taxpayer plan. You get all the costs of nationalization with none of the upside. So it’s easy to see how a government which doesn’t want to nationalize — like this one — came up with the PPIP scheme. It might not reduce the total subsidy going to the financial sector, but it certainly reduces its transparency.

Floyd Norris has the expected yet still depressing news from the FASB: bowing to political pressure, it’s severely weakening the mark-to-market rules which apply to banks. The doublespeak from the ABA is particularly egregious:

Banks have long been required to value some assets at their current market value, but the rule has provided an exception allowing banks to disregard “distress” sales that do not accurately reflect real market values.

One rule adopted Thursday will make it easier for banks to conclude sales are distressed and can be ignored.

The American Bankers Association, which had pushed legislators to demand the board make changes, praised the decision. “Today’s decision should improve information for investors by providing more accurate estimates of market values,” the association’s president, Edward Yingling, said.

One particularly unhelpful effect of this rule will be to create even more of a disconnect between the income statement and the balance sheet:

For some other assets, banks must write them down to market values only if they conclude that the decline is “other than temporary.” The measure that drew dissents will allow banks to keep part of such declines off their income statements, although the decline would still show on the institutions’ balance sheets.

Essentially what this means is that retail investors wanting to do their homework before investing in banks are going to be put at a huge disadvantage to the institutional analysts who have the time to bone up on the finer details of what can be fudged, accounting-wise, and what can’t. And more generally, the amount of faith that the markets have in banks’ reported earnings will fall even further from its already-very-low level.

There are some pretty big names coming out in opposition to the new rule, including an organization called the Investors Working Group, which is led by former SEC chairs William Donaldson and Arthur Levitt. With any luck, the root-and-branch regulatory reform being promised by Tim Geithner will include an overhaul of the FASB, and ideally do away with US GAAP altogether, replacing it with International Financial Reporting Standards.

When the G20 talks about strict new global regulation, that should include a ban on member countries unilaterally deciding that they don’t want to play nice with everybody else, and are going to have their own idiosyncratic and politically-motivated accounting standards.  Yes, America, that means you.

Ken Lewis was interviewed, in Texas, on CNBC this morning, and Becky Quick started off with a softball:

Quick: This is an area where you have a major market share, just like you do in the rest of the country. I heard recently you say that one out of every two Americans has a banking relationship with you?

Lewis: Every other American family banks with us, yes.

Lewis was grinning from ear to ear when he said this — as though it wasn’t a highly embarrassing admission that his bank is far too big to fail and therefore poses an enormous systemic risk. If you needed any evidence that Ken Lewis still doesn’t Get It, you don’t any more: he’s still of the mindset that bigger is better. Hell, he probably still thinks that buying Merrill Lynch was a Really Good Idea.

I don’t know what the best way might be of cutting BofA down to a manageable and less-dangerous size. But I do know that with Lewis in charge, the chances of that happening are exactly zero.

Joe Bel Bruno has a good piece of reporting in today’s WSJ, saying that Citigroup shares have been bought in large numbers by retail investors looking for outsize returns.

Some discount-brokerage firms report a surge of individual, or retail, investors buying shares of Citigroup during the past five months, amid the New York bank’s stock-price slide…

“We’re speculators, and that can be really risky, but it’s worth it to take a shot,” said Jin Chen, a 22-year-old Rowland Heights, Calif., resident who recently bought 10,000 shares of Citigroup at $3.10 a share. “This is my opportunity to make some money.”

“Most brokerage customers are looking at a portfolio down 50% from a year ago, and thinking that they have to get even,” said Don Montanaro, TradeKing’s chairman and chief executive.

Citigroup stock is highly volatile — as is any stock trading on option value — and it’s tempting to look at the history of Citi’s share price and decide that if you’d bought at the bottom in March, you would have more than doubled your money right now.

But no retail investors should be going anywhere near Citigroup stock right now. Yes, you might have lost a lot of money in the market, but it’s not smart to try to get it back by taking wild gambles. And a glance at Citi’s preferred shares is all you need to see that the market is still pricing in some massive dilution of Citi common.

If you really feel the need to express the view that the government will always bail out the banks, then Bruce Kelly has a much better idea: buy PFF, the ETF of preferred shares. It’s chock-full of financials, which means that you’re not exposed to idiosyncratic Citigroup risk, it’s yielding a juicy 14% right now, and its expense ratio is very low. If the preferred does end up getting swapped into common equity, you’re better off buying common stock this way than buying it directly today. If it doesn’t, then you get a very nice yield on your money.

Then again, if you’re a 22-year-old making $30,000 bets on Citigroup, perhaps all you’re interested in is excitement. But there are surely cheaper ways of finding that.

Update: Peter Eavis is thinking along similar lines.

UBS recently signed on to continue as lead sponsor of Art Basel through 2011. Oops. Maybe that wasn’t such a smart idea, given that it’s just closed down its entire art-advisory division.

UBS was always well placed to be the last man standing in the inevitable shakeout of art-advisory departments in investment banks. It had the most rich clients, and it invested by far the most money in pushing itself as the only bank which could manage both dollars and Diebenkorns. So this announcement is pretty shocking — but also a little heartening, to those of us who love art for its intrinsic rather than its monetary value.

Maybe we can date the top of the market to the 2007 pronouncement by Tobias Meyer of Sotheby’s, who said that “the best art is the most expensive because the market is so smart”. Of course the art market wasn’t the only market which ended up proving to be rather less intelligent than its participants had believed.