Felix Salmon

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.

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.

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?

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.

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.

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.”

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.

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.

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.

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.

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.

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.

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.”

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.

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.