Felix Salmon

Santander starts selling its Brazilian jewel

Felix Salmon
Jul 29, 2009 21:34 UTC

2002 was a bad year for Banco Santander: in the wake of economic crises in Argentina, Uruguay, and Brazil, the bank found itself with large Latin American losses and a desperate need for capital. So it ended up selling 25% of its Mexican subsidiary, Santander Serfin, to Bank of America. Now history is repeating itself, this time in Brazil.

Santander was the big winner in the acquisition of ABN Amro, largely because of Brazil. It’s now cashing in those winnings, saying that it intends to float 15% of its Brazilian subsidiary on the Brazilian stock exchange — but isn’t really making a profit on the deal. Santander paid $15.6 billion for ABN Amro’s Banco Real, which was roughly the same size as Santander’s own Banespa in Brazil. If the combination is now worth $30 billion, there hasn’t been much in the way of appreciation. Of course, in the world of emerging market banking, staying flat over the course of the past two years is no mean achievement.

By all accounts, Emilio Botin, Santander’s chairman, has been ruing the Mexico deal pretty much since the day the ink dried on the sale. It’s not just that he sold the stake cheap, it’s also that it’s always nice to have 100% control of your subsidiaries, especially when you have a pan-regional presence. Santander is by far the largest bank in Latin America, and many of its corporate clients have operations in more than one Latin country. When dealing with those clients, it’s a bureaucratic nightmare to have to attribute a certain percentage of all transactions to the Mexican subsidiary so that Bank of America can get its fair share of the profits. What’s more, there’s always a risk in Latin America of governments imposing high new taxes on their banks — and when that happens, the big multinationals love having the ability to book profits in some other country. Again, that ability is severely constrained when you have to share one country’s profits with outside investors.
The news out of Brazil, then, is odd, since it would seem to create all those problems all over again.

My colleague Alex Smith likes the deal — it “could raise $4.5 billion of scarce capital while giving Botin another currency for shopping in South America”, he says. But Santander already has a monopoly in Chile, has a dominant position in Argentina, Uruguay, Venezuela, and Brazil, and it has no real chance of gaining market share in Mexico, where the top two players are deeply entrenched. Might there be an Andean bank or two that Botin is interested in? Maybe, but nothing nearly as important as 15% of his hugely valuable Brazilian franchise.

One can only conclude that Santander needs this money to shore up its own capital base, and that, much like the Mexican sale, it’s being done more out of desperation than out of any kind of strategic vision. And if Santander — one of the world’s strongest banks — is desperate for capital, one can only imagine what kind of state our weaker banks are in.

Update: Santander spokesman Peter Greiff responds:

“Starts selling”? What makes you think Santander would continue?

Just to be clear, CEO Alfredo Sáenz yesterday said the bank is weighing floating up to 15% of the bank in Brazil through the issue of new shares, not existing ones. So it isn’t really “cashing in” anything. The capital would be used to strengthen the bank in Brazil, he said.

As for the accounting issues involving Mexico, I vaguely remembering you mentioning those once before and, frankly, have never heard them mentioned in-house. If there are questions about how to attribute revenue, they would be normal ones among subsidiaries, not complicated by the BofA stake in Mexico. Keep in mind that 22% of Chile is in free float and Puerto Rico is listed too, not to mention Banesto in Spain. The banks are organized as independent subsidiaries, with their own accounts, regulated and supervised locally. So a floatation wouldn’t necessarily add that much bureaucratic hassle.


Santander is not a strong bank. It is a bank that refuses to recognize losses, even as unemployment in Spain passes 20% and real estate prices plummet.

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High-yield chart of the day

Felix Salmon
Jul 29, 2009 19:35 UTC

Bespoke Investment Group serves up this chart:


It seems as though while the high-grade bond market has responded to increased demand with massive amounts of new issuance, the high-yield market — which is still pretty much closed to new issuance — has responded with lower spreads. That’s a much healthier response: it means that writers of credit protection might have now emerged from technical insolvency, while total leverage continues to fall as debts are paid down and little new debt is issued.

