Felix Salmon

Annie Leibovitz’s exit strategy

Felix Salmon
Aug 31, 2009 22:06 UTC

Bloomberg’s Katya Kazakina has done the rounds of various real-estate appraisers, asking them how much Annie Leibovitz’s property might be worth, and it turns out that the real estate alone – never mind her life’s work – could well sell for substantially more than she owes Art Capital Group. But, as Kazakina says with delicious understatement:

Whether the appreciation of the real estate, in Manhattan and upstate New York, will offer the photographer a path out of her financial troubles is unclear.

For one thing, Leibovitz has to repay Art Capital the sum of $24 million, plus $2.9 million interest, plus fees, by September 8. As one appraiser told Kazakina, “It’s not going to sell in a week” – especially not her West Village live/work studio, renovated at enormous expense, and custom-designed to the specific needs of Annie Leibovitz. And there’s another major impracticality: according to Art Capital’s complaint against Leibovitz, she has refused to allow Art Capital’s real-estate brokers to show her property to interested potential buyers.

For there’s the rub: as part of the loan agreement, Leibovitz authorized Art Capital to act as the “irrevocable exclusive agent” for the sale of both her photography and her property. Neither Leibovitz nor anybody else can sell these properties, the liens on which are held by Art Capital. Only Art Capital can do that. And the way that Art Capital’s sales agreement with Leibovitz is structured, there’s very little incentive for them to sell any property before September 8. As Kazakina reported on August 18, quoting Art Capital spokesman Montieth Illingworth:

Goldman and Art Capital stood to gain 12 percent interest from their one-year loan to Leibovitz, Illingworth said. This means, Leibovitz would have to pay $2.9 million on top of the $24 million loan…

If Leibovitz doesn’t default, Art Capital would receive a 10 percent commission on copyright and real estate sales, Illingworth said. If she does, the commission would increase to 25 percent of the sale of the collateral (the higher rate includes 11 percent to 13 percent in legal, real estate and other fees, Illingworth said.)

How many people, working on commission, will sell an item at a 10% commission today if they know full well that the commission rate rises to 25% in little more than a week’s time?

It’s not just the sales agreement which gives Art Capital an incentive not to sell the property. There’s the loan agreement, too: Art Capital’s Ian Peck told me in June, talking about his business in general rather than Leibovitz in particular, that his “commissions and fees are designed to be prohibitive” in the event that a borrower defaults on her loan. Come September 8, Art Capital won’t just be collecting a 25% commission on any real or intellectual property it sells on behalf of Annie Leibovitz. The amount which Leibovitz needs to repay Art Capital will also spike significantly: the interest rate on the loan will go up to some unknown penalty rate, from 12%, and Art Capital will almost certainly charge Leibovitz substantial (and also unknown) fees on top for going into default.

What’s more, since Art Capital is now working on a 25% commission, it’s also clear that it has every incentive to sell both the real estate and the intellectual property, rather than the real estate alone, since the best-case scenario for Art Capital involvesmaximizing its total sales commission.

The subtext to the Bloomberg article, as elucidated by the likes of Jessica Pressler, is that if she’s really lucky, Leibovitz might be able to pay off her whole loan just from real-estate proceeds, without having to touch her intellectual capital. But that seems improbable to me. Clearly, no real estate deal is likely to get done between now and September 8 — so if and when the property is sold, Art Capital will take a 25% commission off the top. Using the high end but not the highest end of the estimates in the article, the Rheinbeck property could sell for $6 million, with the West Village property going for $24 million. That’s $30 million together, or $22.5 million after commission – not enough even to repay the loan principal, let alone the interest and any unknown default penalties.

Art Capital would, I think, then be fully within its rights to continue to shop Leibovitz’s full archive of photographs, which it values at $50 million, to the highest bidder – and to take its full 25% commission on any sale before repaying the balance of the loan plus interest. Let’s say it sold the archive for $30 million: again there would be that $7.5 million in sales commission, leaving $22.5 million to repay $1.5 million loan principal, plus interest and unknown penalties. Even with no penalties at all, there’s $2.9 million in interest already accrued: in the wake of her real estate and life’s work being sold off for a total of $60 million, Leibovitz would be left with just $18 million, or less. The rest of the proceeds ($42 million plus) would be kept by Art Capital. Oh yes, and Art Capital would also be entitled to a 25% commission on any income from photography which Leibovitz makes for two years after the loan is paid off.

