Felix Salmon

Why can’t borrowers buy back their mortgages at a discount?

Felix Salmon
Apr 11, 2009 15:37 UTC

Thornburg Borrowers Unite is a new blog for people with mortgages from now-bankrupt Thornburg. Those mortgages are for sale, at a discount: why can’t the homeowners themselves buy them back? “If Thornburg can be persuaded to give its borrowers right of first refusal,” goes the argument, “it costs taxpayers nothing, and it prevents third parties from profiting from our losses and the demise of Thornburg.”

This is entirely true, and it seems like a perfectly good idea. But there is one small problem with it — the issue of adverse selection, from the point of view of the investor buying up Thornburg’s mortgages.

If I’m putting in a bid on a large number of Thornburg loans, I know that some will perform well, and be worth more than par, while others will perform very badly, result in foreclosure, and be worth maybe 30 or 40 cents on the dollar to me, all told. Net-net, I might be willing to pay 60 or 70 cents on the dollars for those loans.

The borrowers are saying that if Thornburg is willing to sell their loan to an outside investor for 69 cents, it should be even more willing to sell that loan back to the homeowner for 70 cents. But in fact it’s more complicated than that. The homeowners who are willing and able to buy back their own loans for 70 cents on the dollar are generally the most valuable of Thornburg’s borrowers — they’re overwhelmingly likely to be the ones whose loans are worth par, or more. So if Thornburg allows them to buy their own loans back, the value of the remaining mortgages goes down, and the investors aren’t going to be willing to pay 69 cents on the dollar any more.

And it’s also not strictly true that doing this “costs taxpayers nothing”. If I borrow $500,000 from Thornburg and then buy that debt back for $350,000, I’m basically making a $150,000 profit, which would normally be taxed as income. Recently, the government temporarily suspended the laws forcing me to pay income tax on that $150,000. But the more people who buy back their mortgages at a discount, the more income tax is foregone by the Treasury.

All that said, the idea behind the blog is a fundamentally good one: anything which provides a new bid for legacy mortgage assets should be encouraged. I wish these people well, and hope they get somewhere with their campaign.


The banks are hedging that the property values will be worth more in the future, holding their cards until that time. But, they are never coming back, and this short little breath we have now is a mere last gulp before the final plunge. Look, if one just prices the raw materials to build a complete home, minus the labor, most folks could live in mansions for 100K. Who is going to think the 900% on top of that 100K will ever be absorbed? Truth is, the “easy money” era is over, and the age of individual resourcefulness is here.

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Usury datapoint of the day

Felix Salmon
Apr 10, 2009 09:58 UTC


The typical overdraft fee these days is in the $35 range. And how much is borrowed when people get an overdraft? The thing is that most of the time the overdraft is inadvertent — which means that the account drops only a tiny bit below zero. In the case of debit-card transactions, the average overdraft is only $17. And as a result, as the chart above shows, if you go overdrawn as a result of a debit card transaction, you’re likely to pay $1.94 in fees for every dollar you borrow.

Other methods of payment have lower fees per dollar, but not much lower: if you go overdrawn as a result of with drawing money at an ATM, you’re likely to pay 78 cents per dollar in borrowings, while if you transfer funds electronically, you’ll pay 98 cents. If you write a check, the number is 73 cents.

This is what the likes of John Hempton are talking about when they say that banks are inherently enormously profitable, and that if we just leave them to their own devices and prevent them from paying dividends, they’re likely to become solvent again sooner rather than later, just by dint of how much money they make day in and day out from their operations.

But the question is: do we actually want to live in a country where banks lose money on stupid loans and make it up by socking the poor with exorbitant fees? (It’s not the rich who generally pay those $35 overdraft fees.) If you look at the entire global banking sector over the history of the modern world, I’m pretty sure that looking at interest income alone, it has lost an enormous amount of money in aggregate. Those losses are paid for, generally, by some combination of government bailouts and increased fees. And that’s just not a model I feel comfortable with. Hempton thinks that banks should be both boring and highly profitable; I think it’s worth asking where those profits are coming from before we start embracing that idea too ardently.

