Felix Salmon

Thursday links monetize their viewership

Felix Salmon
May 7, 2009 22:38 UTC

Waiting for CNBC: A tour de force from Tkacik.

Stress: A handy interactive graphic from the WSJ.

Rupert Murdoch’s empty defiance of the Kindle: Why is he trying to reinvent the wheel? See also Tomasky.

Cheese war ends. Everyone wins: Roquefort returns! Yay!

Free Online Graph Paper / Grid Paper PDFs: An incredible resource for geeks who use paper.

Investment Outlook: Bill Gross needs a translator. Representative sentence: “The ghost of Bernard Baruch still counsels that 2 + 2 = 4, but the repercussions of getting something for nothing should dominate the hopes that mankind will get off the deck and revert to a mean or median standard representative of outdated political and economic philosophies.”


printable graph paper, that you print out on your laser printer, an “incredible resource”? Are you being paid off by Big Toner or something?

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Stephen Friedman’s welcome resignation

Felix Salmon
May 7, 2009 22:04 UTC

As Kate Kelly prepares to launch her new book, she can add another scalp to that of Jimmy Cayne: Stephen Friedman, the chairman of the New York Fed, has resigned in the wake of her front-page article on Monday. His resignation letter is unapologetic (“although I have been in compliance with the rules, my public service motivated continuation on the Reserve Bank Board is being mischaracterized as improper”) — but if he really felt sure about that, it seems unlikely he would have timed his resignation to coincide exactly with the release of the stress-test results, thereby ensuring the absolute minimum amount of coverage.

The New York Fed is a peculiar institution: it’s highly profitable, and dividends substantially all of its profits to Treasury, yet is technically owned not by the government but by some of America’s largest banks. Governance there is always going to be tricky. But right now is not the time to cut corners on that front, and grant waivers, especially when Friedman was actively buying Goldman stock during his tenure as chairman of Goldman’s most assiduous regulator. He should never have done that, and it’s good that he has resigned.

Update: Eliot Spitzer has a great column this week on the way the New York Fed is run, which is well worth reading. Friedman might have been a particularly egregious case, but there’s a deeper, more endemic problem at 33 Liberty Street.


“But right now is not the time to cut corners on that front, and grant waivers…”

So you think the Chairman of the New York Fed should have resigned on the Monday following Lehman Week — effectively at the height of the biggest financial crisis in 75 years — in order to avoid some tisk-tisk articles from journalists about the appearance of a minor conflict of interest?

Yeah, I’m gonna go out on a limb and say that that was EXACTLY the right time to grant a waiver. Seriously, if that wasn’t the right to grant a waiver, then there isn’t a right time.

The stress test’s biggest loser: GMAC

Felix Salmon
May 7, 2009 21:30 UTC

The stress test report is out, and the gory detail is all there on page 9 (which is page 10 of the PDF). The final row is the one everybody’s concentrating: the “SCAP Buffer”, or the amount of money these banks will need to raise in order to come into compliance with the stress test. By far the biggest number on that row is the $33.9 billion for BofA, but that’s just 2% of BofA’s risk-weighted assets. Check out, by contrast, the $11.5 billion that GMAC is being asked to raise: that’s a whopping 6.6% of risk-weighted assets.

It’s worth remembering the benchmarks outlined in the stress tests:

The SCAP capital buffer for each [bank] is sized to achieve a Tier 1 risk-based ratio of at least 6% and a Tier 1 Common risk-based ratio of at least 4% at the end of 2010, under a more adverse macroeconomic scenario than is currently anticipated.

It seems that in order to have a 4% capital ratio at the end of 2010 in the adverse scenario, the government reckons that GMAC needs to raise capital equivalent to 6.6% of its assets today. Yikes. The reason is expected losses of $9.2 billion in 2009 and 2010 under the adverse scenario, of which a whopping $4 billion falls under the unhelpful category of “Other”, which is elucidated as “other consumer and non‐consumer loans and miscellaneous commitments and obligations”.

Oh, and if GMAC wants to take on the obligations of Chrysler Financial, as intended? Then it’ll need even more capital. But this is where GMAC really stands out from the crowd, and not in a good way at all:


Most banks have a healthy amount of capital available to absorb losses — something in the 5% range. GMAC’s resources for absorbing losses appear, by contrast, to be negative. The reason is that it has very little in the way of loan loss reserves, and it also has very little in the way of expected future profitability.

A bank like JP Morgan is expected to make a lot of money in 2009 and 2010 — enough to offset total losses of a whopping $97.4 billion under the adverse scenario. GMAC, by contrast, looks like it just doesn’t have any profit centers to offset the losses it’s liable to suffer.