High-yield markets were always going to take a while to come back in vogue, after blowing up twice (the first blow-up was the implosion of Drexel in the late 1980s). But the fact that there’s still demand for these instruments, as indicated by the chart, just goes to show how short memories are in this market.


High yield bond issuance for the first half of 2009 was $59 bn. Annualized, that is a bit higher than the average annual issuance of the past five years. Not stunning, of course, but I would not characterize it as ‘closed.’ The leveraged loan is another story.

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Buy vs rent datapoint of the day

Felix Salmon
Jul 29, 2009 19:13 UTC

Alex Veiga has lots of good datapoints on renting vs buying across the country. The main result is that buying is still more expensive than renting, but that the gap is narrowing sharply:

An Associated Press analysis of 45 metro areas finds the gap between the monthly mortgage payment on a median-priced home and the median rent has shrunk from $777 a month to just $221 in the past three years.

My feeling is that the gap is going to continue to narrow, until it becomes negative. And then I’m not sure what happens: if a large number of renters start buying, that of necessity is going to mean rents falling further.
But already, for the right people in the right place, some sales work out significantly cheaper than renting:

Jere Ross, an Air Force vehicle operator, and his wife recently bought a four-bedroom, 1 1/2-bath house in Zephyrhills, Fla., a Tampa suburb, for $86,500 rather than jump into another yearlong apartment lease.

Ross, 23, used a Veterans Administration loan, which doesn’t require a down payment, and got a 30-year mortgage at a fixed rate of 5.5 percent. His monthly payment comes to $700 a month, including property taxes and insurance — $110 less than he paid to rent an apartment nearly half the size.

The most interesting news from a blogger perspective, however, is that Dean Baker, one of the earliest and most vehement housing bears, has just shelled out $650,000 on a 5-bedroom house. Sounds like a good deal to me, but then again I live in Manhattan.


This is an excellent article if you’re in Dallas. Apartment finders are fantastic, especially if you know what you want.

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Judging high-frequency trading

Felix Salmon
Jul 29, 2009 16:03 UTC

There’s an interesting debate in the comments to my post on high frequency trading about the widely-cited $20 billion figure for the profits attributable to HFT. In Jon Stokes’s Ars Technica article on the subject, he writes this:

At least two different groups, the TABB Group and FIXProtocol, estimate that high-frequency trading generated around $20 billion in profits for the financial sector last year. Goldman Sachs accounts for some 20 percent of global high-frequency trading activity, and the bank recently had a blow-out quarter in which its HFT-heavy trading operation racked up a record number of days where profits topped $100 million.

If Goldman Sachs alone can make $100 million a day from HFT, then $20 billion globally seems reasonable. But that’s a very big if, and I’d love to see how TABB Group and FIXProtocol arrived at their figures. (It would also be nice if HFT was clearly defined, which it isn’t, although I think most people agree that it’s a superset of flash trading.)

Elsewhere, Paul Wilmott (con) and Tyler Cowen (pro) join the debate. I’m more convinced by Wilmott than Cowen, although both make good points: Wilmott says that the complex algorithms driving HFT are prone to spectacular failure, while Cowen notes that “the correct judgment of efficiency occurs at the system-wide level, not at the level of the individual trading strategy”.

To that point, I’d be inclined to think that the massive volatility we’ve seen in the stock market of late is an indication that it’s not getting any more efficient, and therefore that it’s entirely plausible that HFT is hurting efficiency. Zero Hedge (now with its own domain name) puts the case in its strongest form:

Long-term buy and hold investors have already departed the market, as they have realized the traditional methods of approaching stock valuation such as fundamental and technical analysis have gone out of the window and been replaced by such arcane concepts as quant factors.

