Another reason to talk to your grown children about your financial affairs.
As the current crisis evolved, global governments and central banks went into their arsenals and wheeled out a series of fiscal and monetary weapons — including, famously, a bazooka. The central banks even managed to improvise a few brand-new armaments of their own, mostly carrying unpronounceable four-letter acronyms like TSLF.
But while the world’s governments had a certain amount of momentum a few months ago — enough that a $700 billion stimulus package got passed in the US, anyway — it seems that momentum has now been lost. John Gapper bemoans what’s happened on the regulatory front:
“We must not let turf wars or concerns about the shape of organisational charts prevent us from establishing a substantive system of regulation that meets the needs of the American people,” Mr Geithner testified to Congress in March. Unfortunately, he was talking to a bunch of turf warriors.
And more generally, as any number of European elections are currently demonstrating, disaffection with government is high. Floyd Norris wraps it all up in a blog entry entitled “Government Failure”:
If this is a double-dip recession, it will fall on governments to take further steps to counteract it. The outlook on that score is not good.
Essentially, the financial crisis was met by robust government response. The economic crisis was met by weakened, but still reasonably effective, government response. But if things get worse again, the prospects of strong world governments rising to the occasion have pretty much evaporated at this point. If anything, governments are more likely to be the problem than they are the solution — look at California’s fiscal woes, for instance, or the wave of devaluations and possible defaults which threatens to crash over central and eastern Europe.
At that point, we’ll have run out of saviors. The IMF can’t singlehandedly save the world, and there aren’t any superheroes able to save the day against the odds. Which is one reason why, if and when the markets turn south again, the next bottom is likely to be significantly lower than the previous one.
Survivor, CJR edition: Who can make it through to the end of a panel featuring Bill Ackman and Gretchen Morgenson?
Mark Gimein on the economics of ticket scalping
Really bizarre new Takashi Murakami/Louis Vuitton animation
“September became the preferred time to start the school year because travel is cheapest during July and August“
As every financial journalist knows, if you talk to self-proclaimed experts at investing in some given asset class, those experts will always tell you that what you really need, if you want to invest in their asset class, is expertise. This is not helpful. But Brett Arends seems to have bought it, at least when it comes to wine:
You really need to know what you are doing. That’s true of any market, but probably more in wines, where expertise can be developed over decades, than in many others. The really smart money in the wine market is going to cream the dumb money.
The odd thing about this is that if any market has seen the dumb money cream the smart money, it’s the wine market.
By far the best-performing wines have been the big brand-name first-growth Bordeaux: Petrus, Lafite, Margaux, that sort of thing, especially from renowned vintages. Meanwhile, anybody trying to snap up undervalued wines or otherwise make some kind of relative-value play will have massively underperformed. Those fabulous wines from the south of France or Australia or Germany or Italy or Spain? That case of 1945 port? Your bottle of 1899 madeira? None of it has performed particularly well as an investment. And it turns out that the cult California cabernets can be rather more difficult to sell than you might think — assuming you were able to buy them in the first place.
Now there are good reasons not to buy wine as an investment, and Arends covers most of them. But if you are going to buy wine as an investment, it’s not at all obvious that expertise is going to help you.
Dealscape joins in the Bloomberg-bashing:
Bloomberg’s attempt to wring a bit of news out of an apparently boring interview with Zipcar CEO Scott Griffith makes it clear the traditional news outlets are often just as guilty of churning out nonsense as the user-generated content, blogs and tweets they fear.
Yet again, Bloomberg has overstretched when newsifying a boring Bloomberg interview. In this case, the headline (“Zipcar Seeks IPO”) is based entirely on speculative quotes from analysts following the company — including one who says outright that Zipcar hasn’t even started talking to bankers — and has no basis in anything from inside the company whatsoever. I have no idea why Bloomberg felt the need to sex up a non-story in this manner, but I’m beginning to see a pattern here.
Update: Bloomberg issued an interesting statement to Clusterstock:
“We have the Zipcar CEO ON TAPE saying that IPO is absolutely ‘the right outcome for us.’ When asked when, he said ’2010,’” a Bloomberg spokesperson tells us.
