Felix Salmon

The NYT has an interesting chart showing light-vehicle sales, on a seasonally-adjusted annual basis, every month since 1976. The chart would seem to imply that a large uptick in vehicle sales is in the offing. But there’s one other chart I would like to see total cars per household (or per person) in the US. Was there a significant increase in cars per household as America suburbanized and moved into bigger homes with bigger garages? And if we’ve reached a far-too-high number of cars per household, how long will new-car sales have to remain near current levels before we get back down to a “new normal”?

I think that when auto financing becomes broadly available once again, the number of new-car sales is bound to rise. But those new cars might well be smaller and less profitable than the SUVs of the past decade. I suspect that much of the boom in SUV sales was a function of everybody else buying SUVs: it’s much more pleasant to drive a small car in Europe, surrounded by other small cars, than it is to drive a small car in the US, surrounded by SUVs which you can’t see around and which tower menacingly over you.

What happens to car sales when the getting-bigger trend comes to an end — as it must — and starts to reverse course? For one thing, the desire to upgrade to a bigger car starts to dissipate. And if you’re not going to upgrade to a bigger car, why buy a new car at all?

Jason Zweig is the lastest person to decide that the financial sector should take less risk. After looking at mutual fund practices when it comes to securities lending, he concludes:

Your fund should lend out your securities, but the proceeds should go to you. And fund managers should reinvest the collateral only in absolutely safe securities. The current system, where they keep half the gains and stick you with all the risks, has got to go.

He’s right that funds should lend out securities, he’s right that the proceeds should go to investors, and he’s right that the current system is broken. He’s absolutely wrong, however, about the “absolutely safe securities”.

Investing in absolutely safe securities is something of an oxymoron: if they’re absolutely safe, it’s not really investing. Investing is meant to be the means by which capital gets allocated to where it can be most used efficiently. Securities lending is an important part of that process, since without it shorting stocks would be almost impossible, and as a result there would be less liquidity and the price discovery process would be damaged.

Mutual funds are also an important part of the capital-allocation process, since they’re actually paid to assess and take risks with investable capital. Consequently, it’s ridiculous that a mutual fund — pretty much the definition of an active risk-taker — should be shunning all conceivable risk when it comes to investing repo collateral.

The only “absolutely safe securities” are short-dated Treasury bills, and the last thing we need is an institutionalized flight to quality whereby every repo transaction involves an uptick in demand for short-term government debt. After all, we’re meant to be getting credit flowing again — and short-dated credit securities are far less risky than the equities in which most mutual funds are paid to invest. So let’s have mutual fund companies taking small and sensible risks with their repo collateral: it’ll be much better for all of us.

Richard Bradley reports:

Harvard has already halted the hiring of junior faculty and announced an early retirement program for tenured professors, and for the first time ever is considering laying off tenured professors.

And why might Harvard be laying off tenured professors? Because it’s down to its last $25 billion, of course.

Bradley adds a bit to what we know about Harvard’s financial mismanagement:

According to the university’s 2008 financial report, in the next 10 years it must pay various private investors some $11 billion in capital commitments. Where will that money come from if, as seems likely, endowment growth over those years is minimal or nonexistent, and alumni’s own strained budgets limit their generosity?

These are the famous capital calls from Harvard’s private-equity investments, which previous HMC managers assumed could be met out of earlier private-equity payouts. Or something. But now — and for the foreseeable future — Harvard is facing a massive liquidity crunch:

HMC “took the university right to the edge of the abyss,” one alumnus, a financier who is privy to details of the university’s balance sheet, told me. I asked what he meant. “Meaning, you’re out of cash.

“That,” he added, “is the definition of insolvency.”

Er no, actually it’s the definition of illiquidity, but never mind. The point is that Harvard has run out of liquid assets, and that’s going to have huge effects on its institutional psyche — and possibly even on the job security of tenured professors. My guess is though that no one with tenure will be laid off involuntarily.

And maybe Harvard’s alumni might start giving a lot more now than they have in the past. After all, until recently, any giving from alumni was dwarfed by the investment gains of the endowment, and so the incentive to add another drop to the bucket was greatly reduced. Now, by contrast, cash from alumni is desperately needed to meet the university’s annual liquidity requirements. It might even feel better, giving money when you know it’s going to actually be spent, rather than giving money simply to augment some gargantuan endowment.