How can Leibovitz get out of this mess? As I see it, she has two hopes. One is that Goldman Sachs, which owns part of the loan, takes pity on her and advances her the money to pay it off in full. The other, as sketched out by John Cook, is that she files for bankruptcy and throws herself on the mercy of a sympathetic bankruptcy judge:

Art Capital would still likely be able to force the sale and recoup some or all of its debt, but a judge might be convinced to reduce the amount, modify the interest rate, or alter the sales agreement under which Art Capital gets commission on the sale.

For Leibovitz, there’s a real risk that the bankruptcy strategy would gain her little and just end up diverting precious millions to two (or more) sets of bankruptcy lawyers. But I reckon it might well be her best hope.



Paulson vs Fuld, cont.

Felix Salmon
Aug 31, 2009 19:44 UTC

Vanity Fair scores another bullseye this month with Todd Purdum’s 8,000-word article on what Hank Paulson was thinking over the course of the financial crisis, as revealed in a series of embargoed interviews he gave at the time — VF has, improbably, become the home of the best financial journalism in the world of magazines.

There’s more good stuff in this article than can easily be excerpted — go read the whole thing, which kicks off with Paulson throwing up in his private bathroom and just gets better from there. Barney Frank comes out very well indeed — better than Paulson, actually — while Barack Obama’s choice of Tim Geithner as Treasury secretary looks more than it did already like a vote for the continuation of the Bush administration’s status quo.

This article is interesting in that it does somewhat back up the official side of the story as regards Treasury’s (in)ability to bail out Lehman Brothers:

The meltdown at Lehman was catastrophic enough, and Paulson took enormous heat for its failure. Barclays, the British bank, had hoped to buy it, but British regulators blocked the deal, and Paulson saw no alternative. “Lehman Brothers was something that we had been focused on and worked on and worried about for a year. And we knew, and Dick Fuld [the Lehman C.E.O.] knew, and we kept telling him every way we knew how that if he announced earnings like he thought he was going to announce—right after he announced the second-quarter earnings—the company would fail. And when you’ve got an investment bank, no one had any powers to deal with that. I certainly didn’t have any powers to deal with that.”

It’s not clear when exactly Paulson said this, which is important: the decision not to bail out Lehman went quite quickly from being seen as bold and decisive to being seen as utterly catastrophic, and the story about Treasury’s hands being tied only really started to emerge after the latter view became conventional wisdom. But there’s no doubt that Paulson is throwing Fuld under the train here. Which is the kind of thing which Henry Paulson, former CEO of Goldman Sachs, probably wasn’t too upset about doing. Could Henry Paulson, Treasury secretary, really silence such internal thoughts? I doubt it, somehow.


I’ve said it before and I’ll say it again: democracy doesn’t work when the majority aren’t heard, only the loudest are. Politicians are weak-willed and arrogant and think of themselves before the majority. I believe that Paulson did his best, and I also don’t doubt for a second that Washington stooges blocked his every path because they didn’t/couldn’t understand what he was trying to say, or in fact didn’t/couldn’t care less. Change can be enacted very easily, and I think a third party introduced into American politics that has the cajones to stand up FOR the majority (not TO the majority) is a necessary first start.

Also wanted to say, b/c I want to say it as much as possible to Americans, that America now has an enormous structural deficit, i.e. little nips ad tucks won’t cut it (people love to say pork spending, which amount to maybe $80-100b, not $1.5t). Face it now – expect higher taxes, regardless of Reps or Dems, and expect your tax dollar to not go nearly as far for a long time. It’s either that or default in 10-15 years.

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The systemic threat posed by megabanks

Felix Salmon
Aug 31, 2009 12:12 UTC

Just a gentle reminder, if you haven’t got around to it yet, that you really have to read David Cho’s piece (and graphical sidebar) on how the too-big-to-fail banks are growing, both in size and profitability, at the expense of small-enough-to-fail institutions:

J.P. Morgan Chase, an amalgam of some of Wall Street’s most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show…

In the last quarter, the top four banks raised fees related to deposits by an average of 8 percent, according to research from the Federal Reserve Bank of Dallas. Striving to stay competitive, smaller banks lowered their fees by an average of 12 percent…

Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.

