Felix Salmon

Joe Nocera’s column on Bill Ackman led with Ackman crying during the Target AGM. He continued:

He made it sound as if he had achieved a moral victory just by the fact that he had waged this proxy fight. Somehow, he seemed to believe, it was going to make corporate America a better place.

Then — I kid you not — he started quoting John F. Kennedy. “We will pay any price, bear any burden, meet any hardship,” he said. And that’s when the tears started welling up.

Ackman did not take this well. In fact, he fired off a 5,238-word letter to the New York Times, addressed not to Nocera but to “the Editor”, and signed “Sincerely, William A. Ackman”. Along the way — after accusing Nocera of having penned “the pettiest form of hateful and destructive journalism” — Ackman admits that maybe he went a little bit too far with the whole JFK schtick:

I wrote my brief remarks in the hotel the morning of the meeting and looked for inspiration from some of the great speeches I had heard and read over the course of my life. I wrote these words alone. I shared them with no one. Clearly I got somewhat carried away.

But in the annals of getting somewhat carried away, Ackman’s speech at Target’s AGM is nothing compared to his letter to the NYT. He even manages to drag another youthful and charismatic president down into a rather silly dispute:

President Obama would never call his next-term election opponent a distraction because our President understands, as Mr. Nocera should, that our country’s democratic system and American corporations’ success or failure depend upon incumbency being challenged by strong competition, no matter what the quality of the sitting president or a company’s board members.

It’s hard to square this kind of tone-deafness — it’s a column, guy, get over it — with Nocera’s portrait of Ackman as Man of the Media:

Over the years, he has also become increasingly comfortable using the news media as a way to help put pressure on companies. When he first appeared on my radar screen, Mr. Ackman was so press-shy he refused to allow Fortune magazine, then my employer, to take his photograph. Now he happily co-hosts CNBC’s “Squawk Box,” trading bons mots with Becky, Joe and the gang. He has gone from being awkward in public to silky smooth.

The single biggest risk facing any hedge fund manager is overconfidence — and I think that what has happened here is that Ackman, in the wake of all those hours wallowing in CNBC obsequiousness, has lost his initial — and perfectly natural — fear and mistrust of the media. Instead, he can fire off a monster siwoti letter like this one without stopping to think of how it will be perceived. Big mistake: he’s now much more of an object of ridicule than he ever was before the letter was published.

But desperate men, I suppose, will do desperate things. Let’s hope that GGP investment works out better for him.

Ryan Avent — whom I’m sure has driven much more than I have — has an interesting take on the psychology of the automobile:

I think the psychological result of getting into a car is often unappreciated. A driver — myself included — immediately feels entitled to deference on the road, to that point that they may become actually angry with other drivers, and with the pedestrians and cyclists who insist on making drivers travel somewhat more slowly, or wait to turn right, or generally make the process of commuting less than an unimpeded sprint from point A to point B.

This reminds me of the time when I was riding my bike crosstown on a narrow Manhattan street, and an angry yellow cab started honking aggressively at me from behind. I had nowhere to pull over to, and he got increasingly irate, until I reached the red light and he screeched to a halt beside me. He then proceeded to tell me in no uncertain terms that I had no right to be on the road at all. When I pointed out that for all his rushing he would only have wound up at exactly the same red light a few seconds earlier, and wouldn’t have saved any time, he replied that in fact he had the right to run red lights if he wanted to, and I was depriving him of that right.

OK, New York cab drivers can get a bit extreme. But I think that Ryan’s on to something here — despite the fact that I’m actually the opposite way around: I hate driving, precisely because I’m so fearful about the damage I might do to someone else. That said, when I’m on foot or on my bike I hate it when people get in my way: I might not suffer from road rage when I’m in a car, but I certainly do when I’m on a bike. Get out of my bike lane!

I’m no expert on road rage, but I do think that the feeling of invincibility when you’re in a car does increase with the size of that car. Certainly from the point of view of a pedestrian I feel much more intimidated by a huge black Escalade than I do by a Mini, even though they both would do me pretty much the same amount of harm if they hit me at speed. Just sitting above the street life, rather than on the same level as the street life, makes a big — and deleterious — difference. Drive around a city low down in a Lamborghini, and pedestrians will be attracted to you, rather than repulsed from you.

Could it be that as cars get smaller the number of nasty car-on-person accidents will be reduced? One can but hope.

A new website popped up last week called GM Bondholders Unite, and kicked off aggressively:

May 28, 2009 – “The latest GM ‘offer’ sends a chilling message to all individual bondholders, not just those, like us, holding GM bonds: contracts in America are no longer worth the paper they are written on,” said GM Bondholders Unite, a grassroots organization representing individual GM bondholders across the country.

