Felix Salmon

Bad idea du jour: Murdoch hiring bloggers, putting them behind a paywall

Koons’s personal collection: “Poussin, Dali, Picasso, Magritte, Picabia. Egyptian antiquities. And Manet’s last significant nude.”

“The NYT believes that people can be made sober, even rich ones, by smashing into a wall. It is a testable hypothesis“

The limits of arbitrage

Moulton’s Recession Red: “A wine to remember in a year to forget”

Usain Bolt will be world record holder for a generation

China’s impossible inflation forecast

Jayson Blair, life coach

What your tattoo locations say about you

Why $800 billion over 10 years isn’t the same thing as $80 billion a year

Are you in LA at the end of this month? If so, go to the bicycle film festival!

A bad asset is a bad asset, whether it’s a loan or a security. And the distinction between the two isn’t particularly helpful, as is evidenced by equal-and-opposite newspaper stories today.

On the one hand, there’s Floyd Norris in the NYT:

Banks are now losing money and going broke the old-fashioned way: They made loans that will never be repaid.

As the number of banks closed by the Federal Deposit Insurance Corporation has grown rapidly this year, it has become clear that most of them had nothing to do with the strange financial products that seemed to dominate the news when the big banks were nearing collapse and being bailed out by the government.

There were no C.D.O’s, or S.I.V.’s or AAA-rated “supersenior tranches” that turned out to have little value. Certainly there were no “C.D.O.-squareds.”

Staying away from strange securities has not made things better.

On the other hand, there’s Robin Sidel in the WSJ:

U.S. banks have been dying at the fastest rate since 1992, mainly because of bad loans they made. Now the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks.

Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history, and broker a sale of the Texas bank to Banco Bilbao Vizcaya Argentaria SA of Spain. Guaranty’s woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation’s worst lenders.

Guaranty owns roughly $3.5 billion of securities backed by adjustable-rate mortgages, with two-thirds of the loans in foreclosure-wracked California, Florida and Arizona, according to the company’s latest report. Delinquency rates on the holdings have soared as high as 40%, forcing write-downs last month that consumed all of the bank’s capital.

Guaranty is one of thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry and financial institutions.

So, which is it? Was Phase 1 of the crisis based on securities while Phase 2 is based on loans, or was Phase 1 the souring loans and now Phase 2 is the securities? Frankly, it’s neither. Banks’ assets soured, and they failed. Some of those assets were loans, and others were securities. Some banks trusted the structured-finance wizards more than they trusted their own underwriters, and loaded up on highly-rated CDOs. Others trusted their own underwriting more than the structured-finance wizards, and lent out billions of dollars in housing loans which will never be repaid. Both were doomed: the only way to win was not to play.

I first heard the name Daniel Ivandjiiski associated with Zero Hedge in March of this year, before the blog really took off. I do believe that he’s just one of many contributors who use the pseudonym “Tyler Durden”, but he’s the only one I’ve ever heard identified, and I think he’s been there for quite a while. He has reportedly said that he’s just a contributor, not a founder, but I’m not sure that distinction really means very much.

Does it matter that Ivandjiiski was barred from the securities industry for insider trading? In most cases, no, but in some cases, yes.

In any case, it’s now time that “Tyler Durden” disaggregate himself, so that it’s more transparent which blog entries were written by the same person. I used to pay more attention to Zero Hedge than I do now, because I found a few posts which I considered to be so wild that I felt I could no longer trust much of what I read there. If it were clearer which “Tyler Durden” wrote those particular posts, I’d pay much more attention to the other “Tyler Durden” posts. And that’s good for everyone.

Charlie Gasparino is right:

If there’s one certainty of the past decade of Wall Street greed and government mismanagement of the economy, it’s that Citigroup was a grossly mismanaged institution. Eventually, the federal government was forced to prevent what would have been the largest bank failure in U.S. history by pumping some $50 billion in capital into the bank, and guaranteeing hundreds of millions in toxic assets.

