Felix Salmon

Andrew Leonard finds a classic case of the WSJ burying a smoking gun today, in its 2,200-word investigation of the lobbying and maneuvering which caused the FASB’s abolition of mark-to-market rules. 2,100 words in, right at the very end, we find this:

Many saw the new rules as a watering down of standards. That triggered a backlash within FASB. At a meeting of a FASB advisory group in New York on April 28, three of its members threatened to resign in protest, concerned that FASB had jeopardized its credibility.

It would be helpful if the WSJ told us how big the advisory group was, to get a better idea of whether three is a big number. (If it’s this advisory committee, the answer is 13.) But in any case, when the FASB’s own advisors are threatening to resign over a change being pushed through by lobbyists and their bought-and-paid-for lawmakers, you know something pretty smelly is going on.

My feeling is that the problem wasn’t the mark-to-market accounting rules, so much as the sense in government that decisions about recapitalization, nationalization, and other forms of regulatory intervention must all be made based on FASB principles and US GAAP. If we had grown-up regulators who understood the concept of regulatory forbearance when you’re in the middle of a hurricane, there wouldn’t be any need to fiddle the books in this manner — and, for that matter, there wouldn’t have been the horrible shuttering of WaMu, either.

The whole episode is just as tawdry as the WSJ paints it to be, and is ultimately based on the weird idea that FASB rules accurately reflect reality, and that therefore if we change the rules, we must be changing the underlying reality as well. Welcome to Washington, I guess.

In January 2008, Brian O’Keefe informed us that “the biggest bet that [Julian] Robertson has in his own portfolio at the moment” was a curve steepener.

In October 2008, Buck Woodford told us that Robertson’s “favorite investment right now” was a curve steepener.

Now, in a “very recent May/June 2009 interview with Value Investor Insight”, Robertson seems to have “bet the farm” on, you guessed it, curve steepeners.

It’s worth noting that in the middle of this timeline we had the failure of Lehman Brothers and the most astonishingly disruptive market meltdown in living memory. But I guess Robertson saw that coming, seeing as how his strategy doesn’t seem to have changed at all.

Phillips de Pury had a small contemporary editions sale yesterday, which included this quite lovely little unsigned and unframed fabric piece by Louise Bourgeois. An edition of 125, it was estimated at between $1,200 and $1,800; it ended up selling for $16,250.

A few lessons can be drawn from this:

1. Auction-house estimates often don’t mean very much.
2. Bidders can get carried away in the heat of an auction.
3. Love makes you do crazy things: I’m sure it was the motivation for both the winning bidder and the underbidder.

Lance Knobel is right: Newsweek’s monster 6,000-word fisking of Oprah Winfrey is exactly the kind of thing which can and should make the magazine relevant again. A taster:

On one of the Secret shows, Oprah gave an example of the scientific power of the concept. She said that once, while she was hosting an episode about a man who could blow really big soap bubbles, she was thinking to herself, “Gee, that looks fun. I would like to blow some bubbles.” When she returned to her office after the show, there, on her desk, was a silver Tiffany bubble blower. “So I call my assistant,” Oprah told the audience. “I say, ‘Did you just run out and get me some bubbles? ‘Cause I got bubbles by my desk.’ And she says, ‘No, the bubbles were always there. I bought you bubbles for your birthday and you didn’t notice them until today’.”

There are many lessons that might be drawn from this anecdote. One is that if you give Oprah a thoughtful gift, she may not bother to notice it or thank you for it. This is not the lesson Oprah took away from her story. Because the way she sees it, her assistant hadn’t really given her the gift at all. She gave it to herself. Using the power of The Secret, she said, “I had called in some bubbles.”

Given the space available, I would have liked to see the authors, Weston Kosova and Pat Wingert, spend a bit of time examining whether Oprah’s anti-science tendencies actually contribute to her success. There does seem to be a common thread to much of Oprah’s most egregious content: don’t take the scientific patriarchy at its word, and trust instead in your womanly intuition. It’s an attractive idea to much of Oprah’s audience. If she toed the scientific line, might she lose part of her audience and her influence?