Neil Collins picks up the meme today:

The big holders have delivered a slim majority in favour of a deal which bears no resemblance to the legal rights enshrined in the bonds’ trust deeds.

But for all the indignant assertions about legal rights, it’s far from clear what exactly is meant to be illegal here. After all, the GM bondholders (unlike the banks holding Chrysler loans) are not secured creditors, so there’s no issue about them being senior to other stakeholders like the UAW.

According to the annoyingly-anonymous website, the government has used its control over the bondholders “to promote its political agenda over the rule of law” and “has proposed a restructuring scheme that disregards and would overwrite contractual rights of lenders and the statutory protections afforded them through the bankruptcy code’s priority rules”. But I still haven’t found anybody actually spell out what those contractual rights are supposed to be, whether they’re “enshrined in the bonds’ trust deeds” or otherwise.

The GM bondholders do have a PR representative, Tom Vogel. When I asked him about this, he replied by giving me some “comments on background”, which means that he was asking me, weirdly, not to repeat what he said. So I’d just ask this: the next time that somebody claims that the treatment of GM bondholders in any way violates their legal rights, can they be specific about exactly what legal rights are being violated?

As far as I can make out, the main legitimate complaint of the GM bondholders is that they’re getting paid out less than other unsecured creditors (specifically the UAW) with whom they’re pari passu. But I don’t think there’s a legal right anywhere for all pari passu creditors to receive exactly the same treatment. If you owe money on four different credit cards, there’s no law saying you have to pay them all the same proportion of the total amount outstanding.

But if there’s a more substantive complaint, I’d love to see it spelled out explicitly, rather than just referred to in a vague and hand-waving manner.

From Zachary Goldfarb‘s piece on the SEC:

During Cox’s tenure, penalties imposed on companies fell 84 percent, from $1.59 billion in 2005 to $256 million in 2008.  

Goldfarb’s piece adds a bit of background to Moe Tkacik’s devastating precis, last month, of the GAO report on the SEC. Essentially, the SEC commissioners hated imposing penalties on companies, for the wonderful reason that such penalties were “ultimately were shouldered by shareholders — the very people most frequently hurt by fraud”.

And it’s not remotely clear that the SEC is fixable:

A backlog of financial crime cases continues to slow the enforcement division as Schapiro tries to turn more of the agency’s attention to abuses linked to the financial crisis, SEC officials said. The agency is still working to reinvigorate its dispirited enforcement ranks.

The whole story of dysfunction and cronyism reminds me of nothing so much as a season of The Wire — and of course the lesson of that great series is that nothing is ever fixed, and that hopes will always be dashed. Good intentions aren’t remotely sufficient to enact change in an agency as broken as the SEC. Which is why any new regulatory structure would best avoid the SEC entirely, rather than trying to reinvent it.

(Incidentally, if you’re looking for other stories which are straight out of The Wire, try here or here. Once you start looking, they crop up everywhere.)

Nassim Taleb is all over the news today, for a couple of reasons, both of which seem to have caused quite a lot of misunderstanding. So after talking to him this morning, it’s worth clearing a few things up.

Firstly, the new fund being launched with his imprimatur, the Black Swan Protection Protocol-Inflation, is not really a bet on hyperinflation, as the WSJ would have it. Rather, Taleb describes it as a bet that the error rate in global fiscal and monetary policy is being systematically underestimated. “Forecasting errors can compound either way”, he says, and if you have an incompetent pilot flying a plane, then inevitably there’s going to be some kind of crash, whether it flies into a mountain or into the sea.

Essentially, the fund is going long volatility in macroeconomic variables, on the pretty reasonable grounds that policymakers are likely to get things wrong, one way or another. Or, as Baruch condenses it, “when you shake the ketchup bottle, none’ll come; then the lot’ll”.

Then there’s the mini-brouhaha over a GQ article on Taleb by novelist and professional provocateur Will Self. This is British GQ, mind — it doesn’t go through the kind of fact-checking process that the US edition does. And Will Self, for all his erudition, is no finance geek; he prefers purple prose like this.

The streets surrounding the Taleb household were piled high with swept-up leaves the colour of money. Taleb picked me up from the station driving a boat-like Lexus with cream upholstery. “It’s eight years old!” he expostulated as he yawed this way and that through the sleepy sun-dappled Saturday streets, one hand clutching a BlackBerry against the steering wheel. He 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.

