Felix Salmon

From Jeff Gerth and Brady Dennis:

GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company’s massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government’s actions have been “powerful and helpful” to the company, GE chief executive Jeffrey Immelt acknowledged in December…

The FDIC has been working to wean financial institutions off the program. The TLGP originally was slated to end in June, but at the Treasury’s request the FDIC agreed to extend it until Oct. 31. Some participants have stopped using the program, but GE Capital continues to do so for the overwhelming majority of its debt.

Much of the $340 billion in debt will come due in 2012, the year the FDIC guarantees expire. At that point, known in banking circles as the “cliff,” the agency will have to make good if companies such as GE are unable to honor their obligations. FDIC officials say they are comfortable that the agency has collected more than enough money to cover potential losses.

It’s abundantly clear that the FDIC won’t have collected nearly as much money operating the TLGP as it has offered to GE Capital in guarantees. It’s also abundantly clear that GE Capital is too big to fail and won’t be allowed to default — instead, the FDIC guarantees will just be rolled over somehow. What’s not clear at all is how on earth the US government intends to separate GE Capital from its parent, in line with the current administration’s promises that systemically-important financial institutions can’t be owned by non-financial companies.

GE ended up borrowing disproportionately from the TLGP because it had a disproportionately large amount of short-term liabilities which needed to be rolled over — in that sense it was even more of a bank than most banks, if your definition of a bank is any entity which borrows short and lends long. It clearly needs to be regulated as a standalone bank. But how we’re going to get there from here is far from obvious.

Krishna Guha reads the Fed tea-leaves:

The central bank has made it clear it does not expect to raise rates any time soon – saying in its last statement that it sees rates remaining near zero for an “extended period”.

It subsequently extended most of its emergency liquidity facilities to February 2010, a signal that it believes a rate rise by then is highly unlikely.

I’m sure this is true — but at the same time I see no reason why the Fed can’t start raising rates while the emergency liquidity facilities and other artifacts of quantitative easing remain in place.

At the margin, a Fed funds rate at 1% or 1.5% is not going to put much in the way of a visible brake on economic growth — especially not so long as all the Fed’s liquidity facilities are still up and running. But by raising short-term interest rates in the Fed funds market, and by keeping long-term interest rates low through quantitative easing, the Fed would be able to act much more decisively if and when inflation fears really started to appear.

One of Alan Greenspan’s biggest errors was his decision to raise rates only very gradually even as the housing bubble was gaining full force — there are serious practical constraints on the Fed hiking by more than 50bp at a go. So it might make sense to have a bit of a headstart, as it were: by starting to raise rates at the beginning of 2010, the Fed might be able to make them really felt once the tightening cycle started up in earnest. In the meantime, by artificially keeping long-term rates low, the Fed would manage to maintain its accommodative stance.

Guha points out that the Fed funds futures market, until a few weeks ago, was pricing in a Fed rate rise this year; it’s still pricing in some tightening by February. I don’t necessarily think that’s going to happen. But I do think it’s possible.

Philip Delves Broughton on what you really learn at Harvard Business School:

Everyone knows what they’re best at, but often they think it’s of no value. I felt like that when I graduated from HBS, and I was wrong.

Broughton’s memoir of his experiences at HBS is now out in paperback, and I can recommend it: he nails the tone of delusional self-congratulation that seems to pervade HBS alumni.

I suspect that the heyday of the MBA — the extremely expensive piece of paper which pays for itself through massively inflated earnings after graduation — is now a thing of the past. The finance-heavy courses, in particular, should surely be ripe for what their students might like to think of as “consolidation” — what the rest of us would call shuttering. It’s clear, in hindsight, that they did more harm than good. So why perpetuate these things?

Mike at Rortybomb wades into the CRA debate with a very good point: toxic subprime loans bear almost no relation to CRA loans.

80% of the subprime mortgages expired in 30 months; they perpetually had to be refinanced. 75%+ of subprime mortages had a prepayment penalty. This is not at all what CRA loans looked like. CRA rooted for solid, longer-term mortgages.

I do hope the formal debate between John Carney and Barry Ritholtz happens; I’ve already lined up John Gapper and Mike Mandel as judges (they say they have no opinion on the matter), and I’m pretty sure I can host it in a Reuters TV studio. Come on, Barry, you know you want to!

