Felix Salmon

Toxic asset datapoint of the day, Lehman edition

Felix Salmon
Apr 14, 2009 14:01 UTC

We knew there was a lot of nuclear waste on Lehman’s balance sheet. But we didn’t know that was literally true:

Lehman Brothers Holdings Inc. is sitting on enough uranium cake to make a nuclear bomb as it waits for prices of the commodity to rebound, according to traders and nuclear experts.

At least uranium can in theory be used as a force for good, in nuclear power stations. Which is more than can be said for CDO-squareds.

(Via Wiesenthal)


I just read an article in the Sydney Morning Herald, it says that China is building 30 nuclear powerplants and that Chinese companies are lining up to invest in Australian uranium mining and exploration companies.

Analysts warn China’s nuclear expansion will not succeed unless it secures enough uranium. Reason enough to invest in uranium, as demand and price most probably skyrocket in the near future.

The secret stress tests

Felix Salmon
Apr 13, 2009 14:53 UTC

If a bank passes a meaningless stress test and nobody hears about it, will the Treasury market rally? Or will there just be lots more volatility in bank share prices?

Answers on the back of a postcard please to T. Geithner, 1500 Pennsylvania Avenue, Washington DC, along with any other unintended consequences of the current making-it-up-as-we-go-along approach to bank regulation.

At the very least, Treasury needs to be much clearer than it has been about exactly when and how the results of these stress tests are going to be made public. And when in doubt, it should release more information more quickly, rather than going the standard Washington route of keeping stuff secret. Because these results are so important, and known to so many people, that they will leak if they’re not released soon.


So the delay in the ‘stress test results’ is because it is good news? So much for transparency.

http://www.loanclassroom.com/no-wool-pul led-over-my-eyes/

Let’s hurt the American financial services industry

Felix Salmon
Apr 13, 2009 11:18 UTC

Pejman Yousefzadeh is upset:

The brain drain that the American financial service industry may face thanks to increasing regulation, the pursuit of class warfare rhetoric and policies by the Obama Administration and its allies, and the tendency to blame the current economic downturn on entities like hedge funds, which had nothing to do with the financial crisis, will only serve to hurt the American financial service industry down the road.

Well, yes. Think of it as a Pigovian policy response: you tax and regulate the stuff you want less of. And it’s pretty clear that the financial-services industry was far too big, before its crash. Recall Simon Johnson:

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent.

Financial services companies are meant to be intermediaries, middlemen. And any time that the middleman is taking 41% of the total profits in what’s meant to be a highly competitive industry, there’s something very wrong.

So yes, I do want to “hurt the American financial service industry down the road”, if by “hurt” you mean bringing its profits down to something less than 20% of all domestic corporate profits. That doesn’t seem unreasonable to me. And I especially want to hurt the American financial service industry down the road if by “the American financial service industry” you mean the too-big-to-fail banks which have caused such an enormous systemic risk to the global economy. Yes, I want to see them hobbled, much less powerful, and much less dangerous.

So no, I don’t have any particular interest in buying freshly-issued shares of Goldman Sachs at these levels. Buying shares is a bet on steady future growth. And Goldman is too big already. I want it to get smaller, not bigger. It was the imperative to grow which caused many of the problems at places like Merrill Lynch and Bear Stearns. Which makes this kind of equity offering part of the problem, not part of the solution.