It’s urgent that the government (probably through the FDIC) start imposing a surcharge on bank size. If this state of affairs is allowed to continue, there will be hundreds of unnecessary bank failures — maybe there already have been. And rather than the big banks getting smaller — which is what makes sense, from the point of view of the amount of systemic damage they can cause — they will continue to get bigger.

It wasn’t all that long ago that the 10% cap on national deposits was taken seriously: now it has been left far behind, even as the total deposit base has increased substantially. Wells Fargo, JP Morgan Chase, and Bank of America pose a real systemic threat to the US economy. They should be forced to start shrinking today.


How about we promote small regional banks and boutique investment firms. Allow them to be competitive with the larger firms and allow the market to determine where deposits go. Allow private equity to be real participants in these bank takeovers. Increase market competition and level the playing field for everyone, thats how you deal with too big to fail nonsense. Promoting a tax on large deposit institutions that you feel are to large will only increase the cost to people holding deposits in those institutions. For the life of me I can understand where you come up with these nonsense ideas, I know you play to the populist tendency of your readers, but have some common sense. BTW they already pay fees to the FDIC, look how well that has worked out. Government solves nothing!

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Empty storefronts

Felix Salmon
Aug 31, 2009 11:48 UTC

Justin Fox has a very good post on the broken state of the commercial real estate, pointing to empty spaces on Broadway and in Newcastle, Australia. I could easily add my own street, Avenue B, which has an inordinate number of empty storefronts, or could point to Centre Point, in London, a skyscraper which stood empty from its completion, in 1966, until 1979.

Justin is absolutely right about the corrosive effect of bank rents on New York rental rates: all landlords want the kind of rents that only banks can afford, but of course not all landlords can have a bank as a renter. But the bigger picture is that commercial real estate in general often stays empty for extremely long periods of time — something which harms neighborhoods and lets huge amounts of economic value go to waste.

Why is this? I think the answer lies in the fact that commercial leases tend to be very long-term things — so long term, in fact, that the discounted cashflow from any given lease is likely, in a normal (non-bubbly) property market, to be more or less the same as the value of the commercial property itself. Looked at this way, a developer spends a certain amount of money on putting up (or simply buying) a building, and then sells that building, in lease form, for a profit.

If prevailing leases are low, or tenants hard to find, the developer will quite rationally choose to keep the property empty. Leasing at a low rate will lock in a loss, while keeping the property empty has significant option value: at some point in the future, rents might well rise, and the developer can at that point lock in a profit instead. This is why successful property developers generally need very deep pockets: anybody who needs immediate cashflow, in the form of rent today, is in an invidious bargaining position and is likely to lose out over the long term.

Marcus Westbury has manged, in Newcastle, to implement the obvious solution to this problem: short-dated leases, often just 30 days long, which roll over so long as the landlord hasn’t found a permanent tenant. That’s good for the neighborhood, and helps drive up prevailing rents, so everybody wins — except, of course, for the commercial real estate agents, who are disintermediated and who in any case are never going to make any money brokering 30-day deals. But many businesses are never going to find that kind of deal acceptable, even if they’re already in the space in question — remember that Kenny Shopsin, for instance, refused to extend his lease on the space he had occupied for years in the West Village by one year. “A one-year lease,” explained Calvin Trillin with no further elucidation, “is obviously not practical for a restaurant”. Yet somehow a brand-new teahouse in Newcastle manages to operate on a shorter lease yet.

My feeling is that commercial real estate in general has always operated on extremely long timescales, which can seem ridiculous to those of us not in the business. And it always will. Occasionally someone like Marcus Westbury will come along and shake things up. But more generally, many empty storefronts are likely to remain empty for years on end: it’s just how the business works.


I’ve been noticing this in Manhattan for the past few years as well. Go to midtown, 34th and 5th and you’ll see dozens of boarded up street level shops.

