Felix Salmon

Steve Forbes is no fan of progressive taxation — the idea that in a community where all contribute to the commonweal, the better-off should sacrifice more of their income than the poorer folks. Indeed, he published an entire book, entitled Flat Tax Revolution, to the proposition that any burden placed upon the well-to-do should be shared equally by all.

And yet here’s the latest announcement from his eponymous magazine, Forbes:

Other measures to be taken include: suspending 401K matching contribution; salary reductions for anyone making over $100,000, amounting to 10% of the increment over $100,000. Also, employees will have a week long furlough with no pay.

This is taxing the rich! It’s class warfare! Why should those employees earning a six-figure salary be singled out for pay cuts? If you cut their pay, don’t you know that you’re going to reduce their incentive to work hard, and also the incentive for lower-earning employees to aspire to their position? And these are the most productive members of the firm! You’re punishing success! You should be giving the higher-paid employees a pay rise, instead — that will surely boost corporate revenues!

Come on Steve, walk the walk. If the rich can’t be treated equally with the poorer at Forbes, where is the hope for them in this world?

Cap and Trade: I’m pretty much with Kevin Drum on the Waxman-Markey bill. But seeing as how Obama campaigned on a cap-and-trade bill with 100% auctions, I just don’t believe that such a thing is so politically impossible that it can’t even make it into this first draft. If RGGI can do it, so can the Feds.

On the other hand, the Republican talking points about such things are just depressing beyond words: see GOP full of hot air about Obama’s “light switch tax”, which is something they’re still doing.

And wait, there’s even more depressing Republican rhetoric: see Paul Ryan’s Crazy Budget Graph, or April Fool’s Budget Relies on Inconsistent Tax Rates. I do have some sympathy for Dani Rodrik’s skepticism when it comes to technocrats, but surely a government of technocrats — which is what I think we now have — is nearly always to be preferred to a government of idealogues.

A loyal reader writes in with a curious request: he’s lost a bet, which requires him to cough up a bottle of wine that retails for more than $50. But he says he’s “not willing to pay it off honorably”, and is asking if there are any expensive wines with a Wine Spectator score of less than 60. Basically, he’s looking for the worst possible wine in that price range; he says “The wine has to be available either online or in most NY/PA/NJ stores.”

My gut feeling is that any number of Burgundies might fit the bill, or else — if the recipient is anything like me — a particularly sickly Riesling, or a sweet Champagne. Or maybe a high-end vintage white — a Sauvignon Blanc way past its sell-by date, perhaps.

In general, though, this isn’t an easy bet to pay off dishonorably, since expensive wines really do taste better just by dint of being expensive, so long as the person tasting them knows what they cost. In any case they can always be regifted in good conscience. If your friend hates the 17% ABV California fruit-bombs, I’m sure he’ll know someone who loves them. My gut feeling is that the best course of action is to look for a celebrity endorsement, ideally accompanied by a donation to charity. This would be perfect, but it’s too cheap, maybe it comes in a limited-edition magnum?

I love the little graphic that Canada’s BNN TV put together for my appearance on it this afternoon.

Accrued Interest, after looking at the bank bailout plan, has come up with an interesting conclusion: the Legacy Securities Program will be a great success, but the Legacy Loan Program is stillborn, unless some big changes are made.

I’ve done some deep dives on bank residential loan portfolios. Getting detailed data is a challenge, but basically I tried to figure out what percentage of the bank’s current portfolio is “challenged.” High CLTV, bad geographics, low FICO, etc. You can make a relatively safe assumption that most of the loss reserve is pledged to those kinds of loans. Anyway, I can’t find any big banks that are holding, say home equity loans at less than 90% of face. Unless the Legacy Loan Program winds up buying assets at $90 or more, banks won’t sell.

Using some pretty reasonable assumptions, the PPIPs aren’t going to buy these loans until they drop to the low 80s — which means that there simply won’t be a market-clearing price for most of the loans.

But what happens if one or two desperate banks end up selling loans at say the 82.5 cents on the dollar which Accrued Interest reckons would be a reasonable price? Since the whole point of this program is to provide price discovery, wouldn’t that mean that the rest of the banking system would have to mark their loan books to the newly-discovered valuations?

I’m not sure what the answer to that question is. From a simple accountancy perspective I think the banks can continue to classify these loans as held-to-maturity assets, and thereby avoid having to mark them to market. But when it comes to the government’s stress tests, it’s going to be hard for the banks to persuade Treasury that the loans are worth significantly more than anybody is willing to pay under the PPIP. So if the loans don’t clear, that could be prima facie evidence that the banks are not actually as solvent as they say they are. Which could be a nasty unintended consequence of this whole plan.

This press release from Alix Partners just arrived in my inbox; it’s plugging a survey that the company has kindasorta released. The survey “is proprietary“, they say, but that doesn’t stop them from scaremongering up a storm:

While American industry is struggling to get through what could become the worst recession since the Great Depression, Americans say that even after the recession ends, their spending will return to just 86% of pre-recession levels, which equates to an approximate 10% drop, or more than $1 trillion annually, in GDP. They also say this new, lower level of spending is structural and could last for nearly a decade after the recession ends. The findings are based on an in-depth economic survey of more than 5,000 Americans released today by AlixPartners LLP, the global business-advisory firm.

If you read this very carefully, it’s not actually saying that there’s a snowball’s chance in hell of consumer spending or US GDP dropping by these enormous amounts: the key words here are “Americans say”.