I think Grover Cleveland’s second Administration addressed and dealt with a similar financial crisis as we in the U.S. are facing today. Then, before the invention of trucks and superhighways, it was the railroads and barge-lines trying to control the economy and make or break communities by charging more for goods and services, and or,discounting or increasing shipping costs. President Cleveland imposed price controls, nationwide shipping tariffs and signed into law Taft-Hartley.
Today we have banks, hedge funds, money managers, lawyers and insurance companies, in the financial services industry, unlawfully violating their fiduciary obligations with the bad faith depletion of trust funds and commingling those trusts res with personal or third party funds.
The U.S. “Corpus Juris Secondum” is specific that any party proceeding in bad faith ALWAYS has judgment entered against them.
International Trust Law is specific in the prohibition of a Trustee, or party with directorial authority, using that position of trust to gain ownership of the res of the trust.
Both are specific with penalties assessable for commingling even one penny of trust funds.
Both are specific with regards to limits of trustee and caretaker charges on trusts interest income and profits.
Is it lawful for a Trustee to earn ancillary profits by using, (abusing?), said position of trust for the sale of shares or stock in that very position, and or the trust itself, and fail to turn over all income above chargeable caretaker fees to the res of the trust? I think it is not lawful! What do you think?
For example;…WestLaw Publishing entered into a trust agreement with an individual American citizen. Judith Thompsen, the daughter of a Chicago policeman, was designated as Trustee. Judith used the res of said trust to create “Thompsen Financial.” Thompsen Financial gained ownership of WestLaw Publishing. Later in the last century, WestLaw-Thomsen Financial purchased Thomson Reuters Worldwide, including the Scottish title associated thereto. (I reserve for later discussion, the value of said title, as Charles Windsor publicly abdicated the British Crown and pledged to dismantle the feudal system on the death of his mother, with the invocation of St. Patrick’s name while speaking Gaelic; versus the U.S. Constitution’s prohibition against aristocracy and titles.)Today, the Trust entity is called Thomson Reuters. Does Reuters own WestLaw, or does WestLaw own Reuters? Is the presentment as Reuters a bad faith concealment of trust assets? Who owns Thomsen Financial? Does Judith Thompson, that daughter of a Chicago policeman, own it all? Or, does the individual American citizen who created the original trust with Westlaw, having beneficial interest and ownership rights with creator and maker interests, own all? I say, Trust Law and the principles of proceeding in all good faith agree, that individual American owns it all!
If I am the aforestated American Citizen…I hereby and herewith claim and assert all ownership and beneficial rights to the res of the Trust created between myself and Westlaw Publishing with all interest, additions and/or increasement accruals thereto. Further, I revoke, rescind and cancel any and all assignments, conditional or unconditional, of my ownership rights and beneficiary interests in said trust. I revoke, rescind, cancel and void any, and all, modifications, both known and unknown, to the original Trust, except modifications that increase, enlarge or benefit the res of the original Trust. Additionally, notice and demand for a full accounting of the Trust and chargeable Trustee fees is given this day, April 14, 2009, to begin within a reasonable time. All Co-Trustees, if any, directors, employees, agents, vendors or service providers are directed to comply with their fiduciary duties in assisting and facilitating Judith Thompsen (Thomsen) with the transfer of Trust directorial authority and accounting. Forthwith, WestLaw publishing will re-activate the web-site account for legal research, which is an extension of the subject matter of the original Trust, having both my last name and Social Security number. WestLaw will restart the shipping of legal publications, as printed, free of charge, to St. Ethelreda’s School Law Library, 8746 S. Paulina Ave., Chicago, IL, (The grammar school Judith and I attended). All parties, Supervisors of the school, are instructed to assist both Judith and myself in the accounting and transfer processes.
Since the time of Hammurabi, ignorance of the law is no excuse. If any Reuters Employee, Manager or Director refuses to publish this blog, edits this blog, or fails to pass this blog up the chain of command after reading this blog, in the hopes Judith will read it, would be liable for all charges, pursuant to Corporate Accountability Statutes, should Judith require me to press my claims in a court of law. Such is also true for any Thompsen Financial or West Law Publishing associate.
As to hurting the American Financial Services Industry? America invented many great things…The steam ship. The telephone. The first oil well in the world. The airplane. The Internet was invented by an American. But we did not invent Fraud…crime. The tale of “The King’s New Clothes” is a European creation. Now the one boy’s laughter, and shouting “The King is naked?” is an American action. But sadly, we did not invent laughter.
Gov. Long, (LA), was assassinated for reminding Americans each and every single individual voter, as a matter of Law, is sole sovereign of this Great Republic, with no authority over anybody. Everyone is equal before the law. Everyone is King.( Curious Long’s assassin was a law student son of a judge, not descended from a French settler and pioneer.) Each of us must press his own claim of sovereignty.
Is it lawful for a Trustee to claim ownership of a trust, or to deplete the res of the trust due to his mis-management? I think it is a crime. What do you think?