I think that’s overstating things, but even if it’s only true at the margin, it’s still a negative development.

At heart, the debate comes down to liquidity: is HFT a good thing or a bad thing, from a liquidity perspective? Cowen thinks it’s a good thing:

High-frequency trading brings more liquidity into the market. Call it “low quality liquidity” if you wish, but it still looks like net liquidity to me.

I don’t think that case is proven, although again the term “liquidity” is vague enough that it’s important to be able to define terms here. I think the important sense of liquidity is not narrow bid-offer spreads, but rather the ease of doing big deals at the market price, and/or the ability to buy or sell stock without moving the market. In that sense, HFT hurts, rather than helps: every time anybody tries to buy anything, the predatory algos try to pick them off. If that makespeople more reluctant to trade (“if you don’t like it, you can trade yourself at much lower frequencies”, says Cowen) then that ultimately hurts price discovery and transparency.

My bottom line is that HFT is a black box which very few people understand, and that one thing we’ve learned over the course of the crisis is that if there’s a financial innovation which doesn’t make a lot of sense and which is hard to understand, there’s a good chance there’s systemic risk there. Is it possible that HFT is entirely benign and just provides liquidity to the market? Yes. But that seems improbable to me.


This and other topics that are relevant for speed traders and institutional investors will be discussed at High-Frequency Trading Leaders Forum 2013 London, next Thursday March 21.

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Foreclosure chart of the day

Felix Salmon
Jul 29, 2009 13:57 UTC

The chart comes from the Center for Responsible Lending:


According to Congressional testimony from CRL director Keith Ernst, the 1.5 million homes which have already been lost to foreclosure are just the tip of the iceberg compared to the 13 million total foreclosures expected over the five years from end-08 to 2014. He adds:

Many industry interests object to any rules governing lending, threatening that they won’t make loans if the rules are too strong from their perspective. Yet it is the absence of substantive and effective regulation that has managed to lock down the flow of credit beyond anyone’s wildest dreams. For years, mortgage bankers told Congress that their subprime and exotic mortgages were not dangerous and regulators not only turned a blind eye, but aggressively preempted state laws that sought to rein in some of the worst subprime lending. Then, after the mortgages started to go bad, lenders advised that the damage would be easily contained. As the global economy lies battered today with credit markets flagging, any new request to operate without basic rules of the road is more than indefensible; it’s appalling.

He also has a relatively simple idea which I think would help a lot in getting servicers to actually implement the loan modifications they say they’re committed to doing:

One way to help with the various concerns just listed is to create a mediation program that would require servicers to sit down face-to-face with borrowers to evaluate them for loan modification eligibility. Similar programs are at work in several jurisdictions across the country, and they can be very helpful to ensure that homeowners get a fair hearing and that all decisions are made in a fair and transparent way.

I fear that Congress is beginning to get reform fatigue, after so many attempted solutions have failed. But that’s no reason to stop trying new things — in fact, it’s a good reason to try even harder.


The banksters ought to at least be out of a job if not in jail. They, after all, nearly sank the world economy(and maybe still will) The CEO of GM was trashed for ineptitude in leadership. The banksters are guilty of malfeasance, now they are living it up with huge bonuses at taxpayer expence. You know who owns our politicians. Next, they will steal what money we have left through inflation. With these representatives, who needs a king?

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Tuesday links are rather extreme

Felix Salmon
Jul 29, 2009 00:55 UTC

Firefighter shoots a gun at a cyclist’s head to teach him a lesson about riding on the street in daylight?!

Does Rupert know he owns something called Dow Jones PR & Corporate Communications Solutions?

Great moments in democracy, California edition

How PNC credited Solomon Dwek with $25 million just on his own say-so

Sometimes, IT blackmail works on big investment banks

The upgrade is silly given yesterday’s price rise. But on the other hand, Barclays couldn’t keep it underweight.