EMTA, formerly the Emerging Markets Traders Association, had an interesting panel on the Ecuador default today. It was a bit lopsided: no one on the debtor side — and EMTA invited the country’s own representatives, as well as its lawyers and bankers, and even the US Treasury — would agree to attend. As such, it was really a panel of private-sector participants, and felt much like a wake: it was clear that with the success of Ecuador’s exchange offer, the country has won and the private sector has lost.

In the long term, of course, Ecuador might not have benefitted all that much from its antics: Erich Arispe, of Fitch Ratings, pointed out that the country is paying out much more in cash payments for its bonds than it would have had to pay over the next couple of years in coupon payments. On top of that, Ecuador is racking up lots of new debt to multilateral institutions like the Andean Development Fund and the Inter-American Development Bank, so even its fiscal position isn’t really improving.

But in the short term, Ecuador has elegantly managed to buy back a very large chunk of its debt at just 35 cents on the dollar. Old Ecuador hand Hans Humes, of Greylock Capital, summed up how spectacularly successful the Ecuador strategy was, calling it “one of the most elegant restructurings that I’ve seen”.

In hindsight, the deal could hardly have been done any better. First and most important was the matter of timing: as all the panelists agreed, there’s no way that Ecuador could have pulled this stunt in 2006 or even the first half of 2007. But the country was playing the long game: president Rafael Correa was elected president, on a platform which included debt repudiation, in January 2007; Ecuador’s clear intention to default on its debt earned it a pretty much immediate CCC rating from Fitch. Yet the default didn’t happen until December 2008, almost two full years after Correa’s election.

The wait turned out to be the best thing that Ecuador could have done, because in the interim the global debt markets were plunged into turmoil. And Correa didn’t pull the trigger until he could see the whites of his opponents eyes: he announced that he was defaulting on the 2012 global bonds at exactly the time that three huge hedge funds, which held Ecuador’s debt, were being forced by their prime brokers to liquidate their holdings. As a result, the selling pressure on Ecuadorean bonds sent them tumbling from the 70s to the 20s almost overnight.

They would have fallen further, into the waiting arms of a small army of hungry vulture funds eager to get back into the distressed-debt game after many years essentially being priced out of it. But then Ecuador pulled its next smart stunt: it used Banco del Pacifico, a large Ecuadorean bank, to start buying bonds at levels above 20 cents on the dollar. That was just high enough that the vultures didn’t want to amass a large position, and ensured that any future restructuring would face little organized opposition just because Ecuador’s bondholders were so fragmented.

Ecuador’s next clever step was to pay cash for its defaulted bonds, rather than trying to do a bond exchange. That meant that it didn’t need to go through a laborious SEC registration process, during which the legality of the Banco Pacifico stunt would surely have been questioned. And its final clever step was not to put forward a take-it-or-leave-it offer, as Argentina did, which would allow bondholders to agitate for a mass “no” vote. Instead, they just asked bondholders to name their price.

Of course that’s what the bondholders did. None of them wanted to be left as holdouts, given the ease with which Ecuador could change the covenants on the bonds, and also the fact that they hadn’t even managed to accelerate the 2030 global bonds by the time the default happened.

Joe Kogan of Barclays Capital said that bondholders’ inability to accelerate the 30s doesn’t just show a collective action problem. “It demonstrates that people weren’t really willing to hold on to the bonds, and that the original investors who had these bonds were trying to get rid of them,” he said: no one, in the present environment, had any appetite at all for litigation which could drag out for years.

No one expected Ecuador to pull this particular rabbit out of the hat. The country has a reputation for utter incompetence when it comes to fiscal matters, and a few months ago it fired its highly-respected and long-standing legal counsel, Cleary Gottlieb. Somehow, however, this exchange offer was probably the most successful and least fraught debt restructuring in the history of Latin American sovereign defaults.

The multilaterals played their part, by condoning Ecuador’s actions and basically taking its side, despite the fact that the country had no fiscal need to default. And Argentina, weirdly, helped too: holdouts there have got very little to show for their litigation to date, and indeed Argentina was found in contempt of court in New York this week for basically ignoring a judge’s orders to keep certain funds in the US. It was a legal victory for bondholders, but won’t help them get any richer.

And of course it also helped that Ecuador was so small. Even with the bonds at par, they accounted for only about 0.5% of the emerging-market index, which means that at this year’s prices Ecuador constituted about one quarter of one percent of a diversified EM portfolio. You could fight them, but when your portfolio is down 20% for other reasons, what’s the point.

