Opinion

Felix Salmon

Wednesday links reverse their Polish

Felix Salmon
Aug 13, 2009 03:45 UTC

This seems like a lot of work to find out which bloggers make reliably good predictions. In reality, none of them do.

A touching love letter to the HP 12-C

What would have happened to innovation had Apple won the market-share wars of the early 1990s?

The government subsidy for Goldman execs’ healthcare works out at $14,777 apiece

Is August a bit slow for you this year? Then may I suggest you read 8,500 words on The Beatles: Rock Band? Yes? No?

“Economists did better than predict the crisis. We correctly predicted that we would not be able to predict it.” Hm.

Ryan Avent is really, really not fond of Ed Glaeser’s HSR series. Really.

The quiet revolt against heirloom tomatoes

TMFTML lives! Three cheers for Alex Balk! And go read this now!

Pirates sail cargo ship through English Channel?!

COMMENT

I have an HP-12C sitting on my desk. It is like a child’s teddy bear to me and like The Velveteen Rabbit it has been touched (loved?) so much it must now be real, whatever that means for a calculator. (Dreaming of Pi, perhaps?)

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Department of depressing government data series

Felix Salmon
Aug 12, 2009 19:38 UTC

When I visited Argentina in early 2003, the finance ministry gave me, as finance ministries worldwide are wont to do, a printed-out PowerPoint presentation of how wonderfully the economy was going. One slide did stand out, however — the one entitled “Social protest events during 2002″, showing how “crowd concentrations, mobilizations, blocking highways and downtown streets, partial and total strikes, takeover of establishments, and so on” (seriously, that’s what it said) had dropped from over 2,000 a month in the first four months of the year to a mere 847 in December.

Still, it’s understandable that there would be someone in the government charged with tallying such depressing statistics. It seems that the US, too, has such a person:

A new book, “In The President’s Secret Service,” says Obama receives as many as 30 death threats a day, 400 per cent more than those made against his predecessor, George W. Bush.

I would be fascinated to see this data series charted over time, assuming it really exists. I wonder if there’s any correlation between number of death threats, on the one hand, and the probability of a president being assassinated, on the other.

COMMENT

My response is a little bit more “golly gee” than alarm as well, probably in significant part because on some level I don’t expect an actual assasination. My feelings would probably change if a serious attempt were made on the President’s life.

If my memory is working correctly, we went a bit over 52 years from Washington’s inauguration to the first President to fail to complete his term. I believe that’s the longest such period in the history of the republic, and that we are now in the second longest such period (35 years this month).

Andrew Hall’s $100m payday looks more likely

Felix Salmon
Aug 12, 2009 19:01 UTC

Way to duck the issue:

Citigroup’s contract with energy trader Andrew Hall, which reportedly could pay him up to $100 million this year, will not be subject to rulings by the Obama administration’s pay czar, a source close to the bank said on Wednesday…

The source said Hall’s contract will be exempt from review by the pay czar because it was signed before a cut-off date of Feb. 11, 2009…

It was not immediately clear why Feb. 11 was the cut-off date.

My guess is that this just means Hall will cash his $100 million and leave, in one form or another. Certainly there’s no chance of him getting such a rich contract again.

On the other hand, what if his contract doesn’t expire for many years yet? Would Feinberg really be powerless to control the pay of Citi’s top-paid employee indefinitely? And if so, who made these rules?

COMMENT

As a small shareholder in Citigroup I say to hell with him, no one is irreplacable.

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Portfolio.com comes back from the dead

Felix Salmon
Aug 12, 2009 18:22 UTC

Portfolio.com is back! And I seem to have recovered my byline on my old blog entries there — although the blogs do seem to lack any useful navigation or even RSS feeds. When the RSS arrives, I’ll be sure to subscribe to Matt Haber’s blog — he’s a great hire. The best of luck to new editor Josh Moss — launching a new(ish) business title in the teeth of a nasty recession can’t be easy. But the fact that anybody’s launching anything at all is surely cause for some celebration.

