Felix Salmon

Adventures in national stereotypes

Felix Salmon
May 27, 2009 02:29 UTC

The Epicurean Dealmaker has invented a new parlor game: match financial-market participants to Russian national stereotypes circa 1865! Can I play too?

Tolstoy TED Felix
Frenchmen A Frenchman is self-assured because he regards himself personally, both in mind and body, as irresistibly attractive to men and women. Investment bankers; recent MBA graduates All investment bankers under the age of 40; most hedge-fund managers
Englishmen An Englishman is self-assured, as being a citizen of the best-organized state in the world, and therefore as an Englishman always knows what he should do and knows that all he does as an Englishman is undoubtedly correct. Goldman Sachs employees; private equity professionals IMF/World Bank employees; economists
Italians An Italian is self-assured because he is excitable and easily forgets himself and other people. Hedge fund managers; CNBC commentators Traders
Russians A Russian is self-assured just because he knows nothing and does not want to know anything, since he does not believe that anything can be known. “I am completely unaware of anyone currently operating in the financial sector who will admit to knowing nothing, much less take pride in it.” EMH devotees in general; buy-and-hold index-fund owners in particular
Germans The German’s self-assurance is worst of all, stronger and more repulsive than any other, because he imagines that he knows the truth—science—which he himself has invented but which is for him the absolute truth. Economists; derivatives structurers Chartists

Incidentally, the stereotypes age well. Have you met a French investment banker? A Bank of England technocrat? Nouriel Roubini (who counts as Italian for these purposes)? Josef Ackermann?

But of course there’s still a burning question: Why is the American self-assured?


Americans are self assured because they know that things will be better tomorrow.

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Judges’ soaring bankruptcy workload

Felix Salmon
May 26, 2009 19:16 UTC

I’m not sure how often you feel sorry for a judge, but after years of handling the nightmare that is the litigation surrounding Argentina’s sovereign debt situation, the Southern District’s Thomas Griesa is now finding himself making key decisions in the Chrysler litigation, too. So far he seems to have avoided anything Lehman-related, but GM is coming down the pike — and the lack of available bankruptcy lawyers might start being matched only by a lack of available bankruptcy judges. How many monster litigations can any one judge handle simultaneously?

A closer look at the Waxman-Markey allocations

Felix Salmon
May 26, 2009 19:03 UTC

John Kemp has a very handy summary of exactly how emissions allowances are going to be allocated under the Waxman bill. And it turns out that while only 15% of the allowances are certainly going to be auctioned — at least in the first instance — another 14% or so are going to go towards pushing clean-energy objectives. As Kemp notes, this is

in effect granting valuable, saleable rights to companies promoting new technologies such as carbon sequestration and storage, energy efficiency and renewables, and clean vehicle technologies.

We’re talking a lot of money here: the “clean vehicle technology” line item gets 139 million tons of emissions allowances in 2012 alone, on top of 440 million tons slated to go to “energy efficiency and renewables”. Your guess is as good as mine when it comes to the secondary-market value of emissions rights in 2012, but we’re talking billions of dollars annually here.

I like the way that this clean-technology subsidy rises is essentially tied to the successful passage of Waxman-Markey — that’s a good way of aligning incentives. But isn’t the whole point of a cap-and-trade bill that it provides a way to monetize clean energy even without dedicated subsidies? And if we go down this road, aren’t we going to get even more sillybuggery surrounding the reclassification of various forms of energy as “clean” or “renewable”?


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Revisiting WaMu

Felix Salmon
May 26, 2009 18:16 UTC

JP Morgan, having lopped $29.4 billion off the value of WaMu’s loans when it took over the troubled lender, now reckons it’s going to get the lion’s share of that money back:

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

WaMu failed in the middle of the sleepless craziness following the Lehman collapse, and in hindsight might well have been at least as much of a factor in the scary gapping-out of Libor as Lehman was. It’s worth remembering that these are the only two US financial institutions where senior lenders took a haircut — and in both cases the senior lenders were pretty much wiped out. In other bank failures, even the junior lenders generally emerged unscathed.

It increasingly seems as though a panicked FDIC thrust WaMu into the arms of Jamie Dimon, who could — and did — ask for pretty much anything he liked, including the right not to have to pay back any of WaMu’s creditors. The result was that the bank wholesale-funding market went straight into crisis: one sui generis default (Lehman) might have been navigable, but when you have two in as many weeks, it’s pretty clear which way the wind is blowing.

We’ve had endless rehashings of the weekends leading to the Bear Stearns and Lehman Brothers failures, but I’ve seen much less on the subject of WaMu, which is equally if not more fascinating and just as systemically important. The news out of JP Morgan that it massively undervalued WaMu’s loan books certainly seems to indicate that the likes of John Hempton have a point when they say that Sheila Bair got this particular decision spectacularly wrong, and in doing so put the entire US retail banking system on a much more fragile footing than was necessary.