(Source: page 38 of this PDF, via Amanda Clayman)


I have yet to find a bank that doesn’t charge a late fee on credit card balances, which are also usurious. And the late fee is on top of interest charges, which can be as high as 30%. They even charge a late fee if the payment is made before the end of the billing cycle, which is what happened to me recently – the payment was credited on the most recent statement, which also showed a $35 charge (curiously, they didn’t charge any interest, although in the past they have on late payments).

The banks have proven they are incapable of running their business. I don’t like having the government run them, but I would accept rules that basically turn the banking industry into a utility, where they do little more than connect lenders/savers with borrowers, and take their cut. For the banks that don’t want to suffer this kind of regulation, they can choose not to have their deposits FDIC insured, and they can only use their depositors capital, and not borrow any money from the federal reserve, or any of its’ member banks. If they want those kinds of benefits, then they can meet the regulations that prevent them from doing stupid things and colluding with other banks to charge outrageous fees.

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Thursday links look at fixed-income investing

Felix Salmon
Apr 9, 2009 14:15 UTC

Regulatory Capital Arbitrage: “With hindsight, there was too little capital allocated for mortgages originated between 2005 and 2007. Then again, with hindsight, they had a negative NPV, and should not have been issued by any rational profit maximizing firm.”

U.S. Imagines the Bailout as an Investment Tool: It’s still extremely unclear what kind of retail investors are supposed to want to invest in this stuff. What kind of risk profile fits a potential retail investor?

REO Hack Job: Paul Jackson takes on the NYT. “This isn’t insight; it’s a poorly-executed witch hunt masked as real journalism.”

Google and the Temptations of Being Cash-Rich: Why Google should give up its cash for reasons of self-discipline.


The apparent five-minute auto-reload feature of your new blog is annoying, because the period is so short. And at least in Firefox 3.0.8 on Linux, the refresh returns me to the top of the page. This and having to scroll down again to the post I was reading invariably disrupts my train of thought.

The blog’s content remains, as ever, as affably thought-inducing as before.

A suggestion: Reload to the same place, unless there’s a new post. Better yet: Always reload to the same position, but flash an unobtrusive new post indicator in a corner. And yes, I could open each new post in its own tab, but time is money, or something.

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WSJ.com’s barbell strategy

Felix Salmon
Apr 9, 2009 14:00 UTC

Zachary Seward has an interesting interview with wsj.com’s Allan Murray, who is sounding reasonably similar to the FT’s Rob Grimshaw, although even Murray says that he finds FT.com’s bizarre business model “very confusing”.

The WSJ seems to be moving towards something of a barbell strategy here. On the one hand there’s a lot of free content: Murray lists not only “all our political coverage, all our opinion coverage, all our arts and leisure coverage”, but also any “big news story” as the kind of stuff which anybody should be able to read for free. Plus, of course, there’s any story which you get to via Google News.

At the other end, there’s very expensive niche content:

I think what you have to think about is sort of narrower groups of interest where the interest might be deeper and more intense and therefore might make people willing to pay for it…

We’re working on a premium initiative to launch a series of, as you say, niche or narrower information services that we can sell at a premium to smaller groups of subscribers on subjects that they care most about.

The FT has already started going down this road, with the launch of its China Confidential product. There have been three biweekly issues so far, and a subscription will set you back somewhere in the £2,000 or $3,000 range.

How many subscribers does China Confidential have? One, I think, although the number might have risen all the way to three or even four. There will probably be more, but I’m not at all convinced that this kind of business is a smart one for the FT and WSJ to be in.

I’ve spent a fair amount of time among both FT and WSJ reporters, on the one hand, and financial trade-magazine and newsletter journalists, on the other. Essentially, the FT and the WSJ are trying to move in to the newsletter space — but are trying to do so with their present cadre of reporters. And newspaper reporters don’t tend to be nerdy enough to get excited by the finer details of the platinum-molybdenum relative-value play: they’re always more interested in the big stories.