The U.S. government is now Citigroup’s largest single shareholder. The firm is currently on its third CEO (and some regulators are pressing for yet another change at the top); it has gone through almost a half dozen CFOs, numerous management changes during its sordid history, and endless regulatory turmoil.

Throughout the good times and bad, there’s been one constant—Bob Rubin. And consider the following: Citigroup was technically illegal when it was founded by Sandy Weill and John Reed back in 1998 because it combined both commercial and investment banking, but with the help of Rubin as Treasury secretary, the law that would have prevented the supermarket model from working—The Glass-Steagall Act— was dismantled. Citigroup survived, and Rubin was rewarded with his dream job: Lots of money and little if any management responsibility.

Now you know why Bob Rubin’s reputation won’t be repaired anytime soon.

There’s a typo: the government guarantees are for hundreds of billions in toxic assets, not hundreds of millions.

What interests me is that although Gasparino concedes that Rubin’s actions as Treasury secretary were instrumental in creating the monster that was Citigroup, he still says that Rubin “served this country well while in government”.

My view of Rubin is harsher: that from the very beginning of his career he amassed vast stores of both fiscal and reputational capital by making huge bets that things would go right. And so long as things went right, Rubin became ever richer and more powerful. When things went wrong, however, he was blindsided with enormous force. Rubin was so used to things going his way that he lost sight of the possibility that there was any other potential outcome:

[Rubin] has been speaking to former government officials, regulators and friends on Wall Street to determine if they saw the financial crisis coming because he sure didn’t until it was too late. Most admit they didn’t either, and that makes Rubin feel better.

Of course as any former Goldman employee should know, this isn’t a simple binary question — did you see the crisis coming or didn’t you. It’s a question of risk management: did you see the possibility that the crisis might come, and did you protect your balance sheet against that possibility. In Rubin’s case, clearly, the answer is no. While many senior officials were very worried about the possibility that the Great Moderation was really just an old-fashioned credit bubble, Rubin wasn’t. As a result, Chuck Prince kept dancing, fatally, until the music stopped.

There was a nice little debate among the Reuters commentary group this morning about an increasingly-common way of dealing with dodgy loans: what some are calling “extend and pretend” and others refer to as “delay and pray”. Basically, you just roll over bad-but-performing loans as they come due, rather than take any losses associated with the borrower’s inability to make a big principal repayment. Rolfe Winkler, for one, thinks it’s a very bad idea:

Banks argue that loans should not be marked down if they’re still “performing.” As long as borrowers are meeting their contractual obligations, there’s no reason to take a writedown. The problem is, this gives banks an excuse to extend, amend and pretend. They can make concessions on loan terms or delay foreclosure notices, if only to maintain the fiction that borrowers will make good…

As the Japanese can tell you, this is just a recipe for stagnation. Thanks to a debt bubble that authorities refused to deal with decisively, that country is now entering its third consecutive lost decade.

This is true — especially if, like Rolfe, you think that the collateral underlying these loans is going to continue to decline in value. Very few upside-down loans are worth more than the property they’re secured against, and if you’ve lent money against a declining asset, then the sooner you can take your losses and move on, the better.

On the other hand, the person you’re selling that collateral to doesn’t think it’s going to fall in value. And really what we’re faced with here is a distribution of possible future states.

The calculation which needs to be done is pretty complex, and involves the future path of three uncertain variables. First there’s the lender’s own cost of funds: at the moment it’s low, but there is a chance it could rise substantially by the time the extended loan matures. Secondly there’s the income stream from the loan: while most of these loans are performing right now, and making their interest payments on time, there’s a significant chance of future default on many of them. And thirdly there’s the future course of property prices, or other assets securing the loans.

The last two, of course, are highly (but not perfectly) correlated: if the value of collateral declines, then the chances of the borrower defaulting on the loan increase. But in an efficient world, every lender, on a case-by-case basis, would work out the expected profit or loss from extending the loan, taking into account the amount of volatility we’ve seen in all three variables, and then compare that to the known loss they’d need to take if they just foreclosed tomorrow. If the expected loss from extending is lower than the loss that would need to be taken today, then they extend.