This is fascinating, because none of that information — neither the “right outcome” quote nor the specifics of the 2010 date — made it in to the original article. It’s not like there was a lack of space: he’s quoted as saying banal things like “we’re growing in a year where flat is the new up”.
Which raises an interesting possibility: that the CEO went off the record for the IPO material, and that the journalist, Julie Ziegler, took the hint and ran with it, quoting other people about the IPO but not quoting the CEO himself. But when Zipcar objected to Bloomberg’s article, Ziegler decided that the off-the-record comments weren’t so off-the-record after all, any more.
This is pure speculation: I know nothing of the interview. But there is a big difficulty in writing a story based on information you got on an off-the-record basis. Normally you’d just cite “sources close to the company” or something, but that looks really weird when the only quoted source in the article is the CEO. If I’m right, though, I do wonder how high up the Bloomberg hierarchy the decision was taken to go public with comments which were meant to be off the record.
Update 2: The NY Post talked to the CEO, too, and also came out thinking IPO.
Update 3: Zipcar filed to go public in June 2010.
Tomorrow is the two-week anniversary of Dan Colarusso‘s last blog entry — and last day of work — at The Business Insider. After the fanfare surrounding his arrival, his departure after just four months on the job has been very quiet indeed, but does raise the question of whether and how a group blog should try to manage its contributors.
The most successful group blogs basically allow their bloggers to post when they like and what they like; they encourage an entrepeneurial, as opposed to managerial, culture. Sometimes, when the number of bloggers becomes enormous and there’s a desire for a site to be comprehensive, people managers need to be put in place. But TBI is still a very small shop, and I suspect that Henry Blodget won’t be hiring a new managing editor any time soon.
The WSJ’s 1180-word story on “a canny trade by a small brokerage firm in two markets at the heart of the financial crisis” is not easy to follow, but it’s really kinda fabulous.
Basically, a tiny Texas shop called Amherst sold a huge amount of credit protection, at extremely high prices, on a small and obscure bond backed by Californian subprime mortgages. Although the original issue was $335 million, by the time Amherst sold the protection, the amount outstanding was just $29 million: less than 10% of the original amount, and small enough that Amrherst could purchase the remaining loans and pay the bonds off in full.
That wouldn’t normally make sense: the value of the loans was a fraction of the cost of paying off the bonds. But by paying the bonds off in full, Amherst got to keep all the insurance premiums it had been paid by JP Morgan and others, all of whom were speculating on an imminent default. Clever!
JP Morgan and other banks on the losing side of the trade are now whining to Sifma and the American Securitization Forum that it’s not fair they lost money on their speculation that the mortgage bonds would default. Doesn’t your heart just bleed. Well done Amherst: you outwitted the big boys. Good for you.
Mike at Rortybomb has the blog entry of the year I think; the background is here. Essentially he’s found a Rosetta-stone like table on page 6 of the stress test results, and has used it to create a fabulous spreadsheet which allows you to plug various different unemployment rates into a cell at the top and see what kind of capital needs result.
Of course there are lots of caveats — linear extrapolations are pretty down-and-dirty things. But the upshot is startling: if unemployment does rise more than Treasury feared it might, there are still quite a lot of banks which will be able to withstand the economic downturn and require no new capital. But let’s say that a realistic adverse scenario today has unemployment at 12.2% rather than 10.3%. What happens to banks’ capital requirements?
AmEx, BoNY, Goldman, and MetLife all remain at zero. A few banks require relatively modest cash infusions: FifthThird, for instance, sees its hole grow from $1.1 billion to $4.9 billion. JP Morgan requires $39 billion, which is probably doable; Morgan Stanley needs $15.6 billion, which might be a stretch. But look at Bank of America: rather than needing $33.9 billion, it suddenly needs to raise over $100 billion. In fact, BofA alone accounts for more than 25% of all the excess capital needs under this exercise.
It really seems if you go out a bit all the losses are with a few specific banks, and maybe we should look into breaking them up before they become even more of a rotting albatross on our economy’s neck…
I was actually surprised – I assume turning up the numbers a bit would cause everyting to start leaking red ink. Instead it seems that if there is an additional slight downturn in the economy, we know the firms that will have all the problems. They are the ones that are too big to fail.