Nick Gogerty deserves a medal for this:

It almost makes you want to find out what a swap spread is.

(Via Kedrosky)

Big university endowments like to think that their returns constitute alpha — a simple outperformance of the market. But it looks increasingly as though in fact there’s a large component of beta — outperforming when the market goes up and underperforming when it goes down.

The five largest single-school endowments, which in addition to Harvard and Yale, are Stanford University, Princeton University and the Massachusetts Institute of Technology, have said they are planning for declines of 25% to 30% for the fiscal year.

By contrast, the median decline for an endowment or foundation for the first 11 months of the fiscal year was 20%, according to Northern Trust Corp. Foundations and endowments with less than $100 million in assets did even better, down 16% for the period.

If the big endowments came out explicitly and said “we have more money, and therefore the wherewithal to take more risk, while smaller endowments must perforce care more about capital preservation”, that would be one thing. But they generally don’t — in good years, they present their high returns, improbably enough, as carrying relatively small amounts of risk.

The critics of Yale’s David Swensen, in particular, are now finally being heard:

John Michaelson, who heads Cooper’s investment committee, said other schools could benefit from taking a lower-risk investing approach. He is especially critical of what has been known as the “Yale model.”…

Mr. Michaelson of New York private-equity firm Imperium Partners says Yale’s approach, widely emulated in recent years, places too little emphasis on colleges’ annual cash needs and is “deeply flawed.”

Michaelson can talk, here: the $600 million Cooper endowment looks as though it won’t have fallen at all in the year to June 30, and might even have risen a little. And he even locked in property-bubble gains, by renegotiating the lease on the land under the Chrysler building in 2006, and selling a six-story academic building in 2007 for $97 million.

What’s more, the endowment isn’t simply managing to preserve capital: the endowment has risen in value sixfold since late 2001, when it was valued at just $100 million. And one look at its spectacular new Thom Mayne building proves that it’s hardly been hoarding cash over that time. Would that Brandeis had been able to manage its endowment so well.

The Nassim Taleb exaggeration story simply refuses to die: after first flaring up a few weeks ago, Eddy Elfenbein and Joe Weisenthal now pick up on a little yellow note that Taleb has put on the notorious GQ story about him by Will Self. Taleb is accusing Janet Tavakoli of conducting a “(failed) smear campaign” against him — see here and here for instances. But that accusation has just brought attention back onto the numbers in the GQ article — numbers which everybody agrees are false.

Elfenbein and Weisenthal seem to be saying that unless and until GQ puts out a correction, they’ll believe that the magazine is standing by its story — which in turn would imply that Taleb really did say that he got those massive returns. As Don Fishback put it:

Here’s what the curmudgeon thinks: He said it, boastfully. Then it got printed and he realized he said something he shouldn’t have. To cover his a$$, he came up with some excuse to make it sound as if GQ got it wrong.

It’s plausible — but I don’t think it’s true. Taleb has now sent me a copy of an email he sent to Will Self on December 17, long before the article was printed (but after Self had given him the opportunity to read an advance copy). He specifically picks up on the sentence in question, and tells Self that there are “problems with the numbers”. He suggests that where the article quotes him as saying “when they went to the wall we made $20 billion for our clients, half a billion for the Black Swan fund”, that should be changed to “when they went to the wall we made almost half a billion for the Black Swan funds” — deleting the erroneous $20 billion figure altogether.

Taleb didn’t hear back from Self or GQ, so it’s unclear what happened next. Did the email just fall through the cracks? Did Self decide that he had quoted Taleb correctly the first time and would keep the $20 billion number in the article even if Taleb didn’t want it there? Did he misunderstand what Taleb was saying in the email, which wasn’t completely explicit that the $20 billion number was wrong?

In any case what does seem clear is that there was some miscommunication going on, which is understandable when a generalist writer like Self starts writing about the more abstruse areas of high finance. And when Americans refuse to be satisfied until they see a US-style correction from a much more lackadaisical UK magazine.

In any case, here are those emails in full:

From: nassim nicholas taleb
Date: December 17, 2008 7:40:55 AM EST
To: Will Self
Subject:Re: From Will Self
Hello there (from Los Angeles airport). Thanks a million. I cannot interfere with the content, only to correct some minor facts.There are some potential problems with the numbers like the 20 billion, half a billion, etc. that may lead to confusion.
Also I am trying to add my middle name whenever possible to avoid confusing the byline.
I will read again on plane and send clarifications about the numbers.
Ciao.
BTW it was great seeing you.