In the real world, however, bankers are human, and they’re liable to fudge the figures so that extending the loan always makes sense: tweak a volatility assumption here, put in a favorable interest-rate assumption there, and it’s not hard to get the answer out that you wanted in the first place. They have a very strong incentive to do this, because much of the time if they take their losses now, they’ll become insolvent: everybody wants to survive, first and foremost.

So that’s where the regulators come in. At the moment, it’s far from clear that they have either the ability or the inclination to force banks to face reality — especially when they’re dealing with big banks. To the contrary, “extend and pretend” has obvious attractions for technocrats, too: it allows them to kick the hard decisions down the road, which is something nearly all politicians love to do. And when it comes to non-bank lenders, the regulators are pretty much out of the picture entirely.

Tthere’s definitely a part of me which is sympathetic to both borrowers and lenders who manage to come to a “one more chance” agreement. There are significant costs to default and foreclosure, and such agreements mean those costs don’t have to be taken — at least not in the immediate future. When hope becomes delusion, then regulators must step in and force write-downs. But the calculations you need to do in order to tell the difference are pretty complex.

The conversation in the comments to my tattoo post has become very interesting, and now Ryan Avent weighs in with his take:

Most people don’t tend to see things the way Mr Salmon does, but rather take outward signs at face value. Most jobseekers do dress up for interviews. Most young people seeking professional work do not get large, visible tattoos. Firms pay for fancy offices and hire college graduates, even though fancy offices and college graduates are expensive and shabby offices and a staff of non-graduates might signal that the firm is very good at what it does—so good that it doesn’t need to bother with the normal trappings.

In general, I think it tends to be much more costly to depart from convention than to keep to it, at least until a reputation has been established.

I’m reminded of this recent post by James Kwak, formerly of McKinsey & Co:

It’s not what you learn at business school that matters, it’s the screening function. Top business schools screen for the attributes that certain types of companies, including consulting firms and investment banks, value – above-average intelligence, ambition, presentability, ability to get along with others, willingness to follow orders, and a strong streak of conformism. McKinsey recruits people with Ph.D.s (and certain other advanced degrees) as well because the Ph.D. is an indicator of intelligence and (to some extent) ambition, but it is considerably harder to get a consulting job as a Ph.D. from a top school than as an MBA from a top school because of the other things that an MBA signals.

I think there’s a gap in the market here, for a new high-end management consultancy, and/or boutique investment bank, which only hires people with tattoos and which doesn’t employ a single MBA. Even if only a minority of potential clients see things the way I do, that could easily be enough people to build a strong and sustainable business.

Once upon a time, in fact, the City of London was full of “barrow boys” who had left school at 16 and made it rich as traders. In the US, shops like Bear Stearns and Salomon Brothers often took great pride in being staffed with hungry guys from the streets, people with the opinion that it’s making money which matters, not being respectable. Even now, certain corners of the market, like the inter-dealer brokers, have similar characteristics. But as an ever-growing proportion of smart kids goes first to a good college before even looking for a job, and as these firms become better established, it becomes very easy to fall back onto hoary conventions when it comes to staffing.

I’m dedicating this post to a certain heavily-tattooed bank flack who never went to university and who has suffered as a result — more for the lack of formal education than for the ink, it must be said. No one thinks that at this point in her career what she did or didn’t learn as an undergraduate would make the slightest bit of difference to her performance in the job, but somehow it’s always easier to promote someone else. It’s a sign of overcaution and laziness on the part of her managers. And in theory there’s no reason why that laziness and overcaution can’t be exploited by their rivals.

With the savings rate skyrocketing, US deposits are rising fast too. Yes, a lot of people probably intend to invest their savings in the market, but you have to save the money first, before you can invest it. And with the market looking a bit rich these days, certainly by the standards of a few months ago, a lot of people, quite sensibly, don’t feel that they want to risk losing any of their hard-earned money anyway. So:

Domestic U.S. deposits grew nearly $500 billion to a record $7.5 trillion during the year ended in March, according to the Federal Deposit Insurance Corp. And they appear to have kept growing since.

