Opinion

Felix Salmon

GE Capital datapoint of the day

Felix Salmon
Jun 30, 2009 21:22 UTC

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.

COMMENT

GE got a big chunk of its funding from money market funds. Think Lehman Brothers times 1000. Too big to fail, indeed.

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Can the Fed raise rates earlier than expected?

Felix Salmon
Jun 30, 2009 18:52 UTC

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.

COMMENT

You can track the near-term Fed Funds futures through your Reuters 3000 Xtra. Type “FEDWATCH” in a quote screen.

Posted by Mitch | Report as abusive

MBA, RIP

Felix Salmon
Jun 30, 2009 18:11 UTC

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?

COMMENT

Hi,

I still believe that the MBA as a value, not only for the job that you can still find after it, but also for the networking opportunities with interesting people that it opens.
For all prospects students that share my opinion I created a blog online with advice on how to land in their MBA at http://talksonmba.blogspot.com/

Hope this helps

Why CRA loans weren’t toxic subprime loans

Felix Salmon
Jun 30, 2009 17:04 UTC

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!

COMMENT

I am President and CEO of Pan American Bank in East Los Angeles. For over forty years we have focused on serving the working class Latinos in Los Angeles and Santa Ana.

Our bread and butter product has been the 30-year mortgage. At a recent Community Reinvestment Act examination all of our mortgage loans were deemed to be CRA loans. Of the approximately $27MM in such loans, the total delinquent loans can be counted on one hand…literally. Based on this performance, I would say question the existence of toxicity in our portfolio.

I have been a banker for two decades and I have been involved very closely in matters related to the CRA and community redevelopment. Based upon my many years of “banking” experience I can tell you that the CRA did not create the crisis. What created the issue was “intoxication” of the entire loan origination food chain. This loans were NOT originated because they were CRA loans.

It is too convenient for CRA bashers to label this as a CRA-driven crisis. But it just is not the case. The CRA “encourages” banks to provide loans, services and investments to low- and moderate-income individuals and communities. It by no means requires it at levels deemed to be unsafe and unsound.

Since 1970 banks have managed well under the CRA. And they continue to manage well without them. Prudent bankers realized early on that subprime loans were not needed or required under CRA. In fact, subprime loans have been inconsistent with the CRA if you consider the fair lending test that is part of every CRA examination.

Sure, many will conveniently blame the CRA for this mess. And those that do not know anything about banking and the CRA and are conveniently looking for an excuse will agree. But the bottom line is that CRA had nothing to do with the crisis.

Jesse Torres
President and CEO
Pan American Bank
3626 East First Street
Los Angeles, CA 90063
(323) 264-3310

Learn more about us here http://www.docstoc.com/profile/PanAmeric anBank

Video of the day, Swap spreads edition

Felix Salmon
Jun 30, 2009 16:43 UTC

Nick Gogerty deserves a medal for this:

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

(Via Kedrosky)

COMMENT

Utterly amazing. Thanks for the link.

Posted by jonathan | Report as abusive

Endowment datapoint of the day

Felix Salmon
Jun 30, 2009 16:27 UTC

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.

COMMENT

Remember that endowment managers were paid based on valuations of what turned out to be even more illiquid assets than believed. The incentives were aligned to take a lot of risk and to devalue risks to the continuing current operation and capital improvement funding needs.

When the latest Yale kid called asking for money, I told him I was giving it to a local food bank. He tried to engage me about Yale’s needs and I suggested he ask David Swenson for the cash. The food bank needs the money. Yale only needs the money because they got in too deep.

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The Taleb-GQ emails

Felix Salmon
Jun 30, 2009 15:03 UTC

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.

COMMENT

Hi Felix,

Taleb is definitely in the right here for the simple reason that buried deep in the same May 2009 GQ article, on page 189, Self writes:”He [Taleb] was keen to stress that he himself only retained a percentage of the half billion dollars the Black Swan hedge fund he set up condensed from the toxic red cloud.” So the answer is in the article itself.
Regards, Paul V. Azzopardi

Posted by Paul V. Azzopardi | Report as abusive

The upside of being flamed

Felix Salmon
Jun 30, 2009 14:20 UTC

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.

COMMENT

Loved this post; my co-blogger and I recently ran into this debate on our relatively new blog. My co-blogger tackled the issue head on in a post: http://blog.beliefnet.com/everydayethics  /2009/06/blog-commenting-courtesy-do-bl oggers-have-a-right-to-expect-it.html

I’m learning to respect the constructive thoughts, and thicken my skin against some of the nastier comments.

One memorable comment was in reply to a post I wrote regarding the Palin vs. Letterman feud. The comment, to summarize, called me a woman who is loose with physical affection and also had some things to say about my genetalia. I was confused and slightly horrified by the connection, to say the least!

Monday links sound a bit funny

Felix Salmon
Jun 29, 2009 22:03 UTC

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?

COMMENT

oh lor, are we going to have “Nukeman Of The Week” as a regular feature? The one you link to this week is claiming that France is building breeder reactors, when all they’ve actually done is plan to have the design features of one decided on by 2012. He also seems to claim that a commercial-scale pyroprocessing plant could be built for $1bn. That’s really hilarious. There needs to be at least some quality control over this stuff.

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