Opinion

Felix Salmon

Hypothetical ethical quandary of the day

Felix Salmon
Jun 12, 2009 16:48 UTC

Let’s say you’re empty-walleted Tim Geithner, and a senior Citigroup executive offers to buy your home — currently being rented out for rather less than its monthly cost — for the full asking price of $1.575 million. Naturally, you suspect that your identity is responsible for the fact that the buyer isn’t looking to haggle over the price. What do you do?

(Thanks to Jon Weil for the inspiration)

COMMENT

Turn the property over to a blind trust with instructions to disburse to Mr. Geithner no more than $7,500 per month and disclose no details of any transactions or potential transactions until one year after any potential conflict of interest is removed.

Chart of the day: Risk and size in banking

Felix Salmon
Jun 12, 2009 15:04 UTC

Mike at Rortybomb creates this chart from the official stress-test results:

risk_v_size.jpg

Says Mike:

There was an argument from the big-is-better crowd that larger banks may have more losses net, but as a percent of total assets it will be smaller…

This chart should feel like someone just kicked you in the stomach. The biggest banks, using their own models they chose to report to the Fed, did terrible compared to a basket of small banks.

My own more-or-less arbitrary cut-off point is $300 billion: I don’t think that any bank should be allowed to have more than $300 billion in assets. And it turns out, using the official stress-test numbers, that the 12 banks with less than $300 billion in assets have a gross estimated loss of $127 billion, or 7.6% of assets. Meanwhile, the four banks with more than $1 trillion in assets have a gross estimated loss of $425 billion, which is 8.4% of their asset base.

And as Mike’s run-your-own-stress-test spreadsheet shows, the worse the macroeconomic situation gets, the bigger the gap between the biggest banks’ losses and everybody else’s — even when expressed as a percentage of total assets. Sooner rather than later, it would be great if we could start dismembering Citi, BofA, JP Morgan Chase, and Wells Fargo, so that none of them is remotely as big as they are right now.

COMMENT

I wonder if this chart masks the more aggressive strategies of the larger banks. They were the ones who so vigorously pursued M&A and consolidations. These have still not been properly digested. Their higher losses % may be an indicator of that. It could also be just that larger banks have more difficulty determining and addressing their exposure.

However, remember that most of the officially collapsed banks were small and regional operations. Large banks have the capability to better absorb large losses as a percentage of their portfolio than smaller banks. More assets = more leverage = more financing possibilities.

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How to sleep better at night

Felix Salmon
Jun 12, 2009 14:35 UTC

Another reason to talk to your grown children about your financial affairs.

COMMENT

Reducing the stress in your life is definitely going to improve your sleep quality. If you can keep yourself from being all worked up from stress before you go to bed, you should get a great night.

The end of rescues

Felix Salmon
Jun 12, 2009 14:09 UTC

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.

COMMENT

I think the biggest problem is the lack of transparency – that has completely disenfranchised the public at large, convincing us that we’ve been scammed by the gov’t, and that they are quite in league with the banks. I think the public at large is actually willing to go down with the ship and to hell with big business and massive gov’t spending. It obviously hasn’t worked so far, why assume it would work in the future… isn’t that Einstein’s definition of insanity?

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Thursday links get there in the end

Felix Salmon
Jun 12, 2009 05:53 UTC

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

COMMENT

If you read the scalping piece: does it seem more likely the Beijing scalper is a rational monopolist, or that he’s behaving irrationally (or bluffing)? I don’t currently believe that many events with (unsanctioned) scalpers end up with any scalpers commanding a large enough chunk of the tickets to create monopoly power. I would be more willing to believe behavioral explanations for empty seats — or simply that the purchasers changed their minds and couldn’t be bothered to resell them.

Do expert wine investors make more money?

Felix Salmon
Jun 11, 2009 21:15 UTC

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.

COMMENT

Even assuming you do own or can rent the necessary fine wine market knowledge, except in inflationary environments, on a risk-return scale, fine wine as an investment class is not appealing, nor is it liquid.

Neverthless, it could be an attractive and diversifying component in stock and bond portfolios, and during an expected, protracted inflationary period likely ahead, worth consideration.

Luis de Agustin

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Bloomberg overstretch watch, Zipcar edition

Felix Salmon
Jun 11, 2009 20:01 UTC

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.

COMMENT

Quit your Felix bashing because he’s probably right. The fact is every CEO of a VC-backed company will tell you an IPO is an eventual goal. What are they going to say when faced with the exit plan question? What CEO is going to say “Yeah, I plan on running this company into the ground.”

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Colarusso leaves The Business Insider

Felix Salmon
Jun 11, 2009 15:58 UTC

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.

COMMENT

Felix, is there any backstory?

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Amherst’s CDS coup

Felix Salmon
Jun 11, 2009 15:38 UTC

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.

COMMENT

Try Bloomberg.com…just as likely to have a version of the same story

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