I’m confused about where the WSJ journalist, Marshall Eckblad, goes from there, however:

Overflowing deposits don’t necessarily lead to big profits, since big banks have to cover hefty fixed costs for buildings, computers and layers of full-time staff.

This makes very little sense. Deposits, to a first order of approximation, are free money. The more free money they have to lend out, the more profits they make. And $7.5 trillion, lent out at an average of say 7%, throws off more than $500 billion per year. It’s hard to spend that kind of money on buildings and computers.

(Via Moore)

Well done to Henry Blodget, who is now allowing anybody to republish his content for free, by embedding posts from his site. Like this:

This is a great idea, and something I’ve wanted to do for a while. Bloggers want their stuff read by as many people as possible, and there’s no need to force your readers to come to your own site before your readers can do that.

Henry, by doing this, is allowing his most engaged readers to pick and choose their favorite articles and put them on their own sites — it’s free advertising for him, it gives him reach to a large number of readers he otherwise wouldn’t have, and it shows a real embrace of the medium, and a desire to reach readers in the manner most convenient for them. All of that is a great way of building a business.

There’s been talk of publishers doing something like this for some time, often with ads embedded along with the copy, but this is much simpler and easier, with no embedded ads (except of course for the prominent branding for Henry’s own site). I hope it’s a great success, and widely copied.

The photo of the day comes from Wall St Cheat Sheet, which has put together this wonderful picture to illustrate a piece entitled “Is Nouriel Roubini a False Prophet?”.

From left, we can see Tim Geithner, in the background, followed by the garlanded Nouriel himself, followed by Brad Setser (sadly no longer blogging), who looks over the shoulder of CNBC’s Joe Kernen. Over to the right, in black and white, is Stephen Mihm, who wrote a long profile of Roubini for the NYT magazine. Larry Summers is conspicuous by his absence; maybe he’s in the sky above, pulling all the strings.

One of the best travel books ever written (indeed, one of my favorite books, period, ever) is The Surprise of Cremona by Edith Templeton. Unfortunately, it’s not easy to find: your best bet is to track down the 2003 Pallas Athene paperback with an introduction by Anita Brookner.

If you go to the Amazon page for that book, you’ll find there are “7 new” copies for sale. The cheapest is $20; the most expensive is $166.18. Woody’s Books, for instance, is selling the book for $27.50 — plus a $125.79 “sourcing fee”, plus $3.99 shipping from New Jersey — $157.28 in all.

On the other hand, if you check the book out on Amazon.co.uk, you’ll find “6 new” copies for sale, including Woody’s UK, which will sell you the book for £12.99, plus a sourcing fee of just £0.01. Shipping, to the US, is £3.08, for a total of £16.08, or about $26.51 in dollars — less than the sticker price on the US book before the massive sourcing fee. And yes, the book is still shipped from New Jersey.

In other words, the same book, from the same US-based seller, being shipped to the same US address, costs either $26.51 if you buy it on Amazon.co.uk, or $157.28 — pretty much six times as much — if you buy it on Amazon.com. There might be a good reason why Woody’s is doing this. But I don’t think it reflects particularly well on Amazon.

Mike Konczal has a spectacularly good post up at Baseline Scenario today about mortgage servicers. He gives a lot of examples of how incredibly bad and/or evil they are at anything to do with loan modification, and concludes:

Servicers were never designed to do this kind of work; they don’t underwrite, and paying them $1,000 isn’t going to give them the experience needed for underwriting. It’s hard work that requires experience and dedication, skills that we don’t have currently…

But isn’t it at least possible that as the sophistication of the servicers increase, they’ll become equally good at learning how to game the system? I don’t mean this as a gotcha point, because I think it is the fundamental problem here, and there isn’t any way to break it…

The people we are trying to ‘nudge’ into acting as the fiduciary are going to be more than happy to rent-seek these instruments while they crush the consumer economy. This ‘gordian knot’ has to be broken, but it’ll need to be done outside the instruments – in the bankruptcy court.