What’s more, FT and WSJ reporters have a habit of believing that they’re extremely good, just because they get big stories. But of course it’s always much easier to get a big story if you can say you’re calling from the FT or the WSJ than it is if you say you’re calling from some publication which will only be read by a handful of super-premium subscribers.

Indeed, there might well be an element of bait-and-switch going on here: WSJ reporters will get stories wearing their WSJ hats, only to publish them behind ultra-high subscription firewalls which are impenetrable to the overwhelming majority of WSJ subscribers. This is unlikely to impress anybody — not the sources, not the subscribers, and not even the suits, who will eventually realise that their franchises are built on having reach. The FT’s Lex column, for instance, is influential precisely because it’s read by hundreds of thousands of commuters on their way in to work in the morning. The more expensive you make it, the less that it’s read, and the less that it’s read, the less influential it is.

My feeling is that Murray’s latest bright idea is doomed. He’s giving away most of the stuff that people want to read, and he’s trying to make money from selling stuff people need to read. The problem is that for all the WSJ’s astonishing levels of self-regard, there’s precious little of that material out there. Open the paper and ask yourself how much of it really isn’t replicated, for free, anywhere online. The answer is that there’s very little — certainly not enough to persuade hundreds of thousands of people to pay good money for an online subscription.

When people subscribe to wsj.com, they do it because out of a desire for convenience: the knowledge that they can get whatever they want in one place. They’re not, in general, paying this money out of a feeling that they simply can’t live their lives without this particular source of information. And when the WSJ starts trying to charge thousands of dollars for premium content — when it walls off stories even from its own subscribers — a lot of the convenience that people are paying for, the knowledge that all the WSJ’s content is available to them, evaporates. Subscribers hate running into super-premium firewalls: it makes them feel second-class. And it’s the broad mass of subscribers which the WSJ will get the overwhelming majority of its revenue from. It’s a good idea not to annoy them — or they’re prone to start finding their news elsewhere.


Post-BSC sabbatical, I renewed the WSJ — just before they started adding things like the Sports section. The paper has dropped off a cliff in terms of its usefulness.

Still there is that every once and a while article that I only read while thumbing through the print edition, and that snags me. For this, and only this, do I keep the print edition, thumb through on the way to work, and then get everything else from the Pink Paper. (Btw, they have a fantastic online edition; Google “FT Electronic Edition” and pledge your faux-academia.)

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Greenspan’s reputation continues to decline

Felix Salmon
Apr 9, 2009 13:01 UTC

Neil Irwin has a nothing-new-here profile of Ben Bernanke in the Washington Post. What struck me, however, was the way that his collegial style was characterized very much in terms of what (and, implicitly, who) it’s not:

To many Fed veterans, his leadership style is a stark contrast with that of his predecessor, Alan Greenspan, whose tenure was characterized by tightly controlled decision-making with only rare open disagreement.

“It’s not Ben’s personality to pound the table and scream and say you’re going to agree with me or else,” said Alan Blinder, a former Fed vice chairman and longtime colleague of Bernanke’s at Princeton University. “It’s not his way. I’ve known him for 25 years. He succeeds at persuading people by respecting their points of view and through the force of his own intellect. He doesn’t say you’re a jerk for disagreeing.” …

“The chair of any committee can respond to comments that challenge his view in ways that essentially inform the committee that the issue isn’t worth discussing. This chairman doesn’t do that,” said Jeffrey M. Lacker, president of the Richmond Fed, who worried that the Fed was putting itself in the uncomfortable position of allocating capital in the economy. “He takes other views seriously.” …

“He tries to bring as much input as possible,” said Kansas City Fed President Thomas Hoenig. “He’s always been willing to ask questions, accept input and be responsive to that input.”

We probably knew that Alan Greenspan was never a big fan of getting lots of input from the FOMC. But this looks to me very much as though Jeffrey Lacker is going on the record as implying that Greenspan didn’t take other views seriously, and that Alan Blinder is going even further than that.

