Felix Salmon

Financial Intelligence at Harvard Business School

Felix Salmon
Jul 16, 2009 21:05 UTC

Harvard Business School has a blog called Financial Intelligence, where you can find this:

It would not be rational for a public company to be funded only by equity. It’s too inefficient. Debt is a lower cost source of funds and allows a higher return to the equity investors by leveraging their money…

Back to Google. It’s a nearly $22 billion company with no debt, which is inefficient. The problem for Google is that their cash flow and profit are so strong that they can finance the business with retained earnings. But I predict that as Google matures and growth slows, debt will become an important source of funding.

Yes, this is the kind of insight that 942 MBA students are paying $76,600 per year for. The “problem” for Google is that it’s making too much money! Debt is good because it provides leverage for equity investors! And of course, “as Google matures and growth slows”, it will never be content with simply making billions of dollars a year, but will instead seek “funding” in the debt markets in order to, er, invest in something. Or something. That’s all left very vague.

The weird thing is that if Google was ever silly enough to believe this claptrap, it wouldn’t wait until its business had “matured” to raise debt — instead, it would raise debt right now, and spend the proceeds on buying back its stock. That would put an end to its “inefficient” capital structure right there. Thankfully, Google is sensible enough not to want to spend vast amounts of money on needless interest income — especially when it’s paying no dividend. And I doubt it’ll raise any debt at all for the foreseeable future, either now or after its growth has slowed. It simply doesn’t need to.

(HT: Zubin)


I can’t imagine the fate of investors if Google’s growth slows down in the future.http://www.habitchanger.com/money andyou/

The price of suicide

Felix Salmon
Jul 16, 2009 20:08 UTC

Annie Lowrey says that €4,000 is expensive, if you’re pricing out suicide, and is therefore available “only to the wealthy”. Seems positively cheap, to me. Most anyone can rustle up that kind of money somehow, especially if they’re safe in the knowledge that they’ll never need to pay it back. And it’s a good order of magnitude cheaper than dying in hospital.

(Via Ezra)


I would define “cheaper” to also include the potential lessened pain/misery of a quick suicide over a slow death.

That is, what is the value of ‘miserable death avoidance’ and what is its cost? The utility of a quick death might be worth the cost of avoiding a slow painful death.

Of course, for some people, one would need to account for the psychic cost of committing a sin vs. the psychic benefit of dying with religiously-inspired dignity (one could argue that those factors don’t matter because they aren’t reality, but to the believer they do have a cost/value, just like the ‘value’ of greater happiness to homo economicus.)

The next Goldman acquisition

Felix Salmon
Jul 16, 2009 19:59 UTC

Every so often, Andy Borowitz nails it:

In what some on Wall Street are calling the biggest blockbuster deal in the history of the financial sector, Goldman Sachs confirmed today that it was in talks to acquire the U.S. Department of the Treasury.

According to Goldman spokesperson Jonathan Hestron, the merger between Goldman and the Treasury Department is “a good fit” because “they’re in the business of printing money and so are we.”…

Mr. Hestron said the only challenge facing Goldman in completing the merger “is trying to figure out which parts of the Treasury Dept. we don’t already own.”

Meanwhile, Mark Gimein attempts a peculiar defense of the squid:

The rhetoric of the outrage has come full circle: Where, before, the villains were the banks that were stupid and greedy enough to fail, now the villains of the moment are those—a very small club, basically just Goldman and JPMorgan Chase—that have been smart and greedy enough to succeed.

Is it fair to say that Bear and Lehman were stupid, where Goldman and JPM are smart? Not really. In a universe of greedy bankers, some will fail and some will succeed. There’s no particular reason to believe that success is directly correlated with intelligence — in fact, as Gimein himself points out, there’s a long history, from Drexel to Enron, of smart people making spectacular profits before blowing up even more spectacularly. Higher profits generally mean higher risk — and if the US taxpayer is going to have to pay the bill if and when Goldman implodes, we should be able to ratchet down that risk. Or, at the very least, take for ourselves some of the upside when things go well.


I appreciate Andy’s humor, I really do. But Goldman Sachs has been the point man for financial pillaging of the US consumer. I am sure that Borowitz gets it and I certainly get it with my recently published website: http://hubpages.com/hub/Why-Goldman-Sach s-Is-Committing-Treason

Credit card interchange fee datapoint of the day

Felix Salmon
Jul 16, 2009 19:33 UTC

Andrew Martin reports:

At Target, for example, interchange fees represent the second-largest store-level expense, behind payroll. The costs are similarly eye-popping at Home Depot, where officials say they top the price of health care insurance for employees. “The amount of money we’re spending on interchange would put 10 associates in each of our stores,” Dwaine Kimmet, vice president of financial services for Home Depot, said at a recent conference on credit card fees.