From:nassim nicholas taleb
Date: December 17, 2008 6:13:44 PM EST
To:Will Self
Re: From Will Self
Here is what I found.

1- “when they went to the wall we made $20 billion for our clients, half a billion for the Black Swan fund.
“when they went to the wall we made almost half a billion for the Black Swan funds.”

2- “Mean variants” “mean-variance”

I will give it a second reading.
Thanks again.
Ciao,
Nassim

Update: Taleb has found an email from Will Self, dated the following morning, saying that “these changes will be incorporated tout suite”. It’s not clear why they weren’t. Also, Janet Tavakoli emails to say that she stands by both this and this.

The Cajun Boy hits the nail on the head when he describes one of the biggest upsides to opening oneself up to the crazies of the internet by blogging:

After a while, writing on the internet thickens your skin to the point where you’re easily able to easily differentiate between valid criticism and hateful venom-spewing. At some point, the hateful venom-spewing fails to even faze you any longer, while the valid criticisms are accepted and processed rationally and learned from.

This has certainly been my experience, and I’ve seen it in others, too. Bloggers in general are pretty sanguine when it comes to being flamed on the internet or in their comments sections, while non-bloggers tend to get much more exercised when people criticize them online. I’ve lost count of the number of journalists who have put up a blog entry or two and been shocked and excited at some of the comments they got in response; eventually, of course, you just tune that kind of stuff out altogether.

That tuning-out makes bloggers much less defensive when it comes to their work — which means that a thoughtful and pertinent response is more likely to be taken seriously, even to the point of the blogger happily admitting that he was wrong. Blogs are tentative and conversational things, and just as a well-informed interlocutor can make you change your mind on an issue in conversation, a smart commenter can do the same thing on a blog.

Rachman: McCain’s tweets “make him sound like a peasant“

The House Financial Services Committee is going to have a busy July

RT @IDDMagazine Cantor Fitzgerald grows its London leveraged finance team

Judis makes the distinction between the unemployment rate (less important) and total unemployment (very important)

A refreshingly sober look at the NYT’s finances

Does WaPo know from passive constructions?

Steve Kirsch with a great round-up on why fast reactors must be built

If I link from my link blog to a blog of links to blogs of links, and that links back to me, will the snake have eaten its own tail?

Peter Goodman‘s infuriating and important report about the impossibility of modifying mortgages raises an interesting question: why is it so hard? There are three possible answers, I think.

The first is that it’s sheer incompetence — the banks, at least at senior levels, have lots of good will, but they just can’t find the staff to get this stuff done.

The second is that it’s greed on the part of the banks — that while they pay lip service to the idea of modifying mortgages, they actually make more money by being recalcitrant and obstructive and unhelpful.

The third explanation is somewhere in the middle: that it was always difficult to modify mortgages, that the massive wave of loan-mod applications has made it harder still, and that banks just move slowly, even if they do have good will.

My gut feeling is that the reality is somewhere between #2 and #3. If loan mods really made sense for the banks, they would be better at it than this, and they wouldn’t make life so unbearably hellish for their borrowers.

Once again, this is an area where a regulator with teeth could and should step in. If banks claim to be working hard to modify mortgages, they should be tested on that claim, and held to account if it proves to be false. If the carrot of getting a reliable stream of future mortgage payments, along with $1,000 from the government, isn’t enough, then add a stick as well. Someone needs to fix the current broken system, and it won’t be the banks themselves.

David Galbraith, looking at a floor of Le Corbusier’s Villa Stein on the market for €1,080,000, concludes that either “architecture is vastly under valued or painting prices are almost entirely irrational”.

I hope he’s right: architecturally-important residences should sell at a premium. It’s by far the best way to prevent them from being demolished. But it’s hardly irrational that they don’t.

The apartment in the Villa Stein, for instance, is in Garches, an undistinguished western suburb of Paris which, in the words of one website, is “mostly known for the Raymond Poincaré Hospital, which is specialized in medical treatment of road accident victims”. Not the kind of place that a rich art lover would really want to live. What’s more, it’s only 105 square meters, or 1,130 square feet: decidedly cramped if you’re the kind of person who is likely to drop millions of dollars on an artwork.

