Felix Salmon

Ford’s stock issue makes more sense than Microsoft’s bond

Felix Salmon
May 12, 2009 14:08 UTC

Ford is issuing equity and will probably use some of the proceeds to buy back debt. At the same time, Microsoft is issuing debt and will probably use some of the proceeds to buy back equity. Which one makes more sense? The answer, quite clearly, is Ford.

There’s basically only one good reason why companies would want debt rather than equity, especially in these days of deleveraging, and that’s the tax advantages of debt — you pay income tax on corporate profits only after you’ve made your debt-service payments. Ford has lost so much money in recent years that it’s very unlikely to have to pay any tax at all for the foreseeable future — and as a result the less debt it has, the stronger it is.

The case of Microsoft is weirder, mainly because it’s sitting on $23 billion of cash already — why on earth would it need $3.75 billion more? Anything it can do with debt, like buying stock, it can do with cash. And although Microsoft’s debt is cheap — it’s paying only about 100bp over Treasuries, even as most triple-A corporates have a spread of more than twice that — it still is going to end up shelling out significantly more in debt service than it will receive in interest on the proceeds.

The main reason for the Microsoft bond issue, then, is signalling. It’s a way of Microsoft telling the market that it’s still ambitious, that it still wants to grow, that it has some doubts about whether its $23 billion will suffice to fund its plans, and that it wants to lock in low rates now to help finance all manner of wonderful growth over the coming decades.

The question is whether you believe it. My feeling is that Microsoft’s days of fast growth are long in the past, and that it’s increasingly becoming a utility. Not that there’s anything wrong with that. But it does mean that if it already has $23 billion of cash, there’s really no reason to go ahead and issue debt on top.


Very smart move by Microsoft. In about three years they’ll be able to invest it in 10 year treasury notes yielding 25%. Free money.

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When banks try to defend credit cards

Felix Salmon
May 12, 2009 12:55 UTC

With the credit card bill finally coming in to focus, the banks’ complaints are ringing increasingly hollow:

“ABA is very concerned about the direction this legislation is headed and we are concerned over the impact it will have on the ability of consumers, students and small businesses to get credit cards,” said Ken Clayton, senior vice president of card policy at the American Bankers Association. “As we have said repeatedly, it is vitally important for policymakers to get the right balance of better consumer protection while not jeopardizing access to credit and the credit markets. We are very worried that the Senate bill fails to achieve this balance, to the detriment of American consumers.”

For one thing, the new bill isn’t all that different to new regulations imposed by the Federal Reserve which were due to take effect in July 2010; this just moves those regulations up a few months, probably to February. Other than that, the differences are minor: no one, at the margin, is going to fail to get a new credit card just because the terms and conditions have to be transparently posted online.

But in any event, “the ability of consumers, students and small businesses to get credit cards” simply isn’t a problem right now — and it’s very unlikely to be a problem at any time in the foreseeable future. If the average number of credit cards per American comes down, that’s no bad thing — and if, at the margin, a few people find themselves unable to get a credit card in future, that’s probably because they are so uncreditworthy that they really shouldn’t have one in the first place. Much better that they go to their local credit union and get a checking account with a debit card and an overdraft facility, or an outright personal loan.

I know that lobbying organizations have to do their very best to protect their members’ interests, but I do wish that sometimes the press wouldn’t simply parrot their statements with a straight face. At least in this case it’s obvious to the overwhelming majority of newspaper readers that the interests of the banks and their borrowers aren’t nearly as aligned as the ABA would have them believe: the more interest that banks charge, the more money they make, and the less money that consumers have left over.

But I think my favorite argument in favor of the banks comes not from the ABA but from Tom Brown, reliable shill for banking interests everywhere:

If you compare what the card industry looked like 20 years ago to how it looks today, you’ll be astonished at how much better a deal consumers are lately getting. And government regulation isn’t what drove the improvement; free-market innovation and competition, did. Twenty years ago, all consumers paid the same interest rate—and it wasn’t low (19.8%).

Um, Tom. For one thing, consumers ran much lower balances 20 years ago. And for another thing, interest rates generally were a good 10 percentage points higher, 20 years ago, than they are today. Comparing nominal rates, rather than spreads, is rather disingenuous.