Once upon a time, even after Greenspan’s departure, such high-ranking officials would have been careful to disavow such implications. Now, they don’t seem to care any more. If Greenspan is upset by this kind of thing, who cares. He’s a historical relic at this point.


I can’t make heads or tails of this issue. We had lots of crashes before the advent of fiat currency, so how does that make the Fed bad? Is there really any objective way to tell if the Fed is making things better, worse, or if it’s just irrelevant? I lean a tad Keynesian myself, but what about the past decade in Japan? Austrians think Greenspan’s policies precipitated the crisis and that the stimulus is a huge mistake, not to mention the Fed itself. I get the low interest rate = RE bubble thing, but it was poor risk mgt that was the weak link. I don’t really follow the argument. Monetarists I can’t figure out, they just seem grumpy right now, like they don’t like the Keynesian stimulus but aren’t quite sure what they would have done (?) Someone can set me straight on this point, I’m sure. Calgon, take me away!

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Annals of no-comment, Meredith Whitney edition

Felix Salmon
Apr 9, 2009 12:14 UTC

David Weidner speaks to Meredith Whitney:

When I asked Ms. Whitney this week if she deserved acclaim for The Call – in particular credit for calling the meltdown – she declined comment…

“The disclosure (at banks) was playing catch-up,” Ms. Whitney said. “You really had to dig deep and pay attention to balance sheets. A lot of people knew the system was overlevered. That’s why finding the inflection point was so meaningful.”

That’s declining comment? It seems like quite a good answer to me. The Call in question was Whitney’s sell rating on Citigroup in October 2007, when Citi was trading at more than $40 a share; it more or less marked the point at which Citigroup’s share price fell off a cliff. (See the graph below.)

Whitney’s point is well taken: it’s one thing to point out that lots of banks had lots of leverage. But it’s another thing to get the timing right and work out exactly when all that overleverage was going to hit them in the share price.

Weidner’s not impressed: he says that “Ms Whitney’s call on Citi wasn’t that great”, and compares her unfavorably to Dick Bove, Mike Mayo, and Charles Peabody; not to mention Nouriel Roubini and Nassim Taleb. But this isn’t some kind of competition with only one winner. And when it comes to research, it’s not just what you say, it’s how you say it. Whitney has the rare ability, among sell-side analysts, to speak in clear and unhedged declarative statements, which has served her very well. Add to that the fact that she was right, and you can see how she became such a star.



Nice Post Felix. Whitney said it spot on. Nobody is a prophet, but Whitney made a great call, and deserves the credit.

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The Geithner plan vs the Brady plan

Felix Salmon
Apr 9, 2009 11:27 UTC

Mohamed El-Erian is interviewed over at FT.com, and at the beginning of the first interview, at about 1:45, he says this:

I think you’re going to need a little bit of moral suasion. This is very similar to what we saw with the Brady plan at the end of the 80s. You had the overhang of the developing country debt, and you had a mechanism to lift it, but at the end of the day, you also need some moral suasion to get the banks to participate, and to clean up their balance sheet.

It’s an interesting analogy. But in one important respect there’s a huge difference. In the Brady plan, the banks had illiquid loans on their balance sheet which they swore up and down they were holding to maturity (because if they sold them they’d take a loss they couldn’t afford). The solution was to turn those illiquid loans into liquid bonds, add a few sweeteners in the form of zero-coupon Treasuries, and create a mechanism for allowing the banks to slowly let those toxic assets trickle off their balance sheets by selling them in the liquid secondary market as and when they could afford to.

The PPIP, by contrast — or at least the Legacy Securities Program — works the other way around. The banks have liquid bonds on their balance sheet, which they can sell in the secondary market if they want, but only at very low prices. Under the Geithner plan, those liquid bonds will be transformed into highly-illiquid public-private investment funds, with both the ability and the intention to hold the bonds to maturity.