Martin is right that lower interchange fees might not mean lower prices for consumers. But they would improve value in other ways.

Alternatively, we can just let the market take care of things, as Floyd Norris proposes:

Make it clear that credit-card companies cannot force merchants to pass the fees on to their customers — This coffee is $1.50 if you pay cash, or $1.79 if you use plastic. If Visa will offer a better deal to the merchant than AmEx does, maybe a Visa purchase should be $1.69. A little price competition would be welcome.

There’s a good reason that sales taxes are lower in the US, where they’re visibly added on to posted prices, than they are in Europe, where they’re invisibly included in posted prices. Maybe the first thing we should do in the war against interchange fees is simply make them visible.



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Bair wants a bank-size tax

Felix Salmon
Jul 16, 2009 17:12 UTC

Sheila Bair and Ben Bernanke are on board with the idea of taxing banks to give them an incentive to shrink:

The FDIC will propose slapping fees on the biggest bank holding companies to the extent that they carry on activities, such as proprietary trading, outside of traditional lending. The idea goes beyond the Obama administration’s regulation-overhaul plan, which would have the Fed adjust capital and liquidity standards for the biggest firms, without any pre-set fees.

“What we have suggested is financial disincentives for size and complexity,” Bair said in a July 9 interview. Fed Chairman Ben S. Bernanke told lawmakers last month that restricting size is a “legitimate” option.

This is great news, even if it took Bloomberg a full week to report it. Notes Ryan Chittum:

Another bit of weirdness is that its interview with Bair was on July 9 but is only being reported now. There must have been some sort of embargo for Bloomberg not to report this big news for a week.

Why would Bair give an interview on July 9 but tell Bloomberg her statements couldn’t be used until July 15? That doesn’t make any sense at all. Maybe it took that long for Bloomberg to ferret out the details of what she was talking about: “financial disincentives for size and complexity” is vague, while the idea of charging fees for prop trading is much more specific. In any case, I hope that Bair’s idea gets traction in both Treasury and the White House.


Why is this limited to large bank holding companies? Won’t GS and MS simply revoke their BHC status if/when such a rule is enacted? Sure they’ll lose access to the discount window, but if they ever get into any real trouble, they’ll no doubt be granted funding on favorable terms by virtue of their being systemically important.

Suggested edit: Replace the rules-based (and gameable) “large bank holding company” with “systemically important entity” (and leave that undefined in the statute).

Schumer signs on to the Baker-Samwick own-to-rent proposal

Felix Salmon
Jul 16, 2009 15:39 UTC

Great news: Chuck Schumer has signed on to the Baker-Samwick proposal which would allow people living in foreclosed-upon homes to be able to continue renting at the market rate.

Andrew Samwick has revisited the idea, giving full credit to Dean Baker for having the idea in the first place. But I like to call it the Baker-Samwick proposal because Samwick is a conservative economist and his support shows that this proposal can and should have bipartisan support. Says Samwick:

It’s hard to justify why struggling homeowners should get such ungenerous treatment (formerly, a point of pride in the plan) when other entities (AIG’s creditors) have gotten better much better treatment.

Samwick also notes that a bill has already been introduced in the House:

Rep. Raúl M. Grijalva today introduced H.R. 6116, the Saving Family Homes Act of 2008.

The Act would grant homeowners whose mortgages have been foreclosed the right to petition a judge to allow them to remain in the home as renters, and pay a fair market rent. The rent would be set by a court-appointed appraiser and adjusted annually for inflation.

The Saving Family Homes Act is one of the few proposed remedies for the current mortgage crisis which requires no expenditure of federal funds or additional bureaucracy, while giving immediate relief to millions of families facing foreclosure and preventing home vacancies that harm neighborhoods.

I would like to see the Grijalva bill expanded significantly — for one thing it shouldn’t require case-by-case judicial approval, and for another thing it should apply to renters of foreclosed homes as well as owner-occupiers. But it looks like there’s some serious momentum now, and I’m also hearing that there’s been a good amount of groundwork for this proposal put down by the pointyheads at Fannie Mae. Let’s make it happen!


I haven’t made a payment in 8 months. I’m not going to want to pay rent. I need a better deal than that.