Stock volatility datapoint of the day, Shanghai edition

Felix Salmon
Aug 31, 2009 09:22 UTC

A bear market is commonly defined as when you drop more than 20% from the high point; in Shanghai, stocks — which fell 6.7% today alone — have managed to drop more than 20% just in the month of August. But the other major Asian indices didn’t seem too perturbed — none dropped more than 2%, while Kuala Lumpur and Taiwan both rose — and the crazy volatility of the Shanghai bourse should really be put down to Shanghai-specific factors, including the monster run-up the index has had this year.

It both makes sense and is reassuring that global stock markets don’t seem particularly susceptible to contagion from China, either in terms of direction or just in terms of volatility. Traders see the data coming from Shanghai, and essentially ignore it: neither the level of the Shanghai stock index nor its first derivative is a useful piece of information for anybody not directly invested there. The Hang Seng, in Hong Kong, is much more grown-up.

That said, virtually all global stock markets, including that S&P 500, are looking pretty frothy these days, and in this kind of an environment you never know what will set them off. I’m not holding my breath, but at some point a relatively innocuous piece of data will be blamed for a massive global sell-off: while it might be something domestic and macroeconomic, it could equally easily be a movement in some foreign market. Stocks worldwide are going to remain very volatile for the foreseeable future; Shanghai is just the most extreme example.


Arbitrage Pricing Theory implies that factors making up the asset’s price will mean assets will affect each other if they share “factors.”

China is not “connected” to the US market, you can’t invest in it, you can’t hedge it, and you can’t hedge their currency.

It’s beholden to their gov’t. It’s a dictatorship. If there’s a correlation, it’ll last as long as asset correlations last, and that length of time is indeterminate.

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Sunday links go a bit too far

Felix Salmon
Aug 30, 2009 22:30 UTC

FAA, 2007-date: “Nothing can be stowed in the seat pockets except magazines and passenger information cards.”

Cerberus implodes: “The real surprise is that 29% of their investors haven’t asked for their money back.”

TED expends 1,684 words on fisking a pro-forma to-be-sure clause in a WSJ blog entry. I love blogs.

Never mind if your hotel’s on fire, how clean is it?

The amazing Netflix presentation, if you haven’t seen it

Lehman shares surge!

Flying into LHR, I looked down and saw a 13-acre park in prime central-London real estate. I had no idea what it was.

Never mind losing $17.3 billion on the stock. At least you made $350 million on the rights issue!


Vincent Square was not in actuality a former plague pit. It was created because Westminster School was slowly encroaching a former plague pit.

I feel much better now.

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The Murdoch MacTaggart lecture

Felix Salmon
Aug 30, 2009 22:10 UTC

James Murdoch is slightly younger than I am, but that doesn’t stop large chunks of his MacTaggart lecture from sounding as though they’re emanating from a veritable dinosaur. In an age where pretty much everybody agrees on the importance of increased regulation in the financial sector, it seems trite at best for him to equate any such impulses with creationism:

The consensus appears to be that creationism – the belief in a managed process with an omniscient authority – is the only way to achieve successful outcomes. There is general agreement that the natural operation of the market is inadequate, and that a better outcome can be achieved through the wisdom and activity of governments and regulators.

This creationist approach is similar to the industrial planning which went out of fashion in other sectors in the 1970s. It failed then. It’s failing now.

Actually, I can’t remember a time when there was less faith in the ability of the unfettered market to create successful outcomes, either in finance, where largely-unregulated financial institutions ended up needing hundreds of billions of dollars in state bailouts, or in journalism, where media outlets in general, and newspapers in particular, are dropping like flies, helpless in the face of the onrushing digital era.

While it’s pretty obvious that in a competitive marketplace, the cost of any good will fall towards its marginal cost — which in a digital world is free — Murdoch still feels happy proclaiming, against both evidence and common sense, that “it is essential for the future of independent digital journalism that a fair price can be charged for news to people who value it”. Does he really think that if the BBC went away, that would open up the door to charging for digital journalism online?