Bair also took a relatively consumer-friendly bank (WaMu) and forced it to adopt the practices of a relatively consumer-unfriendly bank (Chase) — with predictable results: Chase is now telling former WaMu customers that even if they have directed the bank not to let their accounts go overdrawn, the bank can still push the account into overdrawn territory anyway, and, of course, “will assess an Insufficient Funds Fee” for doing so.

It’s clear that the big winner here is JP Morgan, but the rest of us — taxpayers, WaMu account holders, WaMu creditors — increasingly look like very big losers.


I tend to believe that JP Morgan Chase is culpable and that Dimon is probably at the bottom of the spider’s trap. But instead of crying in our beer about it (I lost a lot of money in WAMU bonds when the FDIC double-dealt it into JPM’s hungry hands), why not return to the tenets of our founding fathers: revolution, but a quiet one. Let’s convince every depositor of the original WAMU to “switch rather than fight” to turn an old cigarette slogan on its head. Let us agree to close all our accounts with JPM and find another bank. Charles Schwab anyone? Or choose a local bank. You know the kind, the one just around the corner with ties to your community, like WAMU had before they got greedy. Or do you really believe that a bunch of New York bankers have your best interests at heart? Adrian

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Why big companies pay better

Felix Salmon
May 26, 2009 16:35 UTC

I’m not particularly surprised that big companies pay more than small companies. It stands to reason, really: successful companies will (a) be able to pay more than unsuccessful companies; and (b) be much more likely to grow to a large size.

The advantages of working for a small company don’t come in your regular paycheck. Instead, there’s more option value, if you’re at a start-up: the small but valuable chance that the company will be a huge success. Plus there’s often more collegiality and less bureaucracy, and any one individual has a much greater chance of being able to make visible change happen. But if you mainly want to maximize your take-home pay, working for the man has a lot to be said for it.


This is a common finding with no known explanation – observationally equivilent workers receive a wage premium at larger companies – even within the same industry. It is a stylized fact in search of a good theory to explain it.

As for increased opportunites at small firms – I know of no evidence that wage growth is larger for workers at small firms. It may be the case that workers do prefer the working environment in smaller companies – however, turnover is generally greater at small firms as well. It might be the case that small firms provide workers an opportunity to build skills and experience that they can use to find a better paying job elsewhere.

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Hoping for an Apple media server

Felix Salmon
May 26, 2009 16:03 UTC

There’s one thing I’m not seeing amidst all the speculation surrounding Apple’s announcements at WWDC the week after next, and that’s a simple media server.

Apple’s computers and apps are great if you store all your media (music, photos, video) on the same startup disk where you house your operating system and your applications. But that’s never a particularly sensible way of organizing things. Yet the minute you start moving your media onto an external hard drive or — worse — a network drive, things start getting glitchy.

And heaven forfend you should want to share a music or photo library between different users on different computers on the same network. iTunes doesn’t like that — if one person adds songs to the library, the other computers on the network can go indefinitely without noticing — and iPhoto pretty much bars it entirely: if one person is using a certain library, no one else is allowed access to it. And what happens when your library outgrows one hard drive and you want to extend it onto another? Again, Apple’s apps don’t generally like that one bit.

HP has a media server which claims to be Mac-friendly, but you need a PC to set it up, and of course it can’t solve the software problems endemic to iPhoto and iTunes. The Apple TV is halfway there, but it’s built for video rather than music and photos, and is designed to be used in conjunction with a screen; what’s more, its hard drive is quite small, and it’s not expandable.

So while I fully expect Snow Leopard to include much easier ways to merge media libraries than exist right now, I’d really love a bit of dedicated hardware for such things as well.


YEAH!!!!!! I second, third and fourth this!!! Go Felix!

Apple has no choice. They can’t ignore media storage and leverage their installed base without offering an easy and simple to use storage option with multiple access methods across their hardware mac/pod/phone(s). Anyone using their product(s) are running out of space rapidly.

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The NYT’s Geffen Put

Felix Salmon
May 26, 2009 15:39 UTC

Peter Kafka delves behind the New Yorker’s firewall today to look at the relationship between David Geffen and the New York Times, as reported by Lawrence Wright. The upshot is that if you’re worried about the future of the NYT, don’t be — the Sulzbergers can take all the risks they want, because they know that if it all goes horribly pear-shaped, the Geffen Put will always be there:

If the Times ever does need a deep-pocketed buyer, Geffen has made it very clear he’s available.

This is good news for all concerned, I think. The option to sell to Geffen has real value to the Sulzbergers even if they never exercise it — it essentially gets rid of the worst-case-scenario of an LA Times-style death spiral where the newspaper is owned by a for-profit owner who has no idea what he’s doing nor any respect for sacred trusts and the like.