At one point in the article, Taleb is quoted talking about his hedge fund, and how “we made $20 billion for our clients”. Did he actually say this? He says that he didn’t, and that in fact he told Will Self in as many words that he was being misquoted and that the numbers were wrong. I believe Nassim on this, as someone who has talked to him quite a lot: he simply doesn’t give journalists performance numbers for his hedge funds. He doesn’t do that for people like me, who would understand what he was talking about; he certainly wouldn’t do it for someone like Will Self. If the $20 billion number ever did come up, says Taleb, it was probably as a very vague ballpark figure for the total notional amount associated with the options bought by his fund.

So Tracy Alloway is right: this episode might make GQ look bad, but it doesn’t really say anything about Taleb. And indeed the whole controversy seems to have been blown up as a result of a missive from Janet Tavakoli, where she says, quite rightly, that “any claim of enormous gains for any strategy—including a black swan fund— should be explained and balanced with caveats”. This is true, but it rather misses the point of the GQ profile, which is all about Taleb the man and which only incidentally touches on his investment returns.

Taleb is, as ever, annoyed that people are looking at things like GQ errors rather than at his bigger philosophical points — and of course now I’m doing much the same thing, although I am planning to write something big on risk which will touch on many of his ideas.

One of Nassim’s peculiar strengths is the way in which he refuses to get bogged down in details. If you ask him a specific question, you’re likely to get a very generalized answer. That can be frustrating, until you get used to it, and it explains a lot of the talking-past-each-other nature of the gripes he has with people like Tavakoli or Bookstaber or Merton. They tend to try to reduce things to something tractable; his whole point is that doing so misses the big picture. What he wants is a debate about his ideas; what he gets is a debate about his returns. But that’s probably inevitable in a world where facts are king — even when those facts can obscure more than they reveal.

So Citi is being removed from the Dow, after all, to be replaced by Travelers, the insurer which got spun off from Citi in 2002 and is now worth more than its former parent.

The inclusion of Travelers makes a certain amount of sense, given that the Dow has been insurer-free since AIG dropped out. But replacing GM with Cisco is a bit weirder — could the continued exclusion of Google be a function of the personal prejudices of Rupert Murdoch? In a way I hope that it is, since that would be yet one more reason for all of us to stop looking at this silly average and start concentrating on more objective indices instead.

Update: Evan points out a very good reason not to include Google in the Dow: because the Dow is (idiotically) price-weighted, Google would have four times the weighting of any other Dow component.

Many thanks to PeakVT, in the comments, who links to this particularly ugly chart which does do what I wanted and show how the number of cars per 1,000 population has evolved over time. The lines are sales figures; the darker line shows that we’ve dropped from selling almost 60 cars per 1,000 population per year to selling about 35 of late. The black squares show that we now have about 780 vehicles per 1,000 population, up from about 750 ten years ago.

In other words, for most of the past decade, every group of 1,000 people bought about 60 cars a year and ended up with about 3 more vehicles at the end of the year than they had at the beginning. So what happens when they’re only buying 35 cars a year? Even if they manage to hold on to their old clunkers for a bit longer than they otherwise might have done, the total number of cars per 1,000 people is likely to fall quite dramatically: a year or two of this and we could be back where we were ten years ago.

Still, check out this league table: the US has vastly more cars per 1,000 people than any other major nation. Canada, for instance, has only 563 vehicles per 1,000 people — less than three-quarters of the US figure. For America to even approach that level would be unprecedented in living memory, but there’s really no particular reason why the average American needs 36% more cars than the average Canadian. If you’re losing say 15 cars per 1,000 people per year, it would take over 14 years to get down to Canadian levels of car ownership.

Hugo Lindgren, in this week’s New York magazine, quotes the NBER’s Robert Gordon saying that auto-sales rates are bound to pick up:

It’s hard to imagine any good news out of Detroit at this point, but Gordon says it’s coming. Before the recession, annual U.S. automobile sales were about 18 million vehicles. They’ve dropped to half that, an insanely low—and unsustainable—level. At this rate, the average car would have to last 25 years. A typical replacement rate would boost auto sales up to around 15 million a year, and Gordon expects that we’ll start working our way back to that figure this year, buoying the stronger auto companies and putting workers back on the line.

If we’ve learned anything over the past decade, it’s that things can stay at unsustainable levels for much longer than anybody might imagine. And over the medium term, it’s far from obvious that auto sales in the 9-10 million range are really as unsustainable as all that. Not only don’t we need to get back to “a typical replacement rate”; it’s actually very unlikely we will ever again see the rates of car ownership that prevailed before the crash. That was a world of 3-car garages in exurban McMansions; we’re moving into a more sustainable way of living, which involves fewer cars and higher urban density. Those black squares in the graph above are going to start marching downwards for many years to come. Which means that the wiggly lines aren’t ever going to regain their prior peaks.