Kogan was sanguine on the question of whether Ecuador’s default would spill over into other emerging-market sovereigns. Most countries with bonds outstanding have some kind of access to the bond market, he pointed out; Ecuador hasn’t been able to issue debt in years, so losing access was no big deal for Ecuador, as it would be for most other countries. Ecuador also isn’t going to suffer as much in terms of economic costs as other countries might — its corporations aren’t going to lose bond-market access either (because they never had access) and it’s not going to suffer a bout of hyperinflation, because it’s dollarized. And although the last Ecuadorean president to default did immediately get kicked out of office, this one was re-elected comfortably, so there aren’t the kind of political costs that you’d expect in other countries. The only real new costs to Ecuador might come in a few years, if holdouts manage to attach Ecuador’s oil exports in one way or another — but given the success of the exchange offer, there probably won’t be any holdouts, or Ecuador could continue to pay them their coupons, just as it’s continuing to pay the coupons on its old Brady bonds which weren’t tendered into the 2000 exchange.

Hans Humes, however, was more worried about Ecuador setting a precedent. “As much as we can say this is an outlier, any country which runs into trouble has a great blueprint now of how to do it,” he said. The last time Ecuador defaulted, it was reasonably constructive, at least in hindsight: it hired Cleary Gottlieb, a big financial-markets law firm, it entered into dialogue with creditors including the Dart family, and it was criticized in some quarters for paying too much to bondholders rather than too little. No one can accuse it of that this time around.

“The world has changed,” said Humes — we’re now living in a world where not only Ecuador can default, but Iceland can default as well. And that’s a world where defaults by small emerging-market countries simply don’t have the systemic consequences that everybody thought they might have. I even heard Humes say something I never thought I’d hear a died-in-the-wool buy-sider like him say: “Maybe,” he said, the solution to “go back to Anne Krueger’s model”

He was referring to SDRM, the attempt by then IMF first deputy managing director Anne Krueger to create a sovereign bankruptcy court. Not a single private-sector player thought this was a good idea, as far as I could tell, and certainly no one on the buy side had any time for the idea. But now, it’s clearly better than nothing — and nothing is what bondholders are ending up with these days. “The official sector’s already beaten us,” said Humes. If you’re going to capitulate to Ecuador, then capitulating to the IMF is easy in comparison.

I’ve lost count of how many times I’ve recommended James Macdonald’s excellent book A Free Nation Deep in Debt: The Financial Roots of Democracy to people interested in the connections between democracy, development, and debt capital markets. So I’m very chuffed that Macdonald has popped up in the comments on this blog to talk about the historical precedents behind Ecuador’s decision to repudiate some of its old debts, while staying current on certain of its newer debts.

His comment is, naturally, worth quoting in full:

One of the interesting features of this default is the revival of the idea of different treatments accorded to different types of debt. There is a long history of such practice. The main purpose has always been to gain the short-term cost benefits of default without incurring the lont-term penalty of reduced access to the credit markets.

In this case, the regime treats its own debts as legitimate while treating those of its predecessors as illegitimate (or at least less legitimate). Eighteenth- century France used a different technique: treating previously defaulted debts as immune to further write-downs, while more recent debts were viewed as fair targets for default because their interest rates were, not surprisingly, considerably higher and could therefore be deemed usurious.

After the Napoleonic War, France finally became a reliable borrower, and one of the main demonstrations of this was honoring the Napoleonic debts in spite of the temptation to repudiate them. It was argued at the time that this was not merely a matter of good faith, but rather an unavoidable price for access to the credit markets on favorable terms as enjoyed by Great Britain.

To my mind, this remains a valid argument. Historically, default almost always had a negative short-term cost – it certainly did so on for France before 1815. The regime always had access to new loans after each bankruptcy; but its access to credit was limited by its previous track record. Attempting to justify its actions by differentiating between types of debt did not fool creditors. They may have continued to lend, but always at rates that factored in the risk of default, and in amounts considerably lower than they were willing to lend to Great Britain.

Just because Ecuador currently experiences a short-term gain will not turn it into a good credit risk. Only paying debts regardless of short-term incentives to default will remove it from the vicious cycle of borrowing and default which has mired Ecuadorean (and Latin American) history since liberation from Spain.

Madonald is right, of course, but it’s also worth noting that “the idea of different treatments accorded to different types of debt” is not something old which is being rediscovered — in many ways it never went away. The international community, including established debtor nations like France and the UK, even enshrined it in the concept of “preferred creditor status” — the idea that the IMF and the World Bank should always be senior to bondholders. And the Brady plan was basically a plan to turn sovereign loans into sovereign bonds on the grounds that while lots of countries had defaulted on their bank loans, none had defaulted on their global bonds, and as a result global bonds were considered safer or more senior than bank loans.