Meanwhile, Ryan Chittum tweets that an annual subscription to the dead-tree NYT is now $811 a year. Which means that if you’re earning the $45,000 median income for New York City and you subscribe to the NYT, almost 2% of your pre-tax income is spent on your newspaper. I’d love to see a chart of the NYT’s subscription cost as a ratio of NYC median income — has it ever been this high? And what’s a realistic upper bound for that figure?

Update: Ryan now says the cost isn’t $811 but rather $770. That’s still $59.23 every four weeks, which is a 40% hike from the $42.40 which I’m currently paying; it definitely approaches the point at which only the cost-insensitive won’t think about unsubscribing.


Sorry, nytimes.com demographic is available. I missed it earlier.

Median income=$85,000.
http://www.nytimes.whsites.net/mediakit/ online/audience/audience_profile.php

The cost of sovereign default turns negative

Felix Salmon
May 26, 2009 14:49 UTC

Ecuador has closed out its bond exchange offer at the higher end of expectations, paying 35 cents on the dollar to investors who hold the 2012 and 2030 global bonds. That’s higher than the bonds have traded all year, and certainly higher than they have traded since Ecuador defaulted — which means that any vulture investors who bought the bonds in default will be able to lock in a decent profit for doing essentially no work at all.

What’s more, Ecuador has announced that anybody who put in an offer higher than 35 cents will be allowed to re-tender at the 35 cent level. This makes sense from Ecuador’s point of view, and gives people who tendered high the opportunity to re-think their strategy in the light of known events. It’s pretty clear that at this level a supermajority of the total bonds outstanding will end up being owned by Ecuador — which means that Ecuador will have the ability to strip a lot of creditor protections out of the instruments.

Ecuador has suffered no negative repercussions from its actions — quite the opposite. If the country needs any money in the next few years, it’ll be able to get it, from the Andean Development Bank or the Inter-American Development Bank or the World Bank or even the International Monetary Fund. None of them seem to particularly care that Ecuador defaulted on its global bonds, and emerging-market bondholders are so weak and fragmented these days that they hold very little sway any more within international financial institutions.

Indeed, given the short memory of emerging-market bondholders, I wouldn’t be surprised to see Ecuador regain its access to the international capital markets within a few years, thanks to the way in which it has managed to substantially reduce its (already pretty low) debt-to-GDP ratio. That could well be the thinking behind the decision to remain current on the 2015 global bonds, which were issued when current president Rafael Correa was finance minister. Look, he’s saying: we pay back the money that we borrow. We just don’t pay back debt which was originally borrowed decades ago and which was restructured twice in a manner designed to be as friendly as possible to private-sector creditors.

Looking at this from a systemic perspective, it’s pretty clear that in this instance the cost of default, to Ecuador, was negative. That’s dangerous: it radically increases the probability of tactical defaults from all manner of other countries, including Argentina, Venezuela, and various African states. And once a wave of sovereign defaults starts, it’s very difficult to stop, since the cost of default drops with each new event. Right now the risk of such a wave is surely near a multi-decade high.


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 Ecuadorian (and Latin American) history since liberation from Spain.

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No end in sight to the housing bust

Felix Salmon
May 26, 2009 13:53 UTC

The done thing when the Case-Shiller index comes out is to look first at the first derivative — how fast is it falling? Then people look at the second derivative — is the rate of decrease slowing down or speeding up? And if there’s no optimism there, you can always find it somewhere. The official press release leads with a graph of the first derivative over time, and then adds this:

“This is the second month since October 2007 where the 10- and 20-City Composites did not post a record annual decline. Based on the March data, however, we see no evidence that that a recovery in home prices has begun.”

I don’t think we needed an index to tell us that. But it is worth taking a step back and looking at the level of the index, rather than just its rate of change:


This is the Composite-10 index; the National and Composite-20 indices are similar, and in general show house prices at their levels from 6-7 years ago; all the same, the length and severity of the drop in house prices is still just a fraction of what we saw on the way up: we had a ten-year boom from 1997 to 2007, and there’s no particular reason why the bust shouldn’t last just as long — especially given the natural stickiness of house prices on the way down.

And what of stories announcing a “new frenzy” of house-buying in Phoenix, poster-city for the housing bubble? I think this could be a sign of a real two-way market developing, with the number of buyers approaching the number of sellers. That’s good for price transparency, but it doesn’t tell us anything about the future direction of house prices: liquid markets can fall just as easily as they can rise. And, in this case, probably will.


From 1987 to present, the Case-Shiller Composite-10 has increased 4.06% per year on average. The CPI has increased 2.97% per year over the same period, for a whopping 1.09% difference in compounded annual growth rates.

An insight like this is completely unavailable from your chart, however, due to: (1) your use of a linear y-axis scale instead of log scale; (2) the lack of a trendline; (3) failure to include a baseline inflation comparator like CPI.

You may be absolutely correct in saying that the housing crash has further room to run, but you’re not doing anyone a service by using crappy charts to support that thesis.

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