Ben Bernanke’s testimony to Congress today starts with 7 paragraphs on general economic conditions, continues with five more paragraphs on the state of the financial sector, and then has six important paragraphs on fiscal policy. Finally, at the end, he spends one paragraph talking about what the Fed is doing in terms of monetary policy and quantitative easing.

This is reasonable enough: after having hit the zero bound, there’s not much which can be said about monetary policy, and fiscal policy is going to be the main driver of America’s standing in the international financial markets going forwards. What’s more, for the past couple of years the Fed has been working hand-in-glove with Treasury: the distinction between fiscal and monetary policy, and the independence of the central bank, have gone by the wayside (quite properly, I might add, contra Angela Merkel) in a time of crisis.

Still, it’s a little disconcerting to see the Fed chairman talk so freely about fiscal policy: now we’ve reached this point, it’s going to be hard to stop him talking this way, even after the crisis is over. And the distinction between the Fed chairman and the Treasury secretary is a useful one, which really should be maintained.

Update: James Pethokoukis, for one, seems to think that the Fed’s actions are divorced from the Obama administration’s economic policy. It’s not clear why he thinks that.

Update 2: Mohamed El-Erian sees the emphasis on fiscal policy as an attempt “to push fiscal sustainability issues clearly away from the Fed’s domain and back where they belong, with Congress and the administration”.

David Reilly has come out with one of the purest forms yet of the “legal rights” meme:

Bondholders are told to give up legal rights, and cash, as part of a government-mandated tradeoff that favors a politically connected special-interest group.

The big threat is that this policy will extend to all bonds, including Treasury and municipal debt, not just corporate obligations…

The president, Einhorn said, had introduced a “quixotic idea” into credit markets: “that creditor recoveries in troubled situations can be determined by an arbitrary sense of shared sacrifice rather than legal agreements and long- established prior practice.” …

That theme was echoed at the Sohn conference by Paul Singer, head of Elliot Associates LP, one of the biggest and most successful hedge-fund managers.

Singer’s funds have used the courts to enforce their rights as creditors. He spoke of his concern the law will be circumvented.

Yet even here, in an 800-word column devoted to the subject, Reilly can’t actually name a single “legal right” which GM bondholders have been told they have to “give up” or which has been “circumvented”. Instead, he’s reduced to a vague sense of “that’s not fair”:

In the run-up to GM’s Monday bankruptcy filing, bondholders were told they would do far worse in a government-organized and -financed restructuring than would a health-care trust fund for GM’s unionized retirees. That was the case even though bondholders were owed $27 billion versus $20 billion for the trust, and even though bondholders’ claims were legally equivalent to those of the trust…

The deal certainly didn’t represent, as Obama said during a Monday press conference, an “equitable outcome” for bondholders.

Reilly neglects to mention, here, that the bondholders are going to get a huge chunk of the “old GM” — the assets which will remain in Chapter 11 after the “new GM” emerges from it. The UAW isn’t.

But more to the point, an unsecured creditor has no “legal right” to get exactly the same outcome as any other creditor with whom she is pari passu. The creditor does have the legal right to kvetch to a judge about fairness, that’s about it. And if the bondholders have a better idea of what’s fair, they’re more than welcome to provide tens of billions of dollars in debtor-in-possession financing in order to make that happen. But of course they’re not willing to put in so much as a nickel, which means that it’s not up to them, and the entity providing the financing — in this case, the US Treasury — gets to call the shots.

As for Paul Singer, I’m curiously untouched by his crocodile tears over bondholder rights. Yes, he regularly goes to court to enforce those rights — that’s how he makes high returns for his hedge fund. If there were nothing to complain about, he’d be out of a job. And, of course, he’s very politically active on the Republican side of the aisle: it’s unlikely he’ll ever have anything particularly nice to say about the Obama administration.

So let’s find a legal expert to come out and say that certain specific rights have been overridden. Or, if we can’t, let’s drop this meme altogether.

Menzie Chinn on inflation: Don’t panic!