Blogonomics: True/Slant fails the interactivity test

Felix Salmon
Apr 13, 2009 11:04 UTC

Matt Taibbi is blogging over at True/Slant, the new website which managed to get itself a fully-fledged Mossberg review last week. Taibbi’s blog is fantastic, and the site looks great. But a few of the site’s early decisions make me bearish on its future.

First, the site’s RSS feeds are truncated — which is simply idiotic. Second, the list of executives (five of them, four with the word “chief” in their name) gives no contact information for any of them: they’re closing themselves off from their readers.

Third, you can’t comment without first registering — another way of the site closing itself off from its readers. (I tried to register, and am supposed to click on a link in an email they were supposed to send me, but I never got the email.) In general, I never fail to be astonished at the number of new blogs which by default, at launch, assume that their readers are so unruly and untrustworthy that all manner of registration or comment-moderation firewalls need to be put up before they can interact with the site.

It’s true that when sites become extremely popular, comment trolls can become a problem. And I’m sure that True/Slant has every intention of becoming extremely popular. But it’s not there yet. So it’s depressing to see how difficult they’ve made it to (a) comment in the first place, and (b) read other people’s comments, if those comments haven’t been “called out”. It makes readers feel like third-class citizens, rather than people interacting with the bloggers as peers. And it’s the kind of thing which should only be implemented when things get so bad that you have no choice.


The Reuters News RSS feeds are truncated, but the blog feeds are not.

Moderation is for libel reasons, mainly. We have had some awful problems with spam in the past, but it’s got better and the Anti-spam word helps.

Don’t blame Felix for big-company issues… The blogs were slipped under the radar a few years back (by convincing a network ops guy to add a DNS entry…), so they’re a bit of a fly-by-night thing.

Posted by Anonymous Coward | Report as abusive

Ben Stein Watch, RIP

Felix Salmon
Apr 12, 2009 16:47 UTC

Shortly after I started blogging for Portfolio, I was quite rude about a Ben Stein column in which he described the lack of any Wal-Marts in midtown Manhattan as “an enduring mystery of the retail economic world”. In September 2007, I officially started the Ben Stein Watch, on the grounds that “we have to stop Ben Stein from writing for the Times. Right now.”

By the time I left Portfolio, the Ben Stein Watch archives (conveniently available at bensteinwatch.com) amounted to 60 separate blog entries, totaling 33,776 words. And although they were popular, they never achieved their stated aim: Stein is still writing for the NYT. But I’m putting the BSW to an end right now.

One reason is that Stein’s columns have ceased to be infuriating to me: instead they tend to lie somewhere between boring and incomprehensible. Another reason is that if Stein couldn’t get himself fired from the NYT for making Expelled , there’s simply no way that a lone blogger is going to have any effect. But mainly I just want my Sundays back — I have better things to do with what is meant to be a day off than try to decipher stuff like this:

If some of us want to help posterity, and help it survive the tsunami of debt, we might be more likely to save when our mood is low (as against the times when we are all happy and positive about the future).  

And so I’ve decided that the BSW won’t follow me from Portfolio to Reuters. I probably won’t ignore the man completely, but I will no longer feel compelled to blog every single NYT column he writes. If anybody wants to take over the franchise, they’re more than welcome to, and I’ll happily provide lots of link love — I might even submit a guest post once in a while.

If you ever wonder, however, whether a Ben Stein column might be making sense, just remember this: the man wrote a book entitled “Yes, You Can Time the Market!” and then wrote this:

I’m writing this on Aug. 13, 2007… the stock market is cheap on a price-earnings basis, profits are fabulous… and in the long run, both here and abroad, stocks are a lovely place to be.

Oh yes, and he also declared, more than three months into the deepest recession in living memory, that “as a matter of definition, we simply cannot be” in a recession at all.

So it’s probably best just not to read the chap. Since paying attention to his atrociousness clearly hasn’t worked, maybe ignoring him will have better results.



I’m not sure why my previous comment has been “awaiting moderation” for three days now.

Nonetheless, I have made my decision with regard to the BSW franchise.

See today’s (Thursday’s) entry in my blog, Pragmatism Refreshed, for my plans. I’d love a link. Thanks.

Saturday links reach the end of the road

Felix Salmon
Apr 12, 2009 02:58 UTC

Job Sprawl: And why it’s not a great idea to start extrapolating.

