Felix Salmon

Chart of the Day: Common capital vs TCE

Felix Salmon
May 9, 2009 16:16 UTC


This chart comes from today’s WSJ, and shows the big difference between tier-1 common capital, which is the criterion that Treasury ended up using in its stress tests, and tangible common equity, which is the criterion everybody thought Treasury was going to use in its stress tests. And you can see why Wells Fargo, in particular, was livid about the switcheroo:

Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as “asinine,” were particularly heated, according to people familiar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed’s findings.

Remember that the numbers in the chart are as of year-end 2008, not the year-end 2010 figures used in the stress tests. But judging by where Wells is right now, it’s 90 basis points short of the 4% common capital ratio, but only 10 basis points short of what everybody thought was going to be used: a 3% TCE ratio.

Banks like Bank of America and PNC, however, clearly benefitted from the change: they’re both short on TCE, but have much more than 4% tier 1 common capital.

Why did Treasury switch from TCE to the even-more-obscure common capital metric? Quite possibly to help Bank of America and Citigroup get the amount of capital they needed to raise down to a number within the realms of possibility. After all, these tests were designed so that they couldn’t be flunked. And that might have seemed a real possibility back when Treasury was still using TCE.


The stress tests were never really about testing stress but mostly about putting confidence back in the market. From where I’m sitting it looks like it worked. There is still a risk that some unknown unknown might pop up and deflate the new confidence bubble, but for now it looks a bit rosier. What we all have to bear in mind is that black swan events may have low probability, but that doesn’t mean they can’t happen one immediately after the other. While banks remain ready to repeat the errors of the past, the problem is still there. I can’t quite see anyone really wanting to turn off the Wall Street money spigot, so risky lending is probably simply waiting for the encore.

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When online publications erase writers’ careers

Felix Salmon
May 9, 2009 02:55 UTC

Back in March, I wondered why the NYT was breaking the web, yet was hopeful that it was some temporary snafu, and that it would be fixed sharpish. But no — it’s still insanely broken, and Thomas Crampton is only one of hundreds of journalists who have seen their careers thoughtlessly erased by an idiotic marketing stunt.

This hits home for me, because, between now and then, my name was summarily erased from more than 4,000 blog entries at Portfolio.com, when the site hired Ryan Avent to replace me. Now, everything I wrote has Ryan’s name on it instead of mine. You could call it erasing my career, I suppose. It can be fixed quite easily — if Portfolio.com stays up, which it’s far from obvious that it will — but I’m told there are no staff available to fix it.

In general, web publishers care much, much less about preserving their archives and honoring incoming links than you’d ever believe possible. I’m not sure why that is, but it’s those of us who are paid by media companies to write things online who tend to bear the brunt of those actions. Maybe we should start insisting on adding clauses to our contracts, whereby we’re automatically given our archives and full rights to republish them wherever we want, the minute that incoming links get broken or the site goes down. Such clauses shouldn’t be necessary, but sadly I think they probably are.


Regarding some safeguard against the kind of thing described here, there is a precedent of sorts in book publishing contracts, which commonly contain a reversion-of-rights clause if a book should fall out of print for a certain period–perhaps a year. A similar clause could restore rights to an online writer.

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Friday links don’t work like they’re meant to

Felix Salmon
May 8, 2009 22:41 UTC

Financial Crisis Containment: An important paper from Anna Gelpern. In a crisis, governments panic — this is called “crisis containment”, if you’re being polite. It’s inevitable. And surprisingly predictable, too.

Climate Impacts of Waxman-Markey: Might be pretty small, even if it works and even if the rest of the developed world signs up too.

60% Of Subprime Defaults Started As Prime Mortgages: “It wasn’t just some bad lending that broke the system. It was widespread financial distress. We were much poorer than we thought, and we’re even poorer now.”

Housing bailout datapoint of the day

Felix Salmon
May 8, 2009 22:35 UTC

Maurna Desmond reports:

Senior federal housing officials say that of 51 loans made under the [Hope for Homeowners] program, 50 were made by Melville, N.Y.-based Lend America, and those 50 loans are being held up pending ongoing federal investigations.

Yes, that’s the program which was meant to help 400,000 troubled borrowers. It turns out to have helped exactly 1.


That program was so successful it has been renamed. The new name is: “Hope Homeowners Don’t Figure out There’s No Hope”(HoHoDoNoHo for short).

When private equity funds try to get around bank-ownership rules

Felix Salmon
May 8, 2009 22:11 UTC

The NYT sent Eric Lipton all the way to Cainsville, in the middle of absolutely nowhere, to visit what used to be called the First National Bank of Cainesville and is now called Flowers Bank, after its brand-new owner, Chris Flowers. Lipton has filed a great story of attempted regulatory arbitrage, where Flowers is personally buying this bank just so that he can get its national banking charter — his private equity shop being considered by the Fed to be not boring enough to own a bank.