It seems that the result of the government’s ad hoc financial engineering over the past year or so has been to shove hundreds of billions of dollars of tail risk into a handful of enormous banking institutions. Which isn’t reassuring at all.
All eyes are on Ken Lewis today: he’ll be testifying to Congress, and, according to the Reuters news planning email this morning, “Lewis is a fiery character and we will be looking for any departure from his script.”
Yet again we’ll be revisiting the history of the last four months of 2008, and specifically two decisions made by Lewis: the September decision to buy Merrill, and the December decision, in the face of pressure from regulators, not to pull out of the deal.
There’s no doubt that the September deal was done hastily. Matt Goldstein reckons that redounds badly on Lewis:
There’s still no evidence that anyone from the federal government was holding a gun to Lewis’ head when he and John Thain shook hands on the merger just as Lehman was spinning towards bankruptcy.
Lewis bears full responsibilty for that deal–along with his newly annointed chief risk officer Greg Curl. It didn’t take a rocket scientist or a mathematician to know that Lehman’s uncontrolled bankruptcy filing would have grave consequences for the financial system. Yet that didn’t stop Lewis and Curl from agreeing to buy Merrill. And at a price that was then a substantial premium to Merrill’s then share price.
If Congressional investigators want to do more than simple grandstanding they should begin by asking Lewis what kind of due diligence his team did in September when he inked the deal. They can start by asking whether he did any due diligence or was it just wishful thinking that everything would out.
But two facts are worth bearing in mind here. Firstly, the deal was of necessity rushed: Lewis and Curl simply didn’t have the time to do due diligence on a bank the size of Merrill over the course of one frantic weekend. But if the Merrill deal hadn’t been announced, there was an extremely high chance that Merrill would have collapsed in short order — and that at that point the shock waves from the Lehman-Merrill 1-2 punch would have been so systemically damaging that Bank of America itself would probably have gone under as well. Given that Lehman’s bankruptcy was obviously going to be harmful, it made some sense for Lewis to essentially draw a line under Lehman and show the market that at least Merrill was safe. If he didn’t, the entire financial system was in jeopardy.
Secondly, essentially all deals done during the financial crisis could reasonably be considered contingent until they actually closed. I noted when Lewis announced the purchase of Countrywide that it wasn’t an acquisition so much as a call option, and after that a whole spate of announced deals ended up being unwound, including Chris Flowers’s acquisition of Sallie Mae and Citigroup’s purchase of Wachovia. Given the rushed nature of the Merrill deal, it was probably reasonable for Lewis to think that if his due diligence turned up some particularly monster black hole in Merrill’s accounts (as it did), he would be able to find a way to wiggle out of the deal somehow.
The problem was that Lewis didn’t wiggle hard enough. Faced with stern disapproval from Ben Bernanke, Lewis quietly stopped wiggling and went ahead with the acquisition, even though he knew it would be extremely bad for his own shareholders. What he should have done is simply told Bernanke in no uncertain terms that his fiduciary duty to his shareholders forced him to back out of the Merrill deal, even if doing so was going to cost him his job. It was when he buckled in December that Lewis made his biggest mistake — not when he agreed to buy Merrill in September.
In my view, it takes a particularly unimaginative, short-sighted, and careless sort of person to see a piece of property in this location and determine that the best and most profitable use for it is a surface parking lot (particularly since street parking near H Street isn’t exactly difficult to find).
Not at all. A parking lot is pure optionality. It generates income, it lowers your property taxes, and it makes it really easy to build something highly commercial if and when developers can actually borrow money again. Old houses like these are never going to be particularly lucrative. Best to take any opportunity to demolish them, so that down the road they can be easily replaced with something shiny and new.
As Ryan’s commenters point out, the problem here isn’t that the owners of the houses want to demolish them, or even that the Historic Preservation Review Board neglected to save them. Rather, it’s that the zoning laws allow parking lots (and the associated curb cuts etc) at all. The problem with the parking lot isn’t that old housing will be demolished, the problem with the parking lot is that it’s a parking lot. Historic preservation boards shouldn’t be used as stealth zoning authorities. There are real zoning authorities for that kind of thing.