Look Into the Sun: The no-advertising business model. Doesn’t seem to be doing particularly well these days either.

The Best Minds of My Generation: Are going to be trying to game the PPIP. Is this a feature or a bug? See also Mike on risk management, and the incentives that banks have to shove the maximum amount of risk possible into the tails. (This is what I call the “Rubin Trade”.)

Why is Good Friday a Stock Market Holiday: I love this: “Two or three years in a row during the 1890′s, there was a big drop in the market on Good Friday. Traders took it as a sign from God that he didn’t want the exchange open.” Because God is a stock market bull, obvs.

Henry Paulson’s Son Finds Dad’s Money Won’t Buy Soccer Bliss: As Ryan says, funny on so many levels.


As one of the few commenters on Mike’s blog who actually took him up on his offer to come up with other endings for the phrase, “A third party of ex-Citi executives, CitiJR, bid $80 for assets worth $50. Sure enough, two years later they lose their $6.50…” I must say I’m a bit disappointed. My offerings weren’t all that great, but I was really looking forward to hearing what the other great minds of my generation might be able to come up with. Well, Felix, how about it? Have at it!

Posted by Jacob | Report as abusive

Stock return chart of the day

Felix Salmon
Apr 11, 2009 23:13 UTC


Nick Gogerty has a great post using this chart to explain why mutual fund managers are doomed to underperform the stock market. Yes, stocks as a whole do rather well — but only if you include the really spectacular winners. If you buy the market and a whole and make money doing so, you’re basically following a strategy of making sure that you include the spectacular winners by making sure that you’re including pretty much everything.

Nick explains that while the mean return for the stock market is quite good (or at least was between 1983 and 2007, which was the dataset for this graph), that isn’t true for other kinds of average:

The median and mode for shares returns is actually well below the cap weighted index which is closer to the mean. The charts above indicate 64% of shares under perform the index. This means that managers who “tilt” or weight their portfolio to their best ideas are statistically taking a random sample and doing bad things, increasing the odds of picking sub-index performance and in so doing also diminishing the allocations to the potentially significantly positive outliers that help deliver the mean performance.

Any good fund manager will tell you that, in hindsight, his best stock picks weren’t his best ideas. But it’s really hard to find a fund manager who won’t overweight his portfolio to the stocks he most believes in. And that’s one of the reasons that I’m suspicious of value investing: it’s full of investors who have done so much homework that they’ve convinced themselves they’re right — and they just won’t let go. This results in great stories, but it doesn’t necessarily result in great returns. Quite the opposite.


Thursday April 9 everybody was happy:

Stock prices and averages rising, better than expected earnings announcements, the Dow move back above 8000 !

BUT, the charts and several indicators show the start of a big decline.

This means we have now in our hands an opportunity to sell stocks at a better price. Thats all.

Remain focused: Its your money

Chaim Kimelblat aka Schpekulant@gmail.com
Listen with your Brain

Posted by Chaim Kimelblat | Report as abusive

Unemployment datapoint of the day

Felix Salmon
Apr 11, 2009 16:53 UTC

Justin Fox revisits the January payrolls report, and finds some scary numbers most of us missed the first time around:

January 2009 was a truly, spectacularly bad month for non-farm payrolls. It was bad enough in seasonally adjusted terms: 741,000 jobs lost. But when you look at the raw data it is truly staggering: 3.6 million jobs gone. There’s always a big decline in employment in January as all those Christmas-season jobs disappear—that’s why the Bureau of Labor Statistics adjusts the data for seasonal factors. But in normal times it’s a decline of 1 million jobs or so. This January accounts for about three-quarters of the total job loss since the fall financial panic.

I find it hard to believe that any economy which managed to shed more than three and a half million jobs in one month is anywhere near recovery. Most of the time, job losses are a lagging indicator. But they’re also, when they approach this kind of magnitude, an important driver of economic activity: people who have just been laid off simply don’t spend money. And a marginal extra 3.6 million people not spending money amounts to a pretty unstoppable force in exactly the wrong direction. If each of those people reduces spending by $1,500 a month, then that’s $65 billion a year right there being sucked from the economy. And that’s just the job losses from January this year.

