Felix Salmon

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?!

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.

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?

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.

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.

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.

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.

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.

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.

Atticus founder Timothy Barakett cited “solely personal reasons” in his letter saying that he was closing down his flagship fund and embarking on the philanthropic part of his life. By sheerest coincidence, the letter comes in the wake of his fund losing 31% of its value, which means that it would have to rise by 45% just to reach its high-water mark and start generating performance fees again for Mr Barakett.

A disinterested observer might conclude that Barakett was quitting on the grounds that he had no interest in working hard as a hedge fund investor if he wasn’t going to be paid lots of money to do so. But since Barakett says that his reasons are “solely personal”, it can’t possibly be that.

Interest-free balance transfers are horribly corrosive things which are instrumental in creating an atmosphere of mistrust between retail banks and their customers. Ryan Chittum has a prime example — himself:

My wife recently mixed up my BofA credit card with my BofA check card and went over limit on the credit line by $39. That triggered the clause that ended my free balance transfer on several thousand dollars I had parked in there, sending the APR up to 18 percent. That’s costing us $110 a month in new interest payments.

Now, sure it’s our fault for screwing up the cards (though they look an awful lot a like), but the point is why do these banks let you go over limit anyway? Precisely to gouge you with fees and to get out from under special offers like free transfers. Remember the days when credit cards were rejected? They wised up on that.

It’s anti-consumer.

But here’s the thing: what’s a reasonable amount of annual interest to pay for a $7,000 personal loan? Obviously $0 is too little, and $1,300 is too much. At Bank of America, the rates for a simple personal loan are, um, er, oh. There’s a lovely list there of no fewer than 61 different products and services offered by BofA — but simple unsecured personal loans are nowhere to be found. Bank of America doesn’t want to offer personal loans to its customers, because it can make so much more money off them by offering highly-lucrative and fee-laden alternative products like credit cards and “overdraft protection”.

All of this has culminated in the Spy-vs-Spy dance that is the free balance-transfer offer. A credit-card company — often a bank — sends you a piece of junk direct mail. Like most junk mail, your first instinct is to trash it. So they have to make it really attractive. And the way they do that is by promising you an interest-free loan. Let us lend you $7,000, Mr Chittum! We’d be happy to! And we won’t charge you a penny in interest!

Mr Chittum, of course, is wise to the trick. Most people are, these days. The credit-card company gets you locked in with a high balance of $7,000 which you’re very unlikely to pay off; at some point in the future, it’ll be able to start charging you enormous interest rates (29% is not unheard-of when it comes to credit-card balances; 18%, these days, is pretty much par for the course) on that money. If you’re smart and disciplined and lucky, you might be able to game the system and pay no interest at all on that balance. Bank of America, for its part, does it very best to make you think that you’ll be able to do just that, essentially getting one over on The Man.

But Bank of America has the empirical data on its side; you don’t. Yes, some unknown percentage of people who take the bank up on its free balance-transfer offer will end up paying no money at all in interest. But statistically speaking, those people turn out to be quite profitable for the bank — if they didn’t, the bank wouldn’t be making the offer in the first place. And so Mr Chittum, when he takes the bank up on its offer, is essentially betting that he (and his wife) will be unusually on-the-ball and conscientious when it comes to managing his credit-card debt.

Most people, when they sign up for one of these offers, think that they’ll successfully game the system. But of course most of them are wrong. That’s good for the bank, in the short term. But in the long term it’s bad, since everybody who ends up making a slip and suddenly paying 18% interest — everybody who chooses to play a game which is stacked against them, and loses — ends up hating the bank, accusing it (reasonably enough) of gouging them with fees and being anti-consumer.

There might be a way in which the new Consumer Financial Protection Agency, if it ever gets off the ground, can change this dynamic. There’s been a race to the bottom in retail financial services which has left most banks with very little in the way of reputation and goodwill; with none left to lose, they feel more free than ever to gouge and mislead their customers. Maybe if the CFPA puts the worst practices to an end, then banks might start competing on reputation and honesty. They won’t pretend to offer you $7,000 interest-free, but they also won’t charge you hundreds of dollars a day if you inadvertently buy a few different items on your debit card without having sufficient funds in your account.

For the time being, we’re right not to trust our banks, because given half a chance they will screw us. It would be great to go back to a world where we can start rebuilding a lot of the trust that has been lost. But I won’t believe it until I see it.

Ben Davis reports:

According to the Chronicle of Philanthropy statistics, it seems that between 2004 and 2006, MoMA eliminated all of its cash holdings (11 percent of its endowment value before that), dramatically upping its hedge-fund exposure.