And, of course, the fiscal cost of the Brady plan was wholly transparent and up-front. Under the Geithner plan, no one has a clue what the cost to the government is going to end up being.

But El-Erian is right that both plans involve Treasury twisting the banks’ arms to force them to do what is ultimately in their own best interest. But in one way the Geithner plan can’t ever be as successful as the Brady plan. Under the Brady plan, the main indicator of success was that the developing-country governments in question regained access to private-sector capital. Under the Geithner plan, the plight of the borrowers is not really part of the problem, since most of the debts in question were issued by some kind of special-purpose vehicle. Maybe the resuscitation of the securitization market as a whole is one of the objectives of the plan. But it’s not at the top of the list.


“The PPIP, by contrast — or at least the Legacy Securities Program — works the other way around. The banks have liquid bonds on their balance sheet, which they can sell in the secondary market if they want, but only at very low prices.”

Ummm, the bonds aren’t “liquid” if the bid/ask spread is so wide that buyers and sellers are at an impasse.

Imagine that a bank is carrying a AA-rated senior CDO tranche at 30 cents on the dollar, but there are still no buyers to be found. If I offer to buy the tranche for 1 cent on the dollar, that doesn’t make the tranche “liquid.”

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The return of the day trader

Felix Salmon
Apr 9, 2009 09:27 UTC

Jane Kim is the latest journalist to do a story about day-trading retail investors, and boy has she found some doozies:

The uncertain environment has prompted David Dilley of Bonita Springs, Fla., to trade more frequently. The 76-year-old retiree believes there has been a “sea change” in economic philosophy — shifting from private enterprise to a command-and-control economy. “The long-term market gains that we’ve had in the past will not occur until that reverts and we get back free enterprise,” he says. So, while he had considered himself a longtime buy-and-hold investor, he’s now trading Canadian oil trusts in his E*Trade account several times a week…

Mark Swenson of southern New Hampshire says he typically trades with exchange-traded funds, instead of buying individual stocks. The 40-year-old says he started trading for the first time last October, in part to generate additional income in case his work as a plumber dried up.

Kim does pick up on one interesting incentive to day-trade — or, rather, the lack of an old disincentive:

While short-term investors are likely to face higher tax bills — since short-term gains are taxed at higher rates than long-term gains — he notes that some people who incurred big losses last year will be able to carry those losses forward to offset taxes in future years.

It’s unintuitive, but it makes a certain amount of sense: if you lose a lot of money in one year, then your risk appetite can actually go up, in that you don’t need to pay lots of taxes if you gamble irresponsibly and make lots of short-term gains. So, good luck with those Canadian oil trusts, Mr Dilley!


trading is a zero sum activity. At the end we all get caught with a bad trade and the profit goes to zero… if we r lucky… :)

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Pay no attention to Moody’s Berkshire downgrade

Felix Salmon
Apr 9, 2009 06:52 UTC

Let’s say that Berkshire Hathaway carried a double-A credit rating from both S&P and Fitch, but retained its triple-A from Moody’s. Would anybody pay attention to the Moody’s rating? Of course not: Berkshire owns more than 20% of Moody’s, it’s a huge and loyal shareholder, and any Moody’s rating of Berkshire is fraught with conflict.

So my gut feeling is that faced with any ratings action by Moody’s on Berkshire, the best thing to do is to ignore it, even the downgrade is eminently sensible, and even both inevitable and a good thing.

One of the biggest weaknesses in financial markets is the way in which investors happily downplay the biggest of conflicts, so long as those conflicts are disclosed. If a bank is a huge lender to a company, then that bank’s research on the company in question should not be taken particularly seriously. And what applies to debt investments applies tenfold for major equity investments. Ignoring the elephant in the room only becomes more egregious when the presence of the elephant is disclosed in some pro-forma footnote.


“One of the biggest weaknesses in financial markets is the way in which investors happily downplay the biggest of conflicts” — considering that you’re being paid money to churn out opinions that we can all get for free at any bar or bus stop, you are surely under at least some obligation to adduce evidence to support such claims as this?

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