How a Harlem GM dealership ended up with $40 billion in debts

The barcode is like TCP/IP, or the shipping container: isn’t it great when standardization actually works?

Why Felix Salmon is confused by cars

Bloggers’ role in choosing Dow stocks

The top marginal income tax rate for a Chicago futures and options trader is 23%. Understandably, the traders are upset that the Obama administration is trying to raise it. But their arguments are pretty weak:

The vital service traders provide is to give markets liquidity… Says Brodsky, “If options markets don’t provide liquidity, people may be less willing to own stocks because they can’t hedge them efficiently.”

Personally, I can think of quite a few people who are wishing that they had been less willing to own stocks over the past few years.

Vernon Smith is a true giant in the world of economics, and his memoir has now received a rave review from Tyler Cowen (who admittedly might be biased, given that Smith is a fellow at Cowen’s Mercatus Center). So the obvious question about the book is this: why was this wide-ranging memoir from a Nobel laureate self-published?

There are lots of possible reasons: Maybe Smith just can’t be bothered to deal with agents and editors and publishers. Maybe he didn’t want to share the profits. Maybe the book is so idiosyncratic that no publisher had any interest in publishing it. Or maybe, contra Cowen, it just isn’t very good. I must say that I do now want to find out — and the fact that Smith will personally get a significant part of the amount I pay for the book does make me more likely to buy it.

“They’ve got the capital to invest in more efficient vehicles, which is what’s necessary to grow the brand.”

-Nick Richards, a spokesman for Hummer, on the upcoming sale of the marque to the Sichuan Tengzhong Heavy Industrial Machinery Company. He can’t be talking about the Hummer bicycle, ‘cos that’s another company, which has already rebranded itself as SwissBike.

Nemo asks for a translation of this post from John Jansen. There’s a lot to unpack, so let’s just do the first bit:

Swap spreads are still under pressure. One derivatives veteran offered the interesting observation that the GM bankruptcy had led to the spread widening. The GM filing would have negated existing swap contracts. GM is (was) an active issuer and probably had been receiving from the street as they turned fixed rate issuance into floating rate debt.

With the bankruptcy filing those trades no longer exist and the street is left paying no one. Ergo the street is long. They have to pay swaps to hedge the exposure of that legally created long position.

The first thing to grasp here is the ubiquity, in financial circles, of the interest-rate swap, where you can turn an income stream from fixed-rate into floating-rate or vice versa. Let’s say that GM issues a 3-year bond at 8% per year: it might then go along to an investment bank and swap that 8% coupon payment into say Libor plus 400 basis points. Essentially the bank commits to making all those 8% coupon payments, while GM now commits to making payments which fluctuate according to prevailing interest rates.

With interest rates low, GM was actually making money on these swaps: the banks would pay it the difference, every six months or so, between the higher fixed rate and the lower floating rate. But now that GM is bankrupt, the swaps have been torn up, and all those future payments which the banks were expecting to make no longer have to be made.

Of course, banks always hedge their positions — which means that some other counterparty will continue to pay them the money they were expecting to have to pay to GM. That’s what Jansen means when he says that the bank “is long”. Now that money isn’t going to GM, the bank will want to hedge its new long position, which essentially means selling that cashflow in the swap market.

A cashflow is like a bond, and when you sell bonds their yields rise. Similarly, here, when a bank hedges its new long position, yields — which in this case are swap spreads — go up. That’s what Jansen means when he says they’re “under pressure”. (A swap spread is the difference between the yield on the cashflow the bank is selling, and the yield on Treasury bonds of the same maturity.)

What we’re seeing in this case is essentially the inverse of what happened after Lehman declared bankruptcy: in that case the street was short, and swap spreads went down sharply. On the other hand, as Jansen says today, the activity in swap spreads might have nothing to do with GM at all: it might rather be a function of negative convexity (don’t ask) or “hedging of exotic non inversion notes” (ditto).