This survey might actually be interesting if today’s savings expectations are compared to savings expectations in the past. If the survey had been run annually, say, then we might have some baseline against which to calibrate the finding that Americans say that they’re going to save 14% of their income. But we don’t, so it’s truly meaningless, graphs like this one notwithstanding:

You might as well run a chart of how much weight Americans have lost in the past, and then add a column showing how much weight they hope to lose in the next year.

Astonishingly, Alix Partners seems to think that this information is useful, and they’re plugging it as an example of the value they can add; their PR person, Brian Shiver, even says that the results of the survey will “require companies across almost every sector to rethink how they operate their businesses”. Er no, they won’t. More likely, they will require companies across almost every sector to rethink the utility of hiring large consulting firms.

Kevin Drum has a few practical issues with my idea about capping bank size at $300 billion:

What happens when you have a whole bunch of banks all operating at their maximum allowed size? Do they keep taking in money but just sitting on it? Of course not. Do they essentially shut down, not taking any new customers? What about natural growth among existing depositors? (For that matter, what about natural asset growth?)

Even more important, what happens when banks can’t can’t compete with each other by growing? What would they compete on? My guess is that they’d they’d compete on keeping the biggest, most profitable customers and would pretty much lose interest in smaller customers. So small depositors would find themselves increasingly unwelcome, paying higher fees and penalties, having a harder time securing loans, and so forth. After all, what incentive would a capped bank have to treat small depositors decently if they don’t don’t really want them in the first place?

The first thing that a bank does when it starts bumping up against the cap is to start selling off its assets: that’s why I’m a fan of old-fashioned securitization, where banks genuinely move assets off their balance sheet. Kevin’s worried that securitization only applies to assets and not to liabilities, and he wonders what will happen to bank deposits; I’m less worried about that. But fine, if deposits grow too large, then maybe banks can be allowed to exceed the asset cap so long as they invest excess deposits only in Treasury bills. (Or, to put it another way, if you sell off a bunch of loans, you have to invest the proceeds in Treasuries if your deposit base is greater than the asset cap.)

There are other things banks can do to move excess deposits off their balance sheets: they can move big deposits into externally-managed money-market funds, for instance.

As for banks competing with each other by growing, I simply don’t believe that they do. That was the point of Mike’s post, at Rortybomb: when banks get big they’re less competitive, not more competitive. And I think that Kevin is just wrong when he thinks that big customers are more profitable than small customers. Check this out, on the subject of Mexico’s biggest microfinance lender, Compartamos:

Compartamos, which had 1.16 million clients and MXN5.73 billion in loans at the end of December, saw its net profit rise nearly 28% to MXN1.12 billion in 2008, giving the bank a return on average equity of 44%, compared with an average for Mexico’s banking sector of 12.5%.

Yes, that’s a 44% return on equity in 2008. There aren’t many banks which can say that.

If there was a cap on bank size, then small depositors would actually become more attractive to banks: you get a much higher return on assets when you’re charging a $25 fee to someone with $500 in the bank than you do when they have a lot more.

So I’m not worried about consumers being hurt by caps on bank size. Quite the opposite, in fact: I’m pretty sure they’d benefit. Just look at credit unions: they’re nearly always small, and they’re nearly always great for consumers. We should take that model and run with it.

It’s my first day at work! After working from home for substantially all of this decade, it’s a strange feeling; I wonder how long it’ll take to get used to it.

A quick note of introduction for the rather enormous number of reuters.com readers who’ve never heard of me: I’ve just moved my finance blog here after two years at Portfolio.com. I’ll be blogging the financial meltdown here in much the same way as I was over there, if maybe with a slightly more global outlook. But there will be room for other stuff, too: art and architecture, food and wine, demographics and development. Whatever catches my eye, really. So do feel free to suggest blogworthy material — my email address is felix.salmon at thomsonreuters — and let me know if you want me to cite you if the suggestion ends up in a blog entry.

In a weird way, this job means the culmination of a decade-long full-circle journey. In 1999 I got my first blogging gig (although it wasn’t called that at the time) at a little-known newswire called Bridge News. I would link to news stories on the wire, add snarky commentary, and do the whole thing on a fixed page in reverse chronological order. But there was very little conversation: in order to leave a comment, you basically needed to pick up the phone and call me.

My first blogs on the internet were tentative things, but by the time blogging really took off in 2003, I was up and running with both felixsalmon.com (my personal blog) and memefirst.com (a group blog). Meanwhile, I was learning a lot about international finance by writing about Latin America for Euromoney, the financial trade magazine. That’s how I first met NYU professor Nouriel Roubini: at the time we were both very interested in sovereign debt restructuring, and somehow after he started up his economics information aggregator, RGE Monitor, I persuaded him to give me a job blogging there.

That job led to the Portfolio gig, and thence back to a newswire, where it all started. My main job now is just to continue blogging as have been for the past couple of years — but I’m also going to be involved in setting up a brand-new commentary and opinion website, set slightly apart from reuters.com, which will be launching later this year. In the meantime, I get to go swimming in the astonishing pool of information which is owned by Thomson Reuters, and blog anything I find there — something which is very exciting indeed, since finding things like bond spreads and commodity price history on the internet is decidedly non-trivial.

As for the biographical stuff, I’m an Englishman who’s made New York my home: I’ve lived here for the past 12 years, and can’t imagine leaving. I’m still 36, for a few more weeks. And I’m very much looking forward to getting to know, through the comments section, all the new readers I’m going to find through blogging at reuters.com. Welcome to the new blog!