James should cross the Atlantic a bit more often. The dream of being able to charge a fee for digital journalism is one which should by rights have died long ago, but it’s being kept alive by dint of the sheer desperation of those, like James Murdoch’s father Rupert, who have convinced themselves that it’s the only way that their media properties are going to be able to continue to make enormous amounts of money.

Weirdly, all of this silliness comes in the context of what’s actually a really sharp and perspicacious lecture. James is quite right that state-sponsored meddling in the media universe is likely to do more harm than good, especially when the state’s market share exceeds 50%. The BBC is too big, and the Corporation really is overstretching, especially when it does things like buy Lonely Planet. And the regulators, in many ways, are even worse.

On the other hand, Murdoch himself has a monopoly on pay-TV service in the UK at least as strong as the BBC has on free TV, and the existence of any monopolist is prima facie evidence of the need for a strong regulator. Yes, the BBC should be smaller. But then again, so should Sky.


I can’t agree with your closing argument, that the BBC is de facto “too big”. Too big for what? Too big for whom? Too big to allow Murdoch to charge us to access The Times’ feeble website? And that’s a bad thing why?

The efficient markets hypothesis in fund fees

Felix Salmon
Aug 30, 2009 14:39 UTC

Via Chris Addy, a Dilbert cartoon from January 2000:


The scary thing is this is actually true, when it comes to things like the Renaissance Medallion Fund. If it wasn’t for current and former employees only, it would have no difficulty raising many billions of dollars at 5-and-44. The only way it can keep the suckers at bay is by closing the fund to all outside investors.


felix. how do you know if the medallion numbers are actually up 80%. also, do you know if medallion engages in flash trading?

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Silly chart of the day, data-fitting edition

Felix Salmon
Aug 29, 2009 22:37 UTC

Paul Kedrosky finds this chart in a Bloomberg story: it’s the kind of thing which really reinforces one’s belief in the wonders of data-fitting.


The story isn’t actually particularly clear on exactly what the graph is showing, and specifically what “adjusted for currencies” means:

The Nikkei doubled between October 1998 and April 2000 in dollar terms, as the chart illustrates. The S&P 500 has risen 34 percent since March when the Dollar Index, a measure of the dollar against currencies in six major U.S. trading partners, is factored in.

So it seems that the BofA analysts who came up with this chart first converted the Nikkei to dollars, only to then convert the S&P 500, which was in dollars all along, out of dollars. Hm. And they chose pretty random start points: what makes 1980 in Japan analagous to 1990 in the US?

But the most breathtaking claim of all is right there in the Bloomberg headline: “S&P 500 May Surge 40% in Duplication of Japan”.

In other words, the people who came up with this chart are not saying that the US is going basically nowhere over the long term. Instead, they’re saying that there could be a big further rally in the S&P 500 over the short term. On the basis of the fact that the Nikkei rose sharply, in dollar terms, at the tail end of the last decade.

I feel quite safe in saying that of all the years to compare 2009-2010 to, 1999-2000 are probably not the most useful. And looking at what Japanese stocks did ten years ago will tell us absolutely nothing whatsoever about what US stocks are going to do now. No matter how many clever charts you come up with, or ridiculous justifications for the conclusions of your silly exercise in data-fitting:

“Even in economies overcoming credit booms, rallies can be powerful and last much longer than you think,” Bank of America’s Sadiq Currimbhoy, Arik Reiss and Jacky Tang wrote.

Well yes, if you’re caught up in the exuberant tail-end of a global stock-market bubble, maybe. But that spike in the yellow line that BofA thinks we might repeat on our orange line? Was basically a function of excesses like Softbank having a market capitalization of $200 billion. If you want to bet on that kind of thing happening in the US over the next year or two, feel free. But I’ll happily bet against you.

Update: Henry Blodget has the original Merrill report; it seems to admit how tortured the numbers it’s using are, and doesn’t go so far as to actually predict a 40% rally from these levels.


The real ridiculousness of this chart is how the creator expects the coincidental graph markings (10 years apart and for different economies!) to accurately predict future trends. Why not then just go around and find equally matching charts and use them? Number of Twitter users in Brazil. Holiday sales figures for Krispy Kreme Donuts. Willie Nelson’s popularity over the length of his career. Who knows? Maybe this guy is onto something!


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