Rose Art Museum overseers file lawsuit in effort to stop Brandeis/in-house looting


Perhaps that cyclist could follow Brooks’ advice: “now turn to the books of Matthew, Mark, Luke and Duck !”

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High frequency trading as a liquidity tax

Felix Salmon
Jul 28, 2009 20:28 UTC

The high frequency trading (HFT) debate continues today, fueled by a rather credulous Bloomberg article (elegantly fisked by Ryan Chittum) but, more substantively, moved along by Jon Stokes, who has a good article on the subject at Ars Techica. I asked him, via email, where he stood on all these questions; I think his answers are very good. Essentially, HFT turns out to be one of those “financial innovations” which lots of people like in theory but which only seem to benefit financial-market professionals in practice. I, for one, don’t think that there’s $20 billion worth of net societal benefit to it. Anyway, here’s the Q&A with Jon:

FS: Did you see today’s Bloomberg article?

JS: Yeah, and like the NYT article there is a slight conflation of flash orders with HFT. I don’t even mention flash orders in my article… I thought they were the least interesting aspect of HFT, at least to me as a computer guy. But clearly the idea of anyone getting market info ahead of anyone else touches nerves (at least among those who are getting the info second… the folks who are getting it first love it).

FS: Can you translate this, from the Bloomberg article, into English?

At Bats, the third-largest U.S. stock exchange, about half of its customers use flash orders, Chief Executive Officer Joe Ratterman said in an interview yesterday. The system is open to everyone and allows brokers to submit prices that are more competitive because the delay gives them a way to anticipate moves in the market, he said.

JS: This is actually a very good explanation of flash orders and the controversy around them.

As for the above, I can tell you what he’s trying to get across to the reporter, in the context of the currently bubbling controversy over flash orders and whether or not the NYSE will allow them in order to remain competitive with other exchanges and with dark pools: “this is no big deal, and doesn’t create a two-tiered market because any broker can use flash orders on our exchange to get a better price (than the people who aren’t using flash orders).”

Actually, my plain English rephrasing sort of crudely encapsulates the entire HFT debate. I.e., the argument of the “move along, nothing to see here” crowd on almost any HFT-related issue is something like:

“HFT does not create a multi-tiered market because anyone with enough money can move up to the highest tier by simply buying more speed and lower latency. So something with multiple tiers, where you can move to a higher tier if you can afford it, is not /really/ ‘multi-tiered’ because the tiers are open to everyone based on ability to pay. See how that works? No? Then go away, commie.”

FS: Can you tell me whether you think that, at the margin HFT improves liquidity? I’ve heard the opposite argued: that because HFT orders tend to be small and fleeting, they actually act against liquidity. That’s one reason why dark pools had to be invented — they’re the only way of trading in size without moving the market.

JS: At this point, you have to speak in more specifics about what you mean by “HFT.” Are predatory algos improving liquidity? I can’t see how one could claim they are for any reasonably useful definition of “liquidity”.

Are stat arbs and AMMs improving liquidity? Yeah, they are when they’re actually in the market. But they have no obligation to provide liquidity, so when things get choppy (i.e. when you need liquidity the most) they can just bail and take all that liquidity with them.

Are flash orders improving liquidity? I have to think way more about it to answer that.

FS: If HFT makes $20B a year, whose money is that?

JS: On one level, the answer to this question is easy for most of what goes on under the heading of “HFT”: the money is coming from whoever is buying stocks that are marked up a penny or so because they were down a rung on the speed/latency ladder. This could be pension funds, retail investors, or anyone else in the world. So it’s coming from the market participants.

(Of course, on some level, the guy who bought Cisco in March of 2000 is “down a few rungs on the speed/latency ladder” from the guy who bought it in August of ’99. But I think it’s important to draw a line here between what HFT is doing and what went on in a lower-frequency age, the same way that we all recognize a line between “speculation” and “investing” that’s drawn based on the time period that you hold an asset. Much of the debate in HFT is over the drawing of these kinds of lines.)