Anna Gelpern has written extensively about this issue: the big difference between sovereigns and corporates is basically that sovereigns are constructively ambiguous about which debts they consider senior to which other debts. “Sovereign immunity,” she writes, “empowers a government to choose the order of repayment among its creditors based on political imperatives, financing needs, reputational concerns or any other considerations”. The answer to this problem is not the idea that all governments should always pay all their debts in full — after all, sovereign credit risk has always existed and will always exist. Instead, a more formal system of transparent and enforceable seniority could make debt markets more efficient and debt restructurings less ugly.

For the time being, however, if and when there’s another wave of sovereign defaults, it’ll be largely up to each individual country which debts they choose to default on. Will it be foreign-currency debts, like Argentina, or domestic-currency debts, like Russia? Will it be bonds, or loans, or both? What will they do with trade finance and other vital short-term credit lines? And where will the multilaterals stand? No one ever knows, until the default actually happens.

Update: Yet more from Macdonald in the comments.

Ezra Klein does us all a favor this morning by spending 1,000 words or so summarizing a 20,000-word, 53-page paper by Yale’s Gary Gorton. Now to make it even shorter!

The key concept is the distinction between informationally-sensitive financial assets — assets which change in price when new information emerges — and informationally-insensitive financial assets — assets which don’t change in price when new information emerges. In the latter bucket we can include insured bank deposits, but bank deposits are insured only up to $250,000, and there are a lot of companies and other institutional investors who just want a safe place to park their cash and are also on the hunt for informationally-insensitive assets.

They found them — or thought they found them — in things like asset-backed commercial paper: they would hand over cash, and receive the senior tranches of securitized loans as collateral. When that happens, writes Gorton,

A ‘banking panic’ occurs when ‘informationally-insensitive’ debt becomes ‘informationally-sensitive’ due to a shock, in this case the shock to subprime mortgage values due to house prices falling.

Gorton’s solution to this problem is to involve the government in all manner of regulation — and insurance — of the securitization market, thereby making ABCP behave much like federally-insured bank deposits. I don’t like this solution at all, since it would send the contingent liabilities of the government into the stratosphere, and more importantly would ratify the demand for informationally-insensitive assets by creating trillions of dollars of new ones.

In my view of the crisis, it’s precisely the demand for informationally-insensitive assets which is the problem. And we need to get individuals, companies, and institutional investors out of the mindset that they can do an elegant little two-step around the inescapable fact that anybody with money to invest perforce must take a certain amount of risk. If you have a world where people are all looking for risk-free assets, you end up shunting all that risk into the tails. And the way to reduce tail risk is to get everybody to accept a small amount of risk on an everyday basis. We don’t need more informationally-insensitive assets, we need less of them.

If Andrew Cuomo tries to become the next governor of New York State — which he almost certainly will — then his current job, attorney general, will open up. And Eric Dinallo almost certainly wants it.

I like two aspects of Dinallo’s decision to step down from his post as New York’s insurance superintendent. The first is the fact that he’s doing it at all: there’s technically no need for him to resign first before running for AG. But clearly a big political campaign would detract from the amount of time and attention he could devote to the insurance industry, and it’s the responsible thing to do.

More interestingly, Dinallo’s resignation temporarily leaves the country without a strong insurance regulator — and that, in turn, should make it much easier for Tim Geithner to push through plans to rationalize the nightmare that is insurance regulation, and bring America’s insurers under one federal regulatory umbrella.

A lot of the consumer-facing aspects of the insurance industry properly should be regulated by a new financial products safety commission: things like variable annuities, in particular, can come close to being predatory, and it’s high time that a regulator with teeth put an end to the sale of the most egregious products. Now would be a great time to introduce legislation creating such a body, and slashing the number of regulators in Washington. If Geithner waits much longer, he’ll only give the entities to be abolished more time to put together a strategy for defeating his bill.

How government is helping drive entrepeneurship — not. Then again, what do you expect from NY State.

Is the Dow up 8, or is it down 43? Who cares? Not CNBC.

U.S. mortgage mess worsens

Most of the attention being paid to yesterday’s Ira Sohn conference seems to concentrate on David Einhorn, with his quite compelling idea that a triple-A rating is a curse, and that therefore Moody’s, whose highest praise is to bestow a triple-A rating on a company, is in for a world of pain.