The weird thing is that this credit card bill is mainly political theater anyway, thanks to those Fed regulations which are going to come into force anyway. It makes the president look good, but it’ll change very little in practice. So one really does wonder what all the fuss is about.

Update: Joe B emails:

Not only was the spread lower 20 years ago, as you so smartly point out, so were nominal rate. I have credit card bills from 20 years ago. The rate was about 12-15 percent on the cards I had. It was the scandalous cards at 19.8. Moreover, there was no such thing 20 years ago as a default rate or companies raising your rate based on your other relationships with the bank. The grace period was also 30 days, compared to 20 today. The junk fees (late, over-the-limit, forex) were lower. And consumers were NOT paying the same rate. There was a wonderful diversity of card issuers and rates (almost all fixed) available.



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Chart of the day: NYC subway ridership

Felix Salmon
May 11, 2009 22:08 UTC

Paul Kedrosky points to this wonderful map of New York City with sparklines showing ridership over time at various subway stations. I can’t get the background map to show up, but the data is all still there, and here’s a bit of the Lower East Side:


It’s well known that the Lower East Side has been resurgent of late — and so the increased traffic at the 2nd Avenue F stop comes as little surprise. (To give you an example of the timescale here, the grey box covers the years from 1952 to 1977.)

What fascinates me about this map is how four stations all of which are quite close to each other can have such very different ridership experiences — a true demonstration of how New York really is made up of very small microneighborhoods.

The Bowery J/M/Z stop has seen less ridership than any other subway station in Manhattan for years, and there are always rumors floating around that it might just be closed. Meanwhile, the Grand Street station just a few blocks away has loads of traffic. Partly that’s a function of the lines they’re on — the B/D lines are useful, while the J/M/Z lines are notoriously unlikely to go anywhere you might ever want to go. But it’s also a function of the fact that the Bowery stop is in a weird not-quite-anything neighborhood, while the Grand Street stop is increasingly finding itself in the heart of a very vibrant Chinatown.

Meanwhile, the Essex and Delancey stop is only very slowly beginning to pick up a little steam — it’s well behind the East Village on that front.

But this chart, of course, is just the beginning. Next up, someone should overlay local property prices, rebased to the NYC average. That could be very interesting indeed.


The graphs also get influenced by the potential connections available. The B and D trains have become much more significant, and others less so. J, M and Z lines are not very connected to other parts of Manhattan, although they might have been routed differently in the past. Perhaps a better graph would be the ridership on the lines (normalized since lines change name) rather than specific stops.

Posted by Nic Fulton | Report as abusive

Google-NYT: The dance continues

Felix Salmon
May 11, 2009 21:53 UTC

Back in January, Google’s Eric Schmidt was dismissive when asked about whether he had any interest in buying the New York Times, although he did say he was interested in doing a peculiar thing where he would “merge without merging”, whatever that meant.

In any event, it seems to have meant that when a real opportunity arose, he spent a good deal of time looking at it:

Scott Galloway, a Web entrepreneur and New York University Business School professor who is one of two Harbinger appointees on the Times board, made an overture to Google co-founder Larry Page about Google buying the Times Co. Even though Google CEO Eric Schmidt has publicly lamented the state of the newspaper industry and dismissed the notion of Google investing in it, people involved said the company looked seriously at the opportunity before deciding to pass.

My feeling is that there’s no point in Google talking to Harbinger: unless and until the Sulzberger family has serious interest in talking, it makes essentially no difference who owns the B shares. But at that point, there are all manner of interesting structures which might be created, some of which might well involve Google’s charitable arm, Google.org. Schmidt’s claim that he didn’t want to mix philanthropy with business was always the least convincing part of his claim not to be interested in the NYT.


I think you mean the A shares. The B shares hold the voting rights.

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How hedge-fund-friendly is the White House?

Felix Salmon
May 11, 2009 19:38 UTC

Ryan Chittum makes a good point about the hedge funds kvetching about the Obama administration on page C1 of the WSJ: their “pique” (to use the word in the WSJ headline) might well be a function of the fact that their income taxes are about to rise dramatically:

Obama’s plan would force hedge funds and private equity and the like to pay income tax like the rest of us instead of much-lower capital-gains rates they pay now on their earnings. Sure, some hedge funds have honorably acknowledged they ought to pay the same rates as everyone else, but nobody likes to effectively have their tax rate doubled overnight—especially when their earnings are already down.

