Opinion

Felix Salmon

The House of Representatives vs automaker bankruptcy

Felix Salmon
Jul 10, 2009 04:53 UTC

I’m no great fan of the Senate, and especially of the way in which you seem to need a 60-40 supermajority to get just about anything passed these days. But then along comes the House to make the Senate look great:

A majority of House members have signed onto a bill to reverse the closing of 789 Chrysler dealerships and block General Motors Corp. from closing more than 1,300.

Notes Kevin Drum:

This is a wholly nonideological porkfest, with 133 Democratic cosponsors and 88 Republican cosponsors. (So far.) Which just goes to show: under the right circumstances, bipartisanship isn’t dead after all.

In our bicameral system, this is exactly the kind of thing that the Senate was designed to stop becoming law. Congressional districts are small enough that individual auto dealers can wield a lot of power with their Congressperson; states, by contrast, are large enough that individual auto dealers have little if any clout with their Senators. But it’s still utterly depressing that Congresspeople are out signing the Automobile Dealer Economic Rights Restoration Act of 2009, which is designed to do an end-run around one of the most successful bankruptcy proceedings in living memory, and which would singlehandedly put the US auto industry onto yet another road to ruin.

I can hope only that this is gesture politics: safe in the knowledge that this act will never become a law, politicians can sponsor it without fear of its repercussions. Ah, the circus that is DC.

COMMENT

The only problem is that it works the other way as well. When the House (albeit rarely) passes something useful, it often gets either (a) very watered down to pass or (b) stalled indefinitely.

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What’s the price-quality correlation for bicycles?

Felix Salmon
Jul 9, 2009 22:03 UTC

Although I’m generally a fan of credit unions, and I’m certainly a fan of bicycling, I’m not at all a fan of this new bike-loan product:

* Rates as low as 7.50% APR*
* 12-month term
* Borrow up to $2,500
* 100% financing of bike plus accessories

One of the best things about bikes is that they’re cheap. Yes, it’s easy to spend $2,500 on a bike if you put your mind to it — or much more even than that. But the only people buying $2,500 bikes should be people who can easily afford to pay cash for them: no one should be taking out a loan for that kind of luxury.

With any luck Eric Matthies will weigh in on this question on his blog — he knows much more about biking than I do. But my gut feeling is that the price-quality correlation when it comes to bicycles is pretty low, and that much of the time it’s actually negative. (What you gain in terms of lower weight — which is generally what you’re paying the big bucks for — you often more than lose on the functionality front.) If Portland credit unions want to encourage daily bicycling, I don’t think that a $2,500 racing bike is exactly what the doctor ordered.

I’ve spent the past day in San Diego (that’s why blogging’s been light) and my mode of transport while I was here was a rented Bianchi Cortina — a very nice bike which retails at $429. My feeling is that $400 is pretty much the maximum sensible price for a new bike for anybody who needs to borrow money to buy one. Maybe make it $500 with the accessories (helmet, lock, lights) included. But $2,500 is just silly.

Update: Eric Dewey from the credit union offering the loan pops up in the comments to say that the high limit was put in place as a sign of support for Portland’s custom bike builders. Which is nice. But I still like to think that we’re moving towards a world where people only buy a custom bike after they have the money to do so.

COMMENT

Brad Ford as it right. There is very little correlation between price and quality above some threshold. Carbon fiber road bike frames will cost you more than $2500, but is this better then a $250 aluminum commuter frame? Depends on whether you’re racing on the roads of France right now or slogging through muddy streets on your way to work. Is a carbon fiber Mercedes McLaren SLR better than a Caddy Escalade? Depends whether your commute looks more like Le Mans or Paris-Dakar.

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Is McQuade now Pandit’s heir apparent?

Felix Salmon
Jul 9, 2009 17:36 UTC

Yes, Vikram Pandit is still a robot. Here’s his latest press release:

Vikram Pandit, Chief Executive Officer of Citigroup, today announced several senior management changes to support the company’s business and strategic priorities and to ensure that proper management is secured to lead these efforts.

“Our relentless focus on executing against our strategic priorities at Citi continues as we remain focused on rationalizing Citi Holdings, and on Citicorp as our core operating business,” Mr. Pandit said. “We are making consistent and substantial progress towards these goals. The senior management changes I am making today will further help in positioning our company for the future.”

Some of these changes make sense — Bill Rhodes, for instance, was always CEO of Citibank more in name than in fact. But others simply smack of yet more deckchair rearrangement, especially after the last reshuffle, in August, has already been re-reshuffled. It can’t be good that Citigroup is now on its fifth CFO in as many years. And it’s certainly not good that Pandit announces these major changes with a bunch of meaningless management jargon instead of any kind of vision.

Those first two paragraphs of the Citi press release are worth reading closely, since they reveal how utterly vapid the Citi business model really is. When all you can do is talk in a pro-forma way about “strategic priorities” and “positioning our company for the future”, it’s pretty clear that you don’t really have a clue what you’re doing, or why.