COMMENT

Felix: With respect to your work, I am just glad the revived Porrtfolio has revived the Seat 2B business travel column. I gained more from reading Brancatellis column than anything else at Portfolio and, come to think about it, pretty much anything else I’ve read on the web. Glad to see it back –zavi

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Dick Parsons datapoint of the day

Felix Salmon
Aug 12, 2009 18:13 UTC

Simon Johnson is quite right: it’s scandalous that Citi chairman Dick Parsons has only about $350,000 of stock in Citigroup — probably the value of a minor farm building abutting his Tuscan vineyard. That gives him every incentive to take outsize risks: his upside is huge, if they pay off, while his downside is barely noticeable for a man of his extreme wealth. It’s long past time for him to get his checkbook out and buy a serious chunk of Citi stock.

COMMENT

Actually, let’s see him buy a big chunk of subordinated debt and/or preferred stock.

The mess at Extended Stay

Felix Salmon
Aug 12, 2009 15:54 UTC

Are you confused by the WSJ article about the Federal Reserve and Extended Stay? If so, then this story, filed in June by Tom Hals of Reuters, might help give some much-needed background. Even then, though, this is a very complicated and messy bankruptcy, so I just phoned Tom to get things clearer still. Here’s how I understand the situation — with the caveat that, as I say, it’s very complicated and messy, and I’m not an expert on this by any means.

First, the fact that Maiden Lane owns a large chunk of Extended Stay debt is not really news: the Maiden Lane lawyer was extremely vocal in the public bankruptcy hearing that Tom attended. (This bankruptcy is being litigated in the Southern District of New York, not in Delaware, which is a good indication of how big and important it is.)

Secondly, if you look at Extended Stay’s bankruptcy filing, something very interesting pops out: there’s substantially only one creditor. M&T Trust Co is owed $8.5 billion by Extended Stay, and that’s basically all of Extended Stay’s debt. M&T Trust Co, of course, doesn’t own all that debt: it was poured into a special-purpose entity, tranched up, and sold off to a large number of real-money creditors. It’s those creditors who are now fighting and suing each other over what happens to Extended Stay.

The senior creditors — Cerberus and Centerbridge Partners, as well as Wells Fargo, Bank of America, and US Bancorp — control a majority of the debt and have come to an agreement with Extended Stay’s CEO, David Lichtenstein whereby they essentially take over the company, leaving the junior creditors (including Maiden Lane) with nothing. Already, at least one junior creditor has written its holding down to zero.

If this were a normal bankruptcy, a majority of the creditors (the senior creditors own about 60% of the debt) might well be able to push that kind of a deal through. But this isn’t a normal bankruptcy, because technically you can’t have a majority of the creditors when there is only one creditor and that creditor is a special-purpose entity.

If the rules for special-purpose entities apply here, then the holders of the various tranches would need near-unanimous agreement, and the senior creditors couldn’t push through their deal.

The Federal Reserve does have a conflict here. As a regulator, it wants to help set ground rules which make CMBS workouts as predictable and transparent as possible. As a creditor, however, it is very much on the side of the junior creditors. To some degree it helps that the management of the Maiden Lane portfolio has been outsourced to Blackrock. And I doubt that Fed policymakers would let one $900 million note affect their prescriptions for systemic change overmuch — especially when JP Morgan has promised to eat the first $1 billion of losses on the Maiden Lane portfolio. But if you’re confused what the nub of the WSJ story is, that’s it.

There’s a subplot, too, concerning a “bad boy” clause in the Extended Stay debt, under which Lichtenstein should by rights be on the hook for $100 million now the company has declared bankruptcy. If the senior creditors get their way and manage to take over the company, however, it seems that they’ve promised to cover all such expenses — rendering the clause largely moot as far as Lichtenstein’s net worth is concerned. As the Fed looks at this case, it’ll not only be thinking about how the rules governing special-purpose entities affect property-company bankruptcies; it’ll also be thinking about whether and how bad-boy clauses should be enforced.