The NYT will stay free

Felix Salmon
Jul 16, 2009 14:27 UTC

FT editor Lionel Barber isn’t content with charging for his own content, he also reckons that every other news organisation is going to follow suit. Here are some quotes from a speech he gave last night:

I confidently predict that within the next 12 months, almost all news organisations will be charging for content…

We are seeing sustained and growing revenue as a result of our strategy of premium pricing for quality, niche global content – crucial at a time of weakening advertising. Many news organisations are following suit in charging, latterly the New York Times which had previously come down in favour of free access to its own content.

If Barber is confident that “almost all” news organisations will be charging for content within 12 months, and that the NYT is a gimme, then I’m happy to propose a wager with Mr Barber: that at no time within the next 12 months will the NYT charge for the content it’s currently giving away for free. What do you say, Lionel, a bottle of vintage champagne to the winner?


I’m fairly convinced that Barber doesn’t actually believe that. I suspect he’s engaging in a bit of incitement to collude:
http://stevereads.com/weblog/2009/07/16/ signaling-price-fixing-among-the-webs-ne wspapers/

Ben Stein, predatory bait-and-switch merchant

Felix Salmon
Jul 16, 2009 13:59 UTC

How far has Ben Stein sunk? Far enough that I feel compelled to resuscitate the Ben Stein Watch, just to share this unfunny and positively harmful TV ad which is now being aired:

“I went to freescore.com and found out my score for free”, says Ben, while an annoying squirrel holds up a sign with the word “FREE” in some horrible brush-script font.

A few points are worth noting here. First, the score itself is not very useful to consumers. What’s useful is the report — if there’s an error on the report, then the consumer can try to rectify it. Secondly, and much more importantly, if you want a free credit report, there’s only one place to go: annualcreditreport.com. That’s the place where the big three credit-rating agencies will give you a genuinely free copy of your credit report once a year, as required by federal law.

You won’t be surprised to hear that freescore.com is not free: in order to get any information out of them at all, you have to authorize them to charge you a $29.95 monthly fee. They even extract a dollar out of you up front, just to make sure that money is there.

Stein, here, has become a predatory bait-and-switch merchant, dangling a “free” credit report in front of people so that he can sock them with a massive monthly fee for, essentially, doing nothing at all. Naturally, the people who take him up on this offer will be those who can least afford it.

The level to which Stein has now sunk is more than enough reason — as if the case for the prosecution weren’t damning enough already — for the NYT to cancel Stein’s contract forthwith. It’s simply unconscionable for a newspaper of record to employ as its “Everybody’s Business” columnist someone who is surely making a vast amount of money by luring the unsuspecting into overpaying for a financial product they should under no circumstances buy.

It’ll also be interesting to see whether the new Consumer Financial Protection Agency will have the authority to regulate this kind of advertising. If it doesn’t, that’s a significant hole in its mandate.

Update: Ryan Chittum notes that the new credit card act requires advertisers to inform consumers that the only place for a free credit report is AnnualCreditReport.com; they will also be required to include a   statement that “This is not the free credit report provided for by Federal law.” When does this act come into force?

Update 2: It’s also worth quoting the NYT’s own ethics guidelines:

40. It is an inherent conflict for a journalist to perform public relations work, paid or unpaid.

44. Staff members may not engage in financial counseling (except through the articles they write). They may not manage money for others, offer investment advice, or help operate an investment company of any sort, with or without pay.

Stein isn’t a staff member. But the NYT generally holds its columnists to the same ethical standards.

Update 3: Here’s a good video, to go with Stein’s bad one.

Update 4: Freescore seems to be intimately connected with a very ugly company called Vertrue. Ugh.


I’m not really interested in defending Ben Stein, but I do feel he was just ignorant of the scam credit score sites that we are flooded with now and just blindly accepted another paying gig. They are all after one thing – your credit card number. Recurring payments is the name of the game these days. And they get plenty of suckers every time they air their commercials. I never buy anything on credit but I would think that an auto dealership, for example, wouldn’t care about a credit “score” number but would look at the overall report. The “score” thing is something the 3 main credit reporting agencies came up with to screw people out of money and I feel they are the main culprits in all of this. And the widespread ignorance of the public makes it easy for them to prey on them.

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China datapoint of the day

Felix Salmon
Jul 16, 2009 13:14 UTC

Andrew Baston reports on China’s 7.9% GDP growth in the second quarter:

China’s government only reports year-on-year growth estimates. But when measured in the same terms as other major economies—an annualized quarter-on-quarter comparison—China’s growth in the second quarter could be on the order of 15%, some private economists estimate.

This is proof, I think, that stimulus programs can have spectacular effects, at least in the short term. Although once again Chinese assets are looking pretty bubblicious as a result. Beware the coming crash!