The market in interest-rate swaps is enormous — orders of magnitude greater than the market in credit default swaps — and, like most markets, it’s done some pretty crazy things over the past year, with long-dated swap spreads going negative for most of that time. Because there aren’t any systemic implications of things like negative long-dated swap spreads, and because the swaps market is a zero-sum game where for every winner there’s an equal and opposite loser, policymakers and bloggers and pundits haven’t paid much attention to it. That’s fine, they don’t need to. But it’s really important for fixed-income traders, which is why the likes of Jansen spend a lot of time looking at it.

No, this is not a parody. It’s real. If you thought a nationalized manufacturer had any hope of being inventive or avoiding the easy and obvious path, maybe it’s time to think again.

(Via Jones)

Robert Reich has come over all faux-naive about the GM bankruptcy and bailout:

Why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up…

It cannot be to preserve GM jobs, because the US Treasury has signaled GM must slim to get the cash. The company has only slightly more than 60,000 Americans today (83,000 around the world), and plans to shut half-a-dozen factories and sack at least 20,000 more U.S. workers this year. It has already culled its dealership network. Plans call for laying off another 18,000 U.S. workers by the end of 2010…

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganization under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars…

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60 billion than to buy GM? …

GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

The key bit of misdirection here is where Reich talks about “what a reorganization under bankruptcy would do” as an alternative to the government spending $60 billion on GM. But a reorganization under bankruptcy is exactly what is going on right now — and exactly what wouldn’t be going on were it not for the government providing debtor-in-possession financing.

The alternative to the $60 billion bailout-with-bankruptcy would be outright liquidiation — and outright liquidation would cost the government even more. Remember the NYT story on Brian Deese?

A month ago, when the administration was divided over whether to support Fiat’s bid to take over much of Chrysler, it was Mr. Deese who spoke out strongly against simply letting the company go into liquidation, according to several people who were present for the debate…

Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate.

If GM were to be liquidated, there would be a domino-line of supplier bankruptcies which might well have fatal repercussions even for the last bits of the US car-manufacturing industry which are reasonably healthy: the Japanese-owned car factories in the south. The wave of defaults and bankruptcies would not only set back the US auto industry and networks by decades, but would certainly spill over into municipal finance and a huge number of other areas of the US economy. The recession would get much worse, and any economic recovery would be significantly delayed.

So the point of the $60 billion isn’t to buy GM, or to provide jobs to some subset of its workers. It’s to avoid the catastrophe that would be a GM liquidation.

The WSJ makes a good catch: the SEC — the agency charged with regulating securities but not derivatives — refers to securities as derivatives three times in a press release which came out last Thursday. This is typical:

Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office, added, “These brokers took customers primarily interested in protecting their money and pushed them into risky derivative investments through blatant misrepresentations.”

No, they were not derivatives, they were mortgage-backed securities, as the official complaint — which never uses the word “derivatives” explains.

When I’ve made this point in the past, invariably people have popped up in the comments saying that these securities can indeed be considered derivatives, for some recondite etymological reason. But really the line between securities and derivatives is quite easy to understand: derivatives are a zero-sum game, while if a security goes to zero, no one else makes a concomitant profit.

I do wonder, though, whether a lot of the animus aimed at derivatives comes from people who are using such a broad definition of the term that it encompasses mortgage-backed securities and other non-derivative instruments. Certainly it would be helpful if stories like this one were assiduous in defining their terms — I’m pretty sure it’s referring only to real derivatives and not to securitizations, but that’s a distinction which is evidently worth making explicitly. And it’s certainly a distinction which the SEC, of all agencies, should be hyper-aware of.

Well, Mr Smartypants, how would you find people willing to fork over $10 million?

Adam Davidson: “I liked the idea of revealing myself in a less than flattering light” Bloggish? Yes. NPRish? No.

“US Dealers are not offering the insentives or inventory type that SATICEFIES MY BASIC TRANSPORTATION NEEDS”

Pimco bond ETF: About time too.

At the Target AGM: “No one was allowed to open a laptop during the meeting, not even to take notes.”

You believe that marriage should be between a man and a woman? Okay! But why?

More super-elegant fisking of anti-gay-marriage speciousness