The Fed is right, as Lipton shows — he even quotes Flowers talking about how “lowlife grave dancers like me will make a fortune” from the bank crisis and bailout. Which is not really the attitude that one wants bank owners to have: they should be boring and conservative, not greedy Masters of the Universe who happily drop $53 million on buying an Upper East Side townhouse.

Incidentally, the NYT’s picture caption is very wrong: it says that the value of the Cainsville bank is “about a third” of the value of Flowers’s townhouse. Not even close. As of the end of last year, the bank had $16.699 million in assets and $12.492 million in liabilities, for a book value of $4.2 million. Even if Flowers paid 2x book (unlikely, but possible, given that what he really wanted was the banking license rather than the bank) he will only have shelled out about $8 million for the bank, or about 15% of what he paid for his townhouse. More likely he paid less than a tenth of what he spent on his home.

If Lipton wants to follow up on the subject of regulatory arbitrage among private-equity shops which own banks, he might want to take a look at MatlinPatterson, a distressed debt fund right here in New York which has been going through all manner of contortions to avoid breaching rules preventing it from owning more than 24.9% of banks such as Flagstar Bancorp in Michigan. When it wanted to buy Flagstar, it couldn’t do so directly. So it asked its limited partners to send more money to a new entity it set up for the purpose, and as soon as it got that money, it refunded an identical amount back to those partners in a deal which looked very fishy to John Hempton back in April. (One of the limited partners was Nicola Horlick’s Bramdean Alternatives.)

I think it’s about time that we move from a rules-based system where private-equity types spend vast amounts of time and effort trying to get around rules preventing them from buying banks, and move to a principles-based approach where anybody attempting something as blatant as this (“it’s not my private-equity shop buying this bank, it’s me personally, so that’s fine”) gets slapped down sharpish. And that goes for MatlinPatterson, too.


Regarding your fraction-of-a-townhouse calculation for how much Flowers paid for his bank: Note that of the $4.2 million book value, it appears that $2.6 million was new paid-in capital from Flowers himself (per the FDIC link, that’s the amount of equity attributable to “business combinations”; it was zero in ’07). Applying your 2x book estimate to the remainder, in all likelihood he paid only around $3 million — excuse me, I mean one-eighteenth of a townhouse — for his bank.

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Cash-for-clunkers gallons-per-mile calculations

Felix Salmon
May 8, 2009 19:05 UTC

Ryan Avent and the MPG illusion both examine the “cash-for-clunkers” bill from the perspective of how much in the way of carbon emissions will actually be saved when someone takes advantage of it. But there are a few sums missing in these posts, so I thought it would be worth filling them out. Here’s Ryan, for instance:

For passenger cars, the incentive is reasonably ambitious: those moving from less than 18 mpg to better than 22 mpg qualify for $3,500 for a four mpg improvement and $4,500 for a 10 mpg improvement.

But standards quickly decline as you move up in size. For SUVs and light trucks one qualifies simply by moving from below 18 mpg to above 18 mpg. A $3,500 voucher is available for an improvement of just two mpg, while a mere five mpg improvement gets you the full $4,500 available.

The full table is here, but only in MPG form. In terms of gallons of fuel used per 100 miles, things look a bit different. Here’s how things work out in useful gallons per mile, rather than silly miles per gallon.

To get a $3,500 voucher by trading in a car, you need to move from 18mpg to 22mpg — which is an improvement of 1 gallon per 100 miles.

To get a $3,500 voucher by trading in a small SUV/truck, you need to move from 16mpg to 18mpg — which is an improvement of 0.7 gallons per 100 miles.

To get a $3,500 voucher by trading in a large SUV/truck, you need to move from 14mpg to 15mpg — which is an improvement of 0.5 gallons per 100 miles.

To get a $4,500 voucher by trading in a car, you need to move from 12mpg to 22mpg — which is an improvement of a whopping 3.8 gallons per 100 miles.

To get a $4,500 voucher by trading in a small SUV/truck, you need to move from 13mpg to 18mpg — which is an improvement of 2.1 gallons per 100 miles.

To get a $4,500 voucher by trading in a large SUV/truck, you need to move from 13mpg to 15mpg — which is an improvement of 1 gallon per 100 miles.

So Ryan’s absolutely right: the criteria for SUVs are much weaker than the criteria for trucks. Why do you need to improve by 3.8 gallons per 100 miles in order to get the $4,500 voucher on a car, when you can improve by just 0.5 gallons per 100 miles in order to get a $3,500 voucher on a large truck? It doesn’t make a lot of sense.