It’s also worth noting that the piece says that 70% of hedge-fund campaign donations went to Democrats in the last election cycle — and then goes on to quote at length Paul Singer, of Elliott Associates. What it doesn’t mention is that Singer was the single biggest supporter and fundraiser that George W Bush had in New York; that he gave even more money to Rudy Giuliani, partly by lending him his private jet; and that in general he is about as loyal and committed a Republican as they come.

Personally, I think it’s a positively good thing that hedge funds are feeling piqued by the White House. Maybe they were hoping that Larry Summers’s presence (not to mention that of Rahm Emanuel) would make the White House a bit more hedge-fund friendly. On the other hand, maybe this is being a bit more hedge-fund friendly. After all, if the worst that the White House does is make good on its promise to keep the Detroit car industry from imploding completely, you can make a pretty good case that hedge funds have gotten off pretty lightly.


I’m glad too see that oil speculators are once again pushing up the price of oil thus hurting the american consumer. I’ve got news for them the economy won’t rebound because when the price of my gas goes up 30 cents in two-weeks I start looking to cut expenses. I feel that if the Obama Administration and the current Congress don’t act quickly to curb the gas prices which hurt all americans they could find themselves eventually replaced with a government that does. People, like my self are slowly tiring of a government that raises our taxes, increases the deficit and does nothing to protect it’s people from those who seek to defy the fundamentals of sound economics in favor of profit. When, we reach the point that we’ve had enough then like those who threw off the British King almost three centuries ago; we too will throw off this current government and form a new government that will provide adequate safe guards to secure our liberties and ensure our posterity.

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Ackman’s desperate Target fight

Felix Salmon
May 11, 2009 17:01 UTC

There’s another of Bill Ackman’s song-and-dance shows today: he’s waging what the FT calls “one of the largest and most expensive proxy battles in US corporate history” against Target, and eliciting some pretty compelling pushback from Bill George in the process. George is no lightweight: he’s the former CEO of Medtronic, is a professor at Harvard Business School, and is a board member of both Exxon Mobil and Goldman Sachs.

The Ackman fight is confusing, especially given the very peculiar quote he gave to the FT:

“This is not a poorly managed company,” he told the Financial Times in an interview. “This is really just about improving the board.”

I really have no idea what this is supposed to mean. No one spends $15 million on a monster proxy battle just because he thinks that one set of independent directors will be marginally better at giving direction to existing management than the current set of independent directors. But Ackman has backed himself into a corner.

When he started his fund, Ackman had all manner of bright ideas about how Target could achieve better results through financial engineering. But the world was different then, and much more amenable, in principle, to such suggestions. Today, talk of spin-offs and lease-backs is extremely unfashionable: we’re living in a back-to-basics business culture, and that’s no bad thing.

The problem for Target is that Ackman still has a fund to run, and pushing financial engineering is the only way that he knows to try to justify that fund’s existence. The fund might have been a bright idea when it was set up in 2007, but not all bright ideas turn out well, and this is one which turned out badly. So we get mission creep: Ackman is now targeting the board, rather than management, for reasons which are increasingly vague.

Most investors, if their investment in a company doesn’t work out, sell it and move on. But Ackman can’t do that, because he’s running a single-stock fund. So he’s liable to be an expensive annoyance to Target for the foreseeable future. He has very little choice.


Felix, I think you’ve got this one exactly right. The quant-based financial engineers need to wake up and smell the coffee. Going forward, the global economy will not be able to afford the “skimming” that the financial services industry has engaged in for decades — positioning themselves in the flow of money and helping themselves to a few hundred basis points a year when all they do is slice the global GDP pizza into a different number of slices. It’s over, boys — let’s see those business plans. Case in point: spoke with a former CIO of a mutual fund company last week; she was recently downsized and bought a landscaping company. Sun on your face and sweat on your back, like the rest of us.