So you can reasonably expect this one to drag on for a while.

COMMENT

you should check out relationship between David Lichtenstein and Arbor Realty Trust ABR

trading assets back and forth for debt as a way to bolster appearance of adequate equity

http://www.reitmonitor.net/atlantis/reit webrpt.nsf/32b0c3fd5239158a852571cc006a2 4a5/852571a400497c378525761700658cfb!Ope nDocument

The WSJ’s unhelpful aggression

Felix Salmon
Aug 12, 2009 13:21 UTC

The front page of today’s WSJ has a big headline: “A President as Micromanager: How Much Detail Is Enough?”. The lead anecdote?

In briefing President Barack Obama one day this spring, White House economist Jared Bernstein delved into such arcana as the yields on different forms of credit relative to the risk. Later, Paul Volcker pulled Mr. Bernstein aside. “Why would the president want to know that level of detail?” asked the former Federal Reserve chairman.

“That’s what he wants,” Mr. Bernstein replied.

This is astonishing stuff, coming from the Journal. Any other US newspaper might be forgiven for underestimating the importance of credit spreads. But for the WSJ, in its lead paragraph, to characterize credit spreads as “such arcana as the yields on different forms of credit relative to the risk” is not only inaccurate (“relative to the risk” makes no sense) but also comes across as unpleasantly faux-naive, in the service of a contentious thesis.

This is part of the new Murdoch Journal, of course — the same paper which has for months been desperately trying to drum up some kind of Congressional expenses scandal by leveraging the power of its front page, to almost no visible effect. It’s aggressive, yes, and that’s normally a good thing. The problem is that it’s aggressive in a particularly unhelpful and often disingenuous way, and there’s no reason to believe that anybody at the Journal is going to stop this carrying through past the silly season of August.

The Journal is clearly desperate for a big political scoop, or at very least a scalp. But it’s sad that it’s letting its desperation show so obviously.

COMMENT

Felix,
Jared is right and you’re dead wrong. Different types of credit instruments have different levels of risk to the borrower and to the lender or investor. The yields on those instruments reflect that risk, e.g. low rates on adjusted rate debt than fixed rate debt for example. Discussing the yield without the risk is what does not make sense.
Randall Dodd

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Tuesday links are awesome

Felix Salmon
Aug 12, 2009 04:08 UTC

Infighting at Atticus?

How to eradicate malaria (PDF)

The Awesome Foundation

Nate Silver, econometrician arguing why we won’t see 10% unemployment

Epic puns thread

CR nerds out on household survey vs payroll survey, and how that applies to the “mancession”

Josh Rosenau on Ben Stein

Biking: Not safe. Shame.

COMMENT

One of your links (the bike one) is to a person who just copied something out of Wikipedia? Sheesh.

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Why the efficient markets hypothesis caught on

Felix Salmon
Aug 11, 2009 18:26 UTC

Why did the efficient markets hypothesis catch on as virulently as it did? There’s the long answer (HarperBusiness, 400 pages, $27.99), and then there’s the short answer, courtesy of Emanuel Derman:

The EMH does recognize one true thing: that it’s #$&^ing difficult or well-nigh impossible to systematically predict what’s going to happen. The EMH was a kind of jiu-jitsu response on the part of economists to turn weakness into strength. “I can’t figure out how things work, so I’ll make that a principle.”

See? Economists are scientists, after all. That which they can’t explain, they turn into an axiom.

COMMENT

Christopher Carol and Tod Allen at John Hopkins point out that people cannot live long enough to navigate an open market using either optimal learning or trial and error.

Put that in your pipe while considering the enormous experiment we’ve hoisted.

A quote from their .pdf at http://www.econ.jhu.edu/people/CCarroll/ indiv_learning_about_c_nber.pdf, “pure trial-and-error learning requires an enormous amount of experience to allow consumers to distinguish good rules from bad ones – far more experience than any one consumer would have over the course of a single lifetime.”

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