What if I own a 1985 Volvo that supposedly gets a combined 20 MPG according to fueleconomy.gov, but is definitely polluting the environment due to the age of the car? Shouldn’t it matter that my car leaks fluids and is definitely polluting the environment even if avg fuel economy according to the website is 20MPG?

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Chrysler bankruptcy going according to plan

Felix Salmon
May 8, 2009 15:48 UTC

This is pretty much exactly what we wanted, right? Chrysler gets the benefits of bankruptcy — such as being able to restructure its obligations to its dealer network — while the holdout creditors, who pushed Chrysler into bankruptcy in the first place, get less than they were initially offered by the Obama administration.

I do wonder what that means for the prospects of a GM bankruptcy. On the one hand, would-be holdouts are unlikely to make the same mistake twice. But on the other hand, there are so many more of them that the collective-action problems of getting a successful restructuring done out of bankruptcy are pretty much insurmountable. I think the best-case scenario for GM, just as with Chrysler, is a quick bankruptcy with little fractiousness from bondholders. The chances of avoiding bankruptcy outright seem slim indeed: the bigger risk is that bankruptcy will drag on to the point at which GM can no longer emerge from it as a going concern.


Aiden – A 363(b) sale isn’t illegal under the code. The case law on the subject allows for such sales. Steve Jakubowski provides and excellent primer in this blog post.

naeem – There is a large difference between the Chrysler lenders, who owned bank loans with liens on substantially all of the assets of Chrysler, and the bondholders at GM, who are unsecured.

The Chrysler bank loans were, not surprisingly, held by a few banks and institutional investors (including hedge funds). The GM bonds are held by retail investors.

If GM does a 363(b) sale, the process will be a bit different since there is no company taking the same place as Fiat did for Chrysler. One could imagine that GM and the Administration would set up a shell company to make the purchase, and their investment banker will provide a fairness opinion on the sale. Given that the Court appears to have accepted the reason for the accelerated sale in Chrysler, I would expect a similar outcome for GM. I don’t expect the unsecureds to have much leverage in this, but perhaps they could end up with a slightly better result.

When will the Boston Globe close?

Felix Salmon
May 8, 2009 15:01 UTC

Robert Gavin of the Boston Globe interviews his own publisher today, and for all the pro-forma statements that the Globe isn’t going anywhere (“the Globe will still be publishing a year from now – and beyond”), the matter is explicitly and entirely out of his control:

The paper had just completed the reduction of 50 jobs in the newsroom when the Times Co. called union leaders together and threatened to shutter the Globe unless they agreed to major concessions. Ainsley said that decision was made by top executives in New York and that the Globe’s losses, coming on top of the dismal first quarter for the Times Co., likely forced their hands. He described it as the likely cause, because he said he doesn’t know exactly what the reasoning was.

“That wasn’t my call, that wasn’t my decision. That was made at the upper reaches of the company so you’d really have to ask them,” he said.

If you read the whole article, it’s pretty clear that the Globe is losing an enormous amount of money right now; that it has essentially zero chance of being profitable at any point in the foreseeable future; and that the chances of anybody wanting to pay good money for it have gone from Jack Welch to zero.

Given all that, it seems to me that the Globe is surviving mainly on an unsustainable mix of nostalgia, pity, and desperate hope, mixed with a certain quantity of noblesse oblige on the part of the Sulzbergers. I put the over at 14 months, and the under at nine.


Advertising revenue has declined because readership has declined and it is simply more effective to advertise where the readers are.

Readership has declined because people do not trust what the papers are printing.

Until the papers rediscover journalism, opposed to activism, readers and revenues will not return.

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Ever more unemployment

Felix Salmon
May 8, 2009 12:49 UTC

I knew this morning’s jobs report was going to be depressing — and with unemployment rising from 8.5% to 8.9% last month, I was right. But the unemployment rate among adult men is even worse. Here’s the relevant bit of the release:


As you can see, as recently as February, adult men were no more likely to be unemployed than the population as a whole. In the past couple of months, however, a nasty gap has opened up, and it’s widening.

Yes, unemployment is a lagging indicator. But with adult-male unemployment rapidly approaching 10%, it’s also going to be a serious drag on the economy for the foreseeable future: households with unemployed men are not exactly engines of economic recovery.

Incidentally, the other unemployment measure worth keeping an eye on, U6, a broader measure of underemployment, hit 15.8% last month, up from 13.5% in December. So while the headline payrolls number might have fallen less than economists had expected, I can’t really see any green shoots here.


The census hiring 60,000 people made it look better than it really was. A radically downsized US auto industry is unfortunately, on the way. Thinking that all those unemployed plant workers can become engineers, writers, physicians, computer programmers & nuclear scientists is a popular fantasy. Once the current charismatic President is out of the White House, a large group of discontented people, concentrated in the Midwest, might spawn a third political party. I’ll even contribute to that effort!

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