This is just yet another example of endowments overestimating their risk appetite and underestimating their liquidity needs. It’s largely, I think, a function of the fact that the people who sit on the boards of these institutions — and especially on the committees overseeing investment decisions — tend to come from the financial world. As such, they overvalue alpha generation, and undervalue safety and common sense.

(Via Artnet)

Vikram got sadder, Sam got mean, and Ken was positively startled. Mary, however, has had a veritable makeover:

(With many thanks to a tipster in California.)

According to MBIA’s latest quarterly report, the insurer has a book value of $2.8 billion, or about $13 per share. JP Morgan analysts Andrew Wessel and Daniel Kim beg to disagree, quite violently: in a note issued this morning they said that MBIA’s tangible book value is actually negative, to the tune of about -$40 per share. Downgrading MBIA to “Underperform”, in an action which has helped to send MBIA’s stock down 14% today, they write:

Although we believe it will be some time before cash at the HoldCo runs out, it is difficult to envision a scenario where there is much capital remaining for shareholders given expected future losses at the consolidated operating company.

The report comes with three pages of disclosures and fine print, including three “Important Disclosures” about the fact that MBIA (a) is or was a client of JP Morgan; (b) will or might pay investment-banking fees to JP Morgan in the next three months; and (c) has paid non-investment-banking fees to JP Morgan in the past 12 months.

The report also covers the substantial legal risk facing MBIA:

Purchasers of credit protection and insured bond holders are suing MBI due to its good bank/bad bank split, which left structured and international obligations with significantly less capital to cover future claims. The plaintiffs argue they purchased protection based on consolidated capital levels, and the transfer must be reversed, as that would no longer be the case. We believe the outcome of this suit is also highly uncertain, and could have serious negative impacts on MBI if it were to lose.

It’s definitely a little weird, then, as an MBIA spokesman pointed out to me this morning, that nowhere in the report do JP Morgan’s analysts disclose that JP Morgan itself is one of the plaintiffs in that suit.

This is why disclosures — especially in a rules-based system like the one we’ve got — are never going to solve anything. There’s a whole slew of things wrong with them:

• They’re almost universally ignored by people reading the reports.
• They’re used by banks as a CYA mechanism, rather than as a way of imparting important information.
• They’re written in a legalistic and deliberately uninformative way: there’s no way of telling, for instance, whether JP Morgan’s fees from MBIA are significant or not.
• They leave out the kind of information which any disclosure written in good faith by a human being would put front and center — like JP Morgan’s involvement in the lawsuit against MBIA.

I’m not accusing Wessel and Kim of acting in bad faith here — after all, the lawsuit was filed in May, and their downgrade came only in August; what’s more, the downgrade doesn’t really help JP Morgan’s cause. But there is a certain lack of transparency to their report, which could be (and is, by MBIA) viewed as a conflict of interest. After all, a lot of the arguments they make in their note are substantially identical to the arguments made in the JP Morgan lawsuit. Especially since they specifically cite the lawsuit as a risk factor facing MBIA, would it have killed them to have noted that JP Morgan was one of the plaintiffs?

Aaron Lucchetti has a 2,000-word front-page WSJ story today which appears online under a “management” heading and with the headline “Wall Street’s B-List Firms Trade on Bigger Rivals’ Woes”. Really, however, it’s all about the obscene displays of wealth being perpetrated by Steven Schonfeld, the new poster boy for conspicuous consumption.

Schonfeld’s new $90 million house, on Whitney Lane in Old Westbury, Long Island, not only has “a poolside cabana designed to look like the Cove Atlantis resort in the Bahamas” but also sports a 9-hole golf course which is off-limits to anybody if Schonfeld isn’t at home:

“It’s not a private golf course,” he explains. “It’s a personal golf course.”

And then there’s this:

At one dinner with traders, he said that anyone who looked at the menu for more than 90 seconds was in the wrong business…

At high-end restaurants, Mr. Schonfeld has been known to order one of everything on the menu, with his party leaving much of the food uneaten.

Schonfeld got into a spot of bother (including $1.1 million in fines from the NYSE) when he tried to be a broker, so now he’s basically just a trader, hiring laid-off employees from big Wall Street firms and seeding them with his own money. Or, as Forbes put it in 2005,

Schonfeld oversees a harem of semi-independent traders who use his equipment, his software and his capital, sharing profits with him and paying him trading commissions.

It’s possible that he’s exaggerating the amount of money he’s spent on his house, and is giving obnoxious interviews to the WSJ, in order to stand out from a crowded field of small trading shops. Or else he’s maybe just a leveraged day-trader who made lots of money from the volatility of 2008 and now wants to flash his cash. Either way, I suspect that Schonfeld is going to be spending much more time on his private personal golf course than at the Old Westbury Country Club down the street. This kind of attitude tends not to sit well with one’s upscale neighbors.