But looking at Mike O’Rourke’s summary of the conference (embedded below), I was struck by comments from Paul Singer, of Elliott Associates:

Singer discussed the rule of law. He noted it is devilishly hard to preserve private capital for a long time. Rule of law is a necessary but not sufficient condition. The color of money can change over time.

This is very true. An enormous number of families have become dynastically wealthy over the centuries; precious few have managed to remain so over many generations, even if they implement harsh and unfair rules like giving substantially everything to the first-born son.

The families which have done very well over the course of centuries — the Hapsburgs, perhaps, or the Rothschilds — carry more than a whiff of helping to write the rules of the game themselves, as opposed to leaving themselves open to the caprice of others. And for all the thought experiments saying “if you put $1 in a bank account paying 1% interest in the year X, it would be worth $Y today”, the fact is that in most cases Y is zero — your money would have been taken from you, in one way or another, by now.

That probably helps explain, at least in part, why Paul Singer and his ilk spend extremely large amounts of money on political lobbying. But it should also be sobering to anybody who thinks that a passive buy-and-hold investment strategy will work over the really long term — not only into your own retirement, but even unto your children’s and grandchildren’s retirement. If you have that kind of time horizon, a whole new set of geopolitical risks starts coming into play — all empires fall, after all, and being in one of those empires when it’s falling can be extremely hazardous to your wealth. Which is maybe why family offices can spend two years searching for exactly the right person to hire.

I’ve been searching for a while for a key policymaker of the bubble years to come out and apologize for his mistakes, and of all people it seems that Bill Clinton has managed to be first across that particular line. “I should have raised more hell about derivatives being unregulated,” he tells Peter Baker — and he’s absolutely right. Would that Alan Greenspan or Bob Rubin or Larry Summers could say the same thing — especially in the light of the revelations from Brooksley Born, the former head of the CFTC, about the way in which they actively agitated to keep derivatives unregulated.

Incidentally, for those of us who have sometimes suspected that Clinton has a brain the size of a planet and knows everything, this brings him back into the realm of the human:

Mr. CLINTON: You remember we had one institution failed that the New York Fed had to bail out. It had some derivative investments and it went down. Do you remember that?

NEW YORK TIMES: I don’t.

Mr. CLINTON: What was the name of that? There was a bank that failed that the New York Fed bailed out an institution that had some derivative exposure? And so I talked with them.

NEW YORK TIMES: In ‘98-ish?

Mr. CLINTON: Yeah.

I’m almost positive he’s talking about LTCM here, which wasn’t a bank and which wasn’t really bailed out by the Fed — the Fed just knocked a bunch of bankers’ heads together until they agreed to bail it out themselves. But of course it wasn’t Clinton’s job to understand the ramifications of the LTCM crisis, it was his Treasury secretary’s job. And his Treasury secretaries signally failed to grok that, LTCM notwithstanding, there were massive and growing systemic risks in the financial sector generally and at highly-leveraged institutions in particular. When will they say sorry?

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The flipside of all those abandoned cars at Dubai airport — assets left behind by foreigners leaving the country for good — is the abandoned liabilities they’ve left behind on their credit cards:

Some UAE banks are seeing up to 2,500 customers leave the country every month without paying off their credit card bills, a number that could rise in June, a senior RAK Bank official said on Sunday…

RAK Bank recovers around a quarter of the debt that goes unpaid as a result of one of the customers leaving the country, Martin said.

I’m surprised the recovery rate in these cases is as high as 25%, frankly: chasing down debtors who live abroad is non-trivial and always expensive. But then again, I’m sure that many of the credit card balances in question are pretty enormous: as Julie Sherrier notes, Dubai is known as something of a shoppers’ paradise. If the credit card debt rises into six figures, which I’m sure it does on occasion, it’s be worth fighting for.

In the blogosphere, 2=trend, and recently two high-profile financial journalists — Alan Beattie of the FT and Justin Fox of Time — have come out with heavyweight new books of economic history. Beattie’s False Economy looks at global development, while Fox’s The Myth of the Rational Market looks at the history of the efficient markets hypothesis. What I didn’t know until today was that Beattie and Fox are both distant relatives of misguided liquidationists — something which came out when I asked them both about economic history.

How relevant is economic history at times like this, I asked. Can studying history prevent us from repeating past mistakes, or does it just end up forcing us into committing new ones? And how much of a good thing is it that an economic historian is chairman of the board of governors of the Federal Reserve?