CEOs always resort to increasingly-frantic and increasingly-frequent management reshuffles before they themselves are ousted. And with the well-respected commercial banker Gene McQuade now running Citibank, I suspect the board will be mulling seriously whether they should elevate him to the top job. I give him a year to prove himself at Citibank, and then, if he succeeds, the poisoned chalice that is the job of Citigroup CEO is probably his if he wants it.

COMMENT

Pandit ain’t the only robot around here.

HA HA HA…You think this is the real McQuade?

IT IS

Urban underfunding datapoint of the day

Felix Salmon
Jul 9, 2009 13:37 UTC

Anecdotally (which means that I don’t have any empirical data on this, but it feels this way), transportation spending is second only to defense spending when it comes to waste, inefficiency, and a general syndrome of money going to politically-influential districts rather than where it would make the most sense.

But then the Obama administration started banning earmarks in the stimulus bill and, I thought, leaving decisions on the allocation of funds to an independent central authority rather than to bickering legislators. I was rather surprised, then, to read this:

The stimulus law provided $26.6 billion for highways, bridges and other transportation projects, but left the decision on how to spend most of it to the states.

The results have been predictable: disproportionate amounts of money for roads in the middle of nowhere, while important urban transit projects go unfunded. Seattle, for instance, got none of the first tranche of federal stimulus funds; Charlotte got less than 2% of North Carolina’s.

This is why we need an Urbanist Party: so that city-dwellers can finally punch their weight in politics (Obama is the first president from a city in living memory) and so that local, state and federal government starts paying much more attention to the people who really make any modern economy run.

COMMENT

As for the urban / rural debate, it’s sooo great that everything we need comes from the cities, including all the wonderful soil to grow delicious ears of corn outside your 10th story apt window.

Nothing grows out in the country or the sticks, except for rednecks and NRA permits :) Oh yeah, toby keith CD collections too

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Does Felix have criminal tendencies?

Felix Salmon
Jul 8, 2009 22:31 UTC

Joe Weisenthal asks, provocatively enough, whether I, had I been a banker during the credit boom, might not now be held criminally liable were the crime of bankslaughter on the books:

We wonder if Felix had been a banker whether he’d be guilty of bankslaughter. After all, in his research into the subject, he concluded early on that the issue of mortgage defaults wasn’t likely to be a huge deal. Later he changed his mind and of course, defaults proved to be a gigantic problem.

But if I were a prosecutor, I’d have no problem convincing a jury of 12 that a “reasonable” banker should’ve known that lending money to people of dubious credit risk, with low loan-to-value ratios, in an inflated market would’ve been a recipe for disaster.

Well yes — but that’s kinda the whole point. You don’t want the managers of systemically-important banks being as careless as I was on the subject of default risk. Here’s what I wrote in the piece that Weisenthal links to:

A little knowledge is a dangerous thing: I would have been much better off with a completely naive view than I was with a very basic grounding in mortgage finance.

I did some paddling around in the shallow end of the theory of mortgage bonds, and what I found surprised me: no one seemed to be the slightest bit interested in default rates. The prices of mortgage bonds were entirely a function of prepayment rates, and default rates simply didn’t enter into the equation.

Now I’m a finance blogger who prides himself on being wrong every so often (my slogan is that “if you’re never wrong you’re never interesting”) and who has essentially zero equity in being right. My job is to hold up my end of the conversation, not to be some kind of all-seeing market guru.

The manager of a systemically-important bank, on the other hand, is in a very different position, with vastly more responsibility. If such a manager did no more than do “some paddling around in the shallow end of the theory of mortgage bonds”, and on the basis of that took hundreds of billions of dollars of potentially highly-toxic assets onto his balance sheet, then yes, that’s highly reckless activity. And it’s probably reasonable to assume that if the crime of bankslaughter had been on the books at the time, then maybe such a manager might have thought twice before rushing in to such markets.

The key insight is that “financial innovation” is not the kind of thing you want too much of at too-big-to-fail institutions. Writes John Carney:

Collier doesn’t seem to have given much thought to the costs of over-deterrence. Bank executives faced with the prospect of a criminal investigation and possible conviction would likely be overly cautious. We’d lose a lot of socially beneficially risk taking by criminalizing bank failure.

For me, over-deterrence is a feature, not a bug. We’ve seen where Carney’s “socially beneficially risk taking” has landed us, and frankly I’d rather have rather a lot less of it.

Carney concludes:

Because bankslaughter is backward looking but conducting business is forward looking, it would almost certainly result in wrongful convictions. Lots of activity that looks reckless after the fact can seem perfectly sensible ahead of time. Unless the crime required bankers to know they were being reckless—in which case it would deter almost no-one and result in approximately zero convictions—it would wind up punishing bankers for just being wrong.

In an ideal world, of course, there would be no wrongful convictions simply because there would be no convictions and indeed no prosecutions. And Carney is right that it seems unfair to convict a banker of a crime just because he was heading up a too-big-to-fail institution and made a bad decision.

On the other hand, having the statute on the books would certainly increase incentives not to become too big to fail: it would help keep banks small. A capitalist society works by having private businesses take risks and fail. A capitalist society fails when private businesses are too big and systemically important to be allowed to fail. And so I think there is a case to be made that the managers of those businesses should be held to a significantly higher standard than managers elsewhere.