He’s completely right. If we look to mortgage servicers as our best hope of modifying and restructuring the mortgages which are dragging down the US economy, we are doomed to disappointment. It was probably worth a try, because it’s the easiest and most obvious place to do this kind of thing. But the experiment has failed, and we should move on, and try something else instead.

JP Morgan is making a big push into the muni market, by throwing its balance sheet around. It’s lending $1.5 billion to California, in return for getting the mandate to sell $10.5 billion of “revenue anticipation notes” next month; it also provided billions of dollars in support for Illinois, last November, and New Jersey, in June. “We are trying to build up our municipal franchise,” JPM’s Jeff Bosland told Michael Corkery. “With a state the size of California, we have the capability to help on a big scale. People tend to remember you when you were there for them in tough times.”

So, how is JP Morgan doing in those municipal-bond league tables? In the first half of this year, it’s in third place, having underwritten $22.6 billion in munis for an 11.6% market share. The leader, Citigroup, underwrote $31.6 billion in bonds, while Bank of America is in second place on $26.8 billion.

It’s worth comparing that position to the state of affairs in 2007, before JP Morgan bought Bear Stearns. For the full year, JP Morgan was in 5th place with $25.6 billion and a 6.0% market share, while Bear was in 8th place with $24.6 billion and a 5.8% market share. Add the two together (there might be a tiny bit of double-counting on issues they co-ran, but I doubt it would make much difference) and you get $50.2 billion, which would have been good for a comfortable second place, behind Citigroup. On the other hand, if you add together the 2007 deals of Bank of America and Merrill Lynch you get to a whopping $65 billion, good for first place, ahead of Citigroup.

One might think that with its two major competitors — Citigroup and BofA — both hobbled by government supervision, JP Morgan would be taking the opportunity to carve out a true leadership position in the municipal bond market. But in fact Citi seems to be doing very well indeed in that market, while BofA is very much holding its own. Maybe municipal finance is something federal regulators positively encourage, or maybe integrating the Bear Stearns team with the JP Morgan team was non-trivial. But in any case competition in this market doesn’t seem to have gone away, even with the consolidation of Merrill and Bear, and the fact that the #3 player in 2007 (UBS) has disappeared from the line-up entirely.

Not only can I do mad tricks on my scooter, I’m also a baseball great. I’m thinking of taking up the javelin next.

The intersection of Wall and Satan

When I Go Into The Bank, I Get Rattled‘ — a marvelous cartoon

The Economist moves from swanky 57th Street to much-schlubbier 3rd Ave

We know that BusinessWeek is for sale. But is there a good chance the print magazine could die completely? That would seem to be the subtext of Keith Kelly’s column today, in which he writes:

OpenGate, at least on paper, might be considered a likely candidate as well. However, even with magazine veteran and acting CEO Jack Kliger on hand for the management presentation from McGraw-Hill, OpenGate might not be able to absorb the estimated $40 million in subscription liabilities that would come with the 900,000-circulation weekly.

What’s a subscription liability? It’s basically all the money which BusinessWeek has already been paid, in subscription revenues, for magazines it has yet to deliver. It’s a liability because if it can’t deliver the magazines, BusinessWeek would have to refund its subscribers their money, or somehow try to fob them off with an equivalent product.

One would assume that the winner of the BusinessWeek auction, which is currently being conducted between nine different potential acquirers, would intend to continue to publish the magazine weekly. If they do so, however, the subscriber base isn’t really a liability at all: it’s an asset, to be treasured. The only time you start worrying about things like “$40 million in subscription liabilities” is if you’re thinking about going web-only, or biweekly, or something like that. Which would be especially difficult given the name of the book.

So for all that numbers in the $35 million range have been bandied around as the purchase price for BusinessWeek, that might just be the headline number, which would then be offset by a “refund of subscription liabilities” or the like. We might yet end up with another $1 purchase price.