So never mind the numbers in GMAC’s first-quarter earnings presentation — $13.3 billion in cash, common equity of $15.7 billion, a tangible common equity to tangible assets ratio of 8%, and so on. It needs a lot of extra money, and it’s far from obvious where that money might come from, although I’m sure some kind of debt-for-equity swap is going to have to be arranged. Given the levels at which GMAC’s debt is trading these days, the bondholders might even make money, on a mark-to-market basis. But they’re going to end up owning an auto finance company. Good luck with that.


Will someine please tell me if the GMAC bonds thht matured in May, 2009 were paid off at full face value, or not! If not, how were they paid? I sold mine at a loss and am wondering now if I should have hung on. Thanks!

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The SEC is unsalvageable

Felix Salmon
May 7, 2009 19:30 UTC

This is one of the driest pieces of prose you’ve ever seen: a 64-page report from the Government Accountability Office on the subject of the SEC, entitled “Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement”. The “Results in Brief” spreads over six pages and is full of stuff like this:

While Enforcement had demonstrated success in carrying out its law enforcement mission, significant limitations in the division’s management processes and information systems hampered its ability to operate at maximum effectiveness and to use limited resources efficiently, and may have contributed to delays in Fair Fund distributions.

In other words, you’d have to be bonkers to try to read the whole thing.

All hail, then, the mighty Moe Tkacik, who has not only read the report but has distilled from it a picture of such utter dysfunction and managerial incompetence that her blog entry should be required reading for anybody who thinks that the SEC can conceivably be turned into an effective regulatory institution.

What’s entirely clear from Moe’s report is that you’d have to be a masochist of the highest order to work at the SEC. Since we don’t really want our capital markets run by masochists of the highest order, there’s a massive problem here. And I don’t think that there’s any feasible solution.


Interested in hearing more about Geithner’s financial regulation reforms? How about proponents of the reforms? Check out positive sentiment surronding financial regulation at newssift.com: http://tinyurl.com/l2rls7

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Which bankers will Treasury oust?

Felix Salmon
May 7, 2009 17:45 UTC

Ben Bernanke, Tim Geithner, and Sheila Bair have put out a statement which says that the stress tests aren’t just about capital:

Over the next 30 days, any BHC needing to augment its capital buffer will develop a detailed capital plan to be approved by its primary supervisor, in consultation with the FDIC, and will have six months to implement that plan…

In addition, as part of the 30-day planning process, firms will need to review their existing management and Board in order to assure that the leadership of the firm has sufficient expertise and ability to manage the risks presented by the current economic environment and maintain balance sheet capacity sufficient to continue prudent lending to meet the credit needs of the economy.

I’d love to know what this means. Who’s going to review the management and boards of these companies, if not the management and boards themselves? And what are the chances that any such entity will come to the conclusion that the leadership of the firm does not have “sufficient expertise and ability to manage the risks presented by the current economic environment”?

I suspect that this requirement is basically a way to allow Treasury to make any changes it wants at the top of the banks’ org charts. Obviously Ken and Vikram are at the top of most pundits’ hit lists, but there’s a good chance that Treasury has overly-complaisant boards in its sights too. I’m sure that Walter Massey is a first-rate physicist, but he has no financial experience whatsoever: is he really the best possible person to be chairman of the largest bank in America? I suspect that Treasury might have its doubts.

The silly war on vulture funds

Felix Salmon
May 7, 2009 16:48 UTC

I was on The World Today this morning, talking about vulture funds:

The bill they’re talking about is this one, which is very similar to the Stop Vulture Funds Act being pushed by Maxine Waters in the US. Essentially it says that if you lend money to a country you have the right to get your money back — but if you then sell that loan to someone else after it has gone into default, the person you sold it to does not have the right to be repaid in full, and instead can only be awarded the amount they originally paid for the debt, plus a small set interest rate.

In other words, the single greatest innovation in the history of debt capital markets — the idea that obligations can be traded, rather than just being held to maturity or litigated upon default — is destroyed at a stroke.

What’s more, the problem these bills are trying to solve is absolutely minuscule. Not only are vulture funds settling their debts for three cents on the dollar, but they more generally have had a very hard time indeed successfully collecting on court judgments around the world. That’s why litigation is a last resort for vultures: anybody who thinks that they buy up this debt with the intention of litigating for repayment in full simply doesn’t understand the business model.

The good news, however, is that neither the UK nor the US bill has any chance of making it into law: the governments in both countries, for all that they’re nominally left-wing, would never support either piece of legislation. This is basically theatre on the part of lawmakers, not a serious and thought-through attempt to rewrite the international financial architecture. If it were, maybe the lawmakers in question might have asked developing countries what they thought of this legislation. And they might well have been surprised at the answer, which is that countries want no part of any act which might hinder their access to capital or their equal-player status on the world stage.