But to justify this $20B/year “fee” you have to make the case that the market system as a whole is getting something of value to all the payers in return. So supporters will say that it’s the price of liquidity and innovation, and, besides, they’ll argue, everyone who has been participating in the markets for decades has been paying these hidden liquidity taxes (and I’d rather call them taxes than fees) to specialists and any other market maker. But when you see this tax ballooning at Internet speed–much the same way that finance has ballooned as a portion of GDP–you have to take a step back and ask, “what is the real, fundamental benefit that we’re all paying for here when we collectively direct money into this?”


Did I get the definition of HFT right?

Adventures in leverage, Liberty Media edition

Felix Salmon
Jul 28, 2009 19:19 UTC

John Malone is feeling bearish:

Mr Malone agreed with Mr Murdoch on the economy. “I think he is particularly bearish on the economy . . . I agree with him. I think this is going to be a long slog. There is just way too much debt in the west and we are starting to be borne down by that debt.”

I agree with both of them. But it’s worth noting that in the first quarter of 2009, Malone increased Liberty Media’s total consolidated debt to $14.09 billion from $12.23 billion at the end of 2008 — that’s an increase of more than 15% over the course of just three months. I guess Malone knows at first hand what he’s talking about.


It’s possible to at once thunk there is too much debt generally and at the same time believe that your company can generate sufficient revenues going forward to service more debt.

Whether this latter belief is justified in Malone’s case, I have no idea.

Have we wasted our crisis?

Felix Salmon
Jul 28, 2009 15:36 UTC

The bond market is on fire right now: Treasury is selling $115 billion of notes this week, with the 10-year bond yielding a whopping 5.1 percentage points more than the inflation rate — the widest spread since 1994. Meanwhile, total corporate bond issuance in the first half of 2009 was an all-time high of $1.791 trillion — more than anything we saw during the boom. This is what it looks like when markets clear: bond investors are seeing attractive yields, bond issuers are seeing abundant liquidity, and there’s an enormous amount of pent-up demand for financing from the long wintry months when no deals could get done at all.

Meanwhile, the S&P 500 is closing in on the 1,000 mark, after having dropped below 700 in March. The primary market in stocks is already heating up again in places like China and Brazil, and assuming that stocks manage to stay at their current levels or higher will surely reopen in the US as well in 2010. Are we really back to normal already, as far as the markets are concerned?

I fear the answer might be yes. Or, rather, I fear that the relatively happy state of the stock and bond markets has removed a necessary degree of urgency from the regulatory-reform debate, which vastly increases the chances that changes will be small and ineffective. I also worry about all this new debt: the deleveraging trend seems to be unwinding itself, and the chances of moving to a more sensible and less leveraged world of more equity and less debt are diminishing by the day.

Pace Rahm Emanuel’s famous comment, we’ve wasted our crisis. Not that I want another one, of course — although I fear that given the amount of complacency in the markets right now, the chances of a second big shoe dropping continue to rise alarmingly. But asset markets have a way of setting the mood of policymakers, and right now that mood is that things ain’t broken any more. As a result, they are pretty unlikely to get fixed.



I’m no expert either, but here’s a few thoughts:

Remember that he stock market is basically gamble on the future more than reflection of the present. The reason the market’s up (as much as anyone knows) is more that the investors think that things will be better in the near future than that things are good now.

And no, most of the world is worse off than us currently, although China continues to apparently roll on (due mostly to their stimulus package and internal consumption). For various reasons (some perhaps right, some perhaps wrong) people are guessing that we’ll right ourselves before most of the rest of the world.

Even more than higher GDP, we need ‘real’ GDP, not based on risky financial transactions (most of the GDP gains of the Bush years were in the financial world – and have of course since evaporated). But alas, Goldman Sachs is once again weaving their magic and we look to be headed right back down the same road. Gulp

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