What’s worse is that you have to get quite a long way into a recovery before businesses feel so upbeat that they start hiring again. New job creation is an incredibly powerful force, but it’s also something which works over the long term, not the short term. In the short term, mass layoffs have a much larger effect. And they’re not over yet.


“I find it hard to believe that any economy which managed to shed more than three and a half million jobs in one month is anywhere near recovery.”

Exactly, dude. You and I totally agree.

Posted by John | Report as abusive

Why it’s better to bail out borrowers than banks

Felix Salmon
Apr 11, 2009 16:09 UTC

Justin Fox does us all the favor of asking — again — why we’re bailing out banks rather than borrowers. If I had to give a simple answer, I’d say that it was because the failure of Lehman brothers has shown us that we simply can’t afford not to bail out the banks. If banks’ creditors in general, and their senior unsecured bondholders in particular, are forced to take massive haircuts on their holdings, we could suffer another sickening downward lurch in the fragile credit markets, with nasty knock-on effects for the economy.

But I’m not entirely convinced that the simple answer is necessarily the correct one. I just got a very smart question via email from Liaquat Ahamed, author of the excellent Lords of Finance :

Lehman had a balance sheet of around $800 billion, $30 billion of equity, $120 Billion of unsecured debt and $650 billion of secured debt (repo etc). The secured debt was fine, the unsecured debt got paid out at 20 cents on the dollar and the equity went to zero. Total loss was $100-120 billion.

As I understand it no counterparties in the US lost any significant amounts of money. Counterparties had been worried about Lehman for a while and had collected margin on unrelaized gains on outstanding trades. In the UK there were some losses from the practice of rehypothecation by the prime broker but even here the losses were only in the tens of billions.

The main impact of the Lehman failure was psychological. The Reserve fund broke the buck the next day from losses on Lehman commercial paper but even then the run on money market funds was contained. Everything the Fed then did that week was designed to contain the psychological damage from the Lehman collapse.

I sort of buy the John Taylor idea that it was the failure of Congress to approve Tarp on the first go around that really spooked everyone and raised the specter that the US would not bail out its banking system.

I’d add to this the fact that when Washington Mutual went bust with massive losses for unsecured bondholders, the systemic implications were relatively small: while it’s received opinion that the Lehman bankruptcy was devastating, very few people (other than John Hempton) think that of the WaMu implosion.

Politically, it’s extremely difficult to pass a bill giving hundreds of billions of dollars to people who borrowed money and now find themselves incapable of repaying it. But then again, it’s politically just as difficult to give that money to the banks who lent it, too. And as Steve Waldman notes, the alternative to not bailing people out is basically to force “prudent” investors and savers to take losses instead:

Don’t go all Rick Santelli on me about the injustice of paying for your asshole neighbor’s granite countertop. We are bailing out a banking system that served as a vast criminal conspiracy built around plausible deniability and limited liability. We are bailing out “savers”, who not only demand to be made whole by the government on risky loans they chose to make to banks for profit, but are smugly self-righteous about it, like it’s their “right” because after all they were the “prudent ones”. Of the three groups we might bail out, these crybabies and criminals are no more deserving than some nearly-broke bastard who believed his financial adviser, his banker, his mortgage broker, and the Wall Street Journal op-ed page when they told him that a cash-out refi was as good as money earned, and that granite countertops were a luxury that would pay for themselves. Don’t get me wrong — I’d rather we could bail out no one, just do a rip-off-the-band-aid kind of reset and let everybody take their lumps. But households and firms in debt are by far the most sympathetic villain in this horror show we wake up to every day.

So maybe we should be spending less time on the banks and more time on the borrowers. Yes, bail out the banks — but don’t do it directly; do it indirectly, instead, via the borrowers. Maybe the banks will take slightly more losses that way. Fine. That just means the banks creditors will be more bailed in than they have been to date, and the current market price of the debts will be justified. And at least it will be ordinary Americans getting the government bailout, rather than multi-billion-dollar corporations who utterly failed at their primary job of managing risk.


mc cain said the same and was called an obstructionist. not sure he had an actual plan (and i didn’t vote for him or his main opposition) but that made sense to me

if goldman was smart enough to hedge against an aig collapse they were smart enough to figure out they would be bailed out. bad idea to do it. bad idea to allow them to return tarp $ and stop paying interest to treasury

Posted by oops | Report as abusive