Anti-vulture-fund legislation like this is paternalism of the worst kind: it might be well intentioned, but at heart it’s a bunch of ill-informed northerners telling impoverished southerners what’s good for them. If and when vulture funds ever become a real problem — which I doubt will ever happen — then I fully expect to see the afflicted countries coming up with their own suggested solutions. In the meantime, let’s not exacerbate the plight of those countries by cutting off whatever access to international capital that they currently enjoy.

Update: Sandrew has a very good comment.


I have no problem with a bond holder collecting debt whether it’s the original lender or a collection agency. What I have a problem with is and the proposed laws are designed to prevent is business cannot collect while the people are starving to death and receiving international aid. For example if a homeless man who was starving owed you ten dollars and I gave him a dollar for food so he would have food that day. Would you go over and take that dollar from him? Some would, but I would try and stop you. Same difference… Just its a whole country. When he gets back on his feet I have no problem with you collecting your money due.

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Bailout math, BAC edition

Felix Salmon
May 7, 2009 14:48 UTC

When the government announced stress tests on February 23, Bank of America stock closed at $3.91 a share. At that level, if the government converted $34 billion of preferred stock into common equity, it would have received 8.7 billion shares in Bank of America. There are 6.4 billion shares outstanding right now, which means the government would have ended up with a controlling 58% stake in the company.

Today, BAC is trading at $14.64 per share. At that level, the conversion of $34 billion of preferred stock would mean the creation of 2.3 billion new shares, which would give the government ownership of “only” 27% of the company — a large stake, but very much a minority stake. What luck, for all concerned, that the stress-test result, at the current share price, doesn’t risk giving the government control of the bank!


How can you tell which issue of private preferred is likely to be converted? I own BMLPRL. Is it worth hanging onto?

CDS demonization watch, insurable-interest edition

Felix Salmon
May 7, 2009 14:24 UTC

A common meme among CDS pundits is that since credit default swaps behave in some ways like insurance policies, they should be regulated as insurance policies, and no one should be allowed to buy credit protection unless they have an insurable interest in the credit in question — that is, unless they loaned money to it.

Nemo, however, turns that meme on its head, and has decided that if you do have an insurable interest, and then act to collect on your insurance, then you’re “a criminal enterprise”:

Morgan Stanley bought insurance against BTA’s default and then caused that default. If you are wondering how this could possibly be legal, then good.

When he says that Morgan Stanley “caused” a default, he just means that the bank called in its loan, as is its right. But because Morgan Stanley was prudent and bought insurance against the default, its losses won’t be as big as they otherwise would have been. In what way is this supposed to be even unethical, let alone criminal?


That’s a nice glossary page. It even says it came from a 2001 textbook; probably copied by an intern. If you want to find out how PIMCO actually feels about CDSs, see Bill Gross’s January 2008 Market Commentary.

http://www.pimco.com/LeftNav/Featured+Ma rket+Commentary/IO/2008/IO+January+2008. htm

Here’s one gem:
“Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever. Financial derivatives of all descriptions are involved but credit default swaps (CDS) are perhaps the most egregious offenders. While margin does flow periodically to balance both party’s accounts, the conduits that hold CDS contracts are in effect non-regulated banks, much like their hedge fund brethren, with no requirements to hold reserves against a significant “black swan” run that might break them.”

The whole article lays out a hypothetical doomsday scenario with derivatives and particularly CDSs at the center. By the end of the year, it had played out and we found ourselves living in the People’s Republic of America.

Hello? The shadow banking system actually did collapse. By the middle of 2008, Uncle Sam, through Fannie and Freddy, was suddenly almost alone in home lending.

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Geithner’s TARP wish-list

Felix Salmon
May 7, 2009 13:54 UTC

Tim Geithner, in his NYT op-ed today:

Some banks will be able to begin returning capital to the government, provided they demonstrate that they can finance themselves without F.D.I.C. guarantees. In fact, we expect banks to repay more than the $25 billion initially estimated. This will free up resources to help support community banks, encourage small-business lending and help repair and restart the securities markets.

On its face, this seems to imply that if and when the big banks start to repay their TARP funds, the TARP will be extended to institutions such as community banks which the government would like to support with TARP money but for whom there’s no money presently in the kitty. That makes sense: while TARP is indeed intended to get banks lending again, it was first and foremost a tool for minimizing systemic risk of the kind simply not posed by community banks and the like.

Incidentally, the $25 billion number is Treasury’s own “conservative estimate“, from back in March, of how much TARP money would be repaid. I guess that estimate has now been increased, although not to any specific number. With all the financial details which are going to be released at 5pm this afternoon, maybe we can forgive Treasury a little bit of fudge on the TARP-repayment front.


Bank of America is using TARP funds to buy up many small
Financial Institutions. TARP money was supposed to be used for making money available for loans to consumers and businesses. Bank of America claimed they were in financial trouble but were not. I call this FRAUD ! !

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