A great piece of architecture in a desirable location can sell at a premium, and a great piece of architecture which can be packed up into six containers and reconstructed anywhere in the world will sell for even more. But in general people looking to buy important architecture only want to do so if there’s a reasonable chance of them actually living in the house in question — at least for some of the year. If such people don’t want to live in Garches, then the seller of the Villa Stein flat is out of luck.

I am ultimately bearish about the prospects for collectible architecture — while it’s possible to imagine a world where it exists, it seems impossible to get there from here. But that doesn’t mean that the entire art market — a market where people get to buy unique and portable objects to savor and enjoy at their leisure — is irrational. It just means that architecture doesn’t behave in the same manner.

Jim Surowiecki weighs in on the Consumer Product Safety Commission today, but says that “the new regulations will come at a price”:

Serious regulation will mean that fewer people can buy homes. But this may not be a bad thing, given all the trouble the housing bubble caused.

For one thing, regulation doesn’t necessarily mean that fewer people will be able to buy homes. Expanding the number of people who can buy homes is the kind of thing that the CRA does, along with government downpayment assistance and the like for low- and middle-income families. That’s not going to go away.

Regulation does, on the other hand, mean that fewer people will be able to overpay for homes — to buy homes they can’t afford. In other words, it will help put a cap on house prices, since speculators and flippers won’t be able to buy anything they like armed with nothing but crossed fingers and a NINJA loan. So long as it costs less to buy than to rent, however, banks should be able to find a way to help most people buy a home if they really want to.

But in any case the housing bubble was hardly a consequence of rising homeownership: homeownership peaked long before the height of the bubble, at the end of 2004.

Rather, the positive effects of lower homeownership lie elsewhere: in more liquid labor markets; in thinner and happier people (not to mention much less leveraged households); and in less societal inequality between rich neighborhoods where substantially everybody owns their home and poor neighborhoods where substantially everybody rents. But Surowiecki knows all this: he wrote an entire column, last year, on the downside of homeownership.

Fewer people buying more affordable homes, then, isn’t a “price” of setting up the CPSC, as Surowiecki would have it. Rather, it’s set to be one of the CPSC’s main benefits. Let’s hope that homeownership falls as a result of the CPSC: it would make America a significantly better place.

Ilaina Jonas reports on commercial property in Manhattan:

During the second quarter an additional 4.7 million square feet of office space was put on the market, surpassing the 3.9 million square feet that hit the market in the first quarter.

The really scary thing is that this is presented as good news, due to the positive second derivative:

The increase slowed significantly in the latter half of the quarter, according to the report released to Reuters on Sunday.

That could help major Manhattan landlords such as SL Green Realty Corp, Vornado Realty Trust, Boston Properties Inc and Brookfield Properties.

I don’t see how landlords care much about the second derivative. They care about supply and demand, and there’s likely to be an enormous amount of unlet office space in Manhattan for the foreseeable future, giving them little if any pricing power. Commercial rents are going to fall, not rise — and all those toxic commercial mortgages are going to start defaulting en masse Real Soon Now.

Is the banking system ready for that hit? No: the idea behind the PPIP was that banks could get some of that toxic waste off their books. But the PPIP failed to get off the ground, and now the banks are left to face the nasty consequences on their own. It won’t be pretty.

As journalists get laid off across the world, the number of professional bloggers is growing fast. Michael Learmonth today has a look at AOL’s fast-expanding suite of web properties, with a quote from AOL’s Jeff Levick saying that he “will continue to grow these sites and launch new sites”. Meanwhile, TPM Media has just posted seven new staff positions in one day.

My feeling is that there’s media jobs are looking pretty much like a barbell these days: you either work for a last-man-standing monolith or else you’re part of a small and nimble team. It’s the media properties in the middle — regional newspapers, small cable-TV properties, anything with high fixed costs and less than a million paying customers — which are suffering the most. And it’s not going to be at all easy for the journalists at those properties to move into the world of blogs.

From WaPo:

Bank of America this year raised the maximum number of times customers can get hit with overdraft fees from five a day to 10.

This seems incredibly short-sighted to me: BofA here is just asking to get slapped down — hard — by Elizabeth Warren when she takes over the new Consumer Financial Protection Agency. And with behavior like this, it will have precisely no one defending it.