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Annals of competition, art-fair edition

Felix Salmon
May 11, 2009 15:46 UTC

There was an interesting quote from an Art Basel spokesman in the FT on Saturday, about the placement of the satellite Scope art fair “just a football throw away from the main fair”:

“Obviously, our exhibitors are not enthusiastic about the idea of Scope being so close to Art Basel,” says a spokesperson for the main fair, “[but] the groups actually pressuring Scope are the residents of Landhof.”

Why is it at all obvious that the Art Basel exhibitors would not be enthusiastic about having Scope nearby? I suspect that the true story is that Art Basel is unhappy about Scope’s proximity, and that it therefore reckons that its exhibitors are as well. Even if they’re not.

I would have expected, however, that even Art Basel would have been quite excited about Scope. After all, the massive success of its own spin-off fair, Art Basel Miami Beach, is largely a product of the fact that a very large number of satellite fairs — Scope, Pulse, Flow, etc etc — sprung up around it and helped to give it a lot of free extra buzz. Just as specialist retailers tend to cluster together geographically, so do art fairs tend to all appear in the same place and at the same time, to the benefit of them all.

In today’s straitened economic times, however, it’s possible that Art Basel is worried that its dealers will desert the more-prestigious Art Basel location for the adjacent (and significantly cheaper) Scope. Given that most collectors who attend Art Basel will look in on Scope as well, it’s easy to see how dealers looking to cut costs might willingly take the step down, especially when Scope is so nearby.

Even if they don’t take that step, the proximity of Scope is good for the dealers, since it applies downward pressure on the amount that Art Basel can charge them. So I’m frankly skeptical that the exhibitors “are not enthusiastic” about it. Anything which improves the vibrancy the art world is a good thing for pretty much everybody these days. But I guess the competitive mindset dies hard.

Reporting massively large numbers

Felix Salmon
May 11, 2009 14:25 UTC

What are we meant to do when we read a story like this one, full to bursting with unimaginably large numbers? The 2009 deficit is now $1.84 trillion, up $89 billion from $1.75 trillion! That’s 12.9% of GDP! The spending plan for 2010 isn’t $3.55 trillion any more, it’s now $3.59 trillion! And so on and so forth.

I’m not picking on Reuters here at all — the team has actually done a spectacularly good job of trying to present these numbers in as many different ways as possible in order to give an idea of how big they are. But the problem is that the job is basically impossible because the overwhelming majority of human brains simply can’t comprehend the sheer magnitude of something like $1 trillion.

One thing which might help would be a cost-per-household measure. (As well as a hyperlink to the primary source.) In 2009, the figures now have total tax revenues of $2.157 trillion and total expenditures of $3,998 trillion, for a total deficit of $1.841 trillion. In real money, assuming 114 million households in the US, that means the average household will pay about $19,000 in taxes this year, but that the government will spend about $35,000 per household; the difference of $16,000 per household will have to be put on the national credit card.

Obviously averages conceal as much as they reveal, but at least this kind of exercise brings the numbers into the realms of the comprehensible. Once numbers go over $100 million or so, they pretty much cease to have any meaning for most of us, except as numerical exercises. It’s often helpful to bring them down to the kind of dollar figures that people can relate to.


With Peak Oil to hit the world economy in 5-to-10 years, the only way out of the huge Federal debt is to inflate it away. The government could default, but would then have to pay for oil with gold or threaten to stop all food exports. What havoc would that cause! I would plan for very high inflation starting within the next 5 years. People should also start thinking about how they will deal with gasoline rationing. There is simply no way to now avoid a reduction in our standard of living. You can’t spend more than you earn, & borrow the difference, forever.

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Sunday links don’t pay as much

Felix Salmon
May 11, 2009 00:01 UTC

Micro-payments considered for WSJ website: Or not so micro, for that matter. I wonder whether micropayments will count towards the cost of an annual subscription, like the Oyster card in London. I doubt they will, though.

Why Are (Some) Consumers (Finally) Writing Fewer Checks? I would have liked some international benchmarks.

Fatal (Fiscal) Attraction: Spendthrifts and Tightwads in Marriage: They attract each other, it seems.

You Have No New Messages—Ever: I haven’t got around to working out how to set up voicemail on my office phone yet. And I’m thinking maybe I never will.

And, in case you were wondering: What Will The Market Do Today?