COMMENT

Even I think bankslaughter is a silly idea. What happened to clawback? I thought we were on the right track there.

Who gets hurt by toxic mortgages?

Felix Salmon
Jul 8, 2009 21:54 UTC

Mike at Rortybomb explains just how dangerous mortgages can be, even to people who avoid the toxic ones:

If I was a degenerate crackhead who snuck into your neighborhood and mugged you for $50, the Wall Street Journal Opinion Page would want me thrown in jail. Now imagine that I’m a degenerate crackhead who took out a subprime loan to move next door to you, in an arrangement that I’m likely not going to pay off. I might not even make one payment. If I default you’ll lose 10% of the value of your home from the externality effect. Assuming your home is worth $300,000, there’s a 20% chance I default in 2 years (realistic numbers), and you lose 10%; 300,000*.2*.1 = I’ve just robbed you for $6,000 while the Wall Street Journal Opinion Page cheered me on. And that’s one house – I’ll have a dozen neighbors. Now mind you, the product was great for me – I got to smoke crack indoors, in a house I could never realistically afford, which was a big plus. The subprime lender sold my loan to a pension fund in Denmark for a nice fee. It goes in the win column for us.

I’m reminded of Brad DeLong’s calculation of the amount that Edmund Andrews has gained by taking out a mortgage he couldn’t afford: if Andrews had behaved responsibly, says DeLong, he would have ended up in much the same place as he is now, but in the meantime he has spent about $97,000 extra over the course of five years. (Plus, of course, got himself a juicy book contract.) The subprime borrowers are often winners; it’s the rest of us who are the losers.

COMMENT

The logic in the quoted article is not right. Theft is stealing something that doesn’t belong to you. The crackhead is not stealing your house by moving in next door (and not paying his mortgage). If you like living in your house, your quality of life doesn’t suffer a bit because your neighbor defaults. Sure the value of your house will go down, but so will the value of many things — your car, maybe your investments, your couches, almost everything you ever bought. There’s no stealing involved here.
Stealing = bad
Stuff getting less valuable over time due to external factors = life

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Behavioral economics question of the day

Felix Salmon
Jul 8, 2009 14:42 UTC

For reasons which are far too boring to go into, I just bought an expensive (four-figure) item for a friend, using my credit card. He paid me back in cash, which is now burning a hole in my PayPal account. And of course I have a human tendency to want to spend that money now, even though I know a monster credit-card bill is going to be arriving in a few weeks. So the question is: how do I maximize the utility of having use of those funds until the credit-card bill is due, while minimizing the temptation to just go out and spend all that cash?

COMMENT

Don’t buy lottery tickets…and don’t play roulette. Like the lottery, it’s a game of negative expectation

http://www.huffingtonpost.com/michael-ma rtin/broke-the-new-american-dr_b_225806. html

http://martinkronicle.com/2009/07/04/bro ke-the-new-american-dream/

Wine market datapoint of the day

Felix Salmon
Jul 8, 2009 13:09 UTC

Some good news is coming out of California:

Total U.S. wine sales rose about 5% in terms of volume in the first quarter from a year earlier, but wines priced at $25 a bottle and up fell about 12%, estimates Jon Fredrikson, an industry consultant with Gomberg, Frederikson & Associates in Woodside, Calif…

Price cuts are taking a heavy toll on wineries’ cash flows, and could make it difficult for them to raise prices in the future. “If you’re a $90 wine and all of a sudden you’re on the Internet at $50, how do you ever become a $90 wine again?” says Elliot Stern, chief operating officer of the Sorting Table, a Napa Valley-based wine distributor.

It’s long overdue that consumers of California wines — not least Californians themselves — became a bit price-conscious. The number of $90 California wines which are actually worth $90 on any kind of sensible global scale is minuscule: most $90 California wines were priced that high simply to stroke the winemaker’s ego and keep up with the winery next door. There’s also the fact that much California wine-growing land is astronomically expensive, or was; prices coming down on that front will also be a good thing.

What we’re seeing is some kind of two-way market finally asserting itself: volumes increasing, as Economics 101 suggests they should, as prices decline. Let’s hope this continues for a while.

COMMENT

$90 Napa wines are signalling goods. They don’t cost that much because of their quality. They exist because – when times are flush – some people “need” to show off their wealth and sophistication. That “need” will come roaring back when ostentatious displays of wealth are fashionable again.

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Tuesday links underperform

Felix Salmon
Jul 8, 2009 04:54 UTC

Justin Fox wants contingent stimulus legislation which kicks in if the unemployment rate passes 11%

Which did better over the past 15 years: Cash or Stocks?

Matt Taibbi: “When people respond by calling names and changing the subject, it means they don’t have any issue with the factual allegations in the article.”

Does the Pope read my blog?

Google answers the question: How will you get used to using Gmail without that familiar grey “BETA” text?

The legal reasoning why CDS are not insurance contracts

Jen Chung with a great roundup of the latest developments in the fiasco that is the WTC site

“Ten years ago, 55% of The Atlantic’s revenues derived from print advertising. Today, that figure is 29%.”

Another Citi management reshuffle?!

The annotated TARP application

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