Beattie replied first:

- yes, I think it definitely helps when looking at such once-in-a-century events to have a discipline which focuses on specific similar episodes in the past, not least because the sample size is so small. And that does seem to be having some effect on the policy response now. Despite the best efforts of some, I don’t think the Montagu Norman/Andrew Mellon liquidationist instinct or the 1930s “Treasury view” on deficit spending are getting much serious traction in the US or UK, for example. (Irrelevant trivia: I am very distantly related by marriage to Andrew Mellon – something like a third cousin three times removed. She divorced him in a spectacular case involving all sorts of legal shenanigans and managed to walk off with a sizeable chunk of the Mellon loot, though not a nickel has trickled down to me.)

- but of course you need to learn the *right* lessons and pick the right comparator. the current German reluctance to increase fiscal stimulus, for example, seems to be assuming that this is a 1920s/1970s inflationary situation, not a 1930s deflationary one.

- it is good that an economist *who is also an economic historian* is Fed chairman. Not sure you’d want someone who was reading entirely out of the previous playbooks without also being able to recognise that the monetary transmission mechanism has changed out of all recognition. The General Theory is a bit light on what to do about credit default swaps, for example.

Then Justin weighed in:

My book is basically the story of a bunch of guys who decided to ignore financial market history (the dodgy parts, at least) in order to create more elegant models of financial markets’ future. That didn’t work out so well, so yeah, knowing economic history would seem to be useful. But Alan’s right that there are lots of different lessons that can be drawn from the past, and sometimes people draw the wrong ones. I too am related to a liquidationist, by the way—George Washington Norris, the hard-line president of the Philly Fed in the early 1930s, was my great great uncle.

On Bernanke, I’d certainly rather have somebody with his background in that job than an ahistorical rational expectations type who believes bubbles and panics don’t happen. He’s not really a historian, though. He’s a macroeconomist who’s done some research on the financial system breakdown of the early 1930s. He’s worked really hard to avert such a breakdown over the past two years, and on balance that’s a good thing. But he hasn’t really been a student of what causes financial crises in the first place. Still, he’s an open-minded guy who reads a lot, so maybe he’ll figure it out.

I’d be interested in what Brad DeLong — one of the foremost economic historians of our own time — thinks about whether the “Treasury view” is getting much serious traction — I suspect he might have killed it before it had a chance to spread widely, and it certainly doesn’t seem to have been mentioned much since January 20. And in general I think that economic historians are having something of a day in the sun right now, with lots of people looking back to previous economic crises around the world, and fewer people finding modern theory-based economics particularly helpful from a policymaking perspective. Maybe economic history is a classic countercyclical asset.
Update: Brad DeLong comments:

The “Treasury View” that fiscal policy will be ineffective–well, in the past two months I have seen it advocated by Pete Klenow, Luigi Zingales, Michele Boldrin, Niall Ferguson, and Nobel Prize winners Gary Becker, Edward Prescott, and Robert Lucas. Of these, only Pete Klenow had even a half-coherent argument.

I’m fascinated that after roundly rejecting GM’s offer to swap their bonds for equity in the existing company, GM’s bondholders seem to have embraced with alacrity GM’s new offer to swap their bonds for equity in a new, post-bankruptcy company. It’s increasingly obvious, it if wasn’t clear all along, that the old exchange offer was in neither GM’s interest nor in that of the bondholders, and that bankruptcy is necessary to allow GM to shed certain obligations — especially obligations to its dealerships — which would otherwise hobble it for the foreseeable future.

The new plan essentially constitutes the nationalization of GM: the US government will own 72.5% of the common equity, plus another $2.5 billion in preferred stock. I can see why bondholders like it: the US will be extremely hesitant to let any state-owned company default, and it won’t sell off its stake until GM’s future viability is assured.

Everybody was worried that a GM bankruptcy would be vastly more complicated and fraught than the Chrysler bankruptcy, given that it has orders of magnitude as many creditors as the private Chrysler. But today’s news gives me some hope that both bankruptcies might go relatively smoothly, as planned and hoped. Although I still have no idea why GM’s shares are trading at over a buck apiece, valuing the existing common equity — which will be wiped out — at more than half a billion dollars.

The rise in US long-dated Treasury yields summed up in a nutshell, from Fitch’s David Riley: Treasuries were “moving from a risk-free asset to a return-free risk asset”.