Felix Salmon

How Goldman Sachs is Annie Leibovitz’s last hope

Felix Salmon
Aug 17, 2009 17:00 UTC

You need to get almost 6,000 words into Andrew Goldman’s story on Annie Leibovitz before the really new and juicy stuff appears:

Under the terms of the agreement, says a person familiar with the loan, Art Capital could be entitled to up to 22.5 percent of all the proceeds from the sale of any of Leibovitz’s work—even for two years after she’s paid off the loan. And that percentage could increase to close to 50 percent if she were to default…

Goldman Sachs, which helped finance the loan, now seems to be distancing itself from Art Capital and reaching out to Leibovitz. “We are deeply troubled by recent developments concerning Annie Leibovitz and Art Capital,” says Goldman spokeswoman Andrea Raphael. “Goldman Sachs owns a portion of the loan underwritten by an affiliate of Art Capital to Annie Leibovitz, but we have no involvement in the current sales-agreement dispute between Art Capital and Ms. Leibovitz. We have proposed to Art Capital that we terminate the current loan agreement with their affiliate so that we can work directly with Ms. Leibovitz to help her resolve her financing needs.”

Allow me to make the subtext explicit. Art Capital talked Annie Leibovitz into signing a draconian agreement — one which she was all but certain to be forced to default on. The terms were onerous enough to begin with, since they gave Art Capital sole right to sell any of Leibovitz’s work while any of the loan was still outstanding and for two years thereafter. But the terms become really predatory if and when Leibovitz defaults, to the point at which Art Capital expects to make an annualized return on its investment in the 40% to 50% range.

Art Capital did not, however, simply have $24 million lying around when it extended the loan to Leibovitz. As a result, it sold part of the loan to other investors, including Goldman Sachs. And Goldman Sachs, while it’s happy to make lots of money, does not want to be painted as a predatory lender. So Goldman is now Leibovitz’s best hope: if Goldman can buy out Art Capital, it might be able to come to a more Annie-friendly agreement.

The problem is that Art Capital is internally valuing its loan to Leibovitz at much more than $24 million. Goldman could offer to pay Art Capital back in full, with interest, but Art Capital has every reason to reject any such approach, since they would make much more money by allowing the loan to default and then exercising all their contractual rights.

There’s only one reason why Art Capital would take the deal with Goldman, and it’s hinted at earlier in the piece:

Edwynn Houk, her gallerist until last year, had no trouble selling her images. Leibovitz, however, could never get around to signing the prints. A buyer might have paid in full but still not get his picture for two years. “Nothing seems easier to me,” Houk says of the stack of photos perpetually collecting dust in her studio. “It’s a mystery why it took so long.” It was a complaint Houk was unable to register with Leibovitz directly because of her habit of postponing their scheduled calls. “Our record was sixteen months,” he says with a sigh.

Or, as John Cook puts it more succinctly, “who wants to spend $50 million on pretty pictures when a raft of lawsuits is in the offing?”

The fact is that so long as Leibovitz refuses to cooperate with the people she’s contractually obliged to cooperate with, it’s going to be really difficult to monetize her archives. Marion Maneker has done the math:

Leibovitz’s prints have sold at auction for as much as $50,000. Her portraits of Keith Haring, Muhammed Ali and John Lennon and Yoko Ono together are the works that have repeatedly attracted auction bids in the $35-50,000 range. Not really enough to drive a $50m valuation.

Since no physical prints are mentioned in the suit as collateral, ACG seems to be selling the copyrights to Leibovitz’s work as well as her labor. How would a buyer paying $30-50m realize the value from those copyrights? Surely they would not be expecting to make 1,000 prints of Haring, Ali, and Lennon/Ono (that’s a joke, btw), so what’s the commercial value (as opposed to the fine art value) of Leibovitz’s artistic output? The ability to sell postcards or plates with images of Whoopi Goldberg flailing in a bath of milk? (Ok, another joke. But also more than a rhetorical question.)

The contours of the standoff are now becoming clear. Leibovitz can, in theory, make a lot of money from her archive — Goldman (that’s Andrew Goldman, not Goldman Sachs) sketches a plan whereby she would sell 40×60 prints of 200 of her most iconic prints at $25,000 apiece. If each print came in an edition of 7, that’s $35 million right there. But that kind of monetization needs Leibovitz’s full cooperation — if she doesn’t sign the prints, they’re not going to be worth anything like $25,000. It’s pretty clear that Leibovitz has no intention of cooperating with Art Capital, and there’s a very good chance that she’ll make it quite clear to anybody thinking about buying her archive from Art Capital that she won’t cooperate with them, either.

If that’s the case, then it’s going to be very hard for Art Capital to get anything remotely approaching the $50 million valuation it place on the archive, or for that matter the expected ROI it foresaw in the event of Leibovitz defaulting. Which means that it might after all be willing to sell the loan to Goldman Sachs to refinance with Leibovitz’s full cooperation.

Still, doesn’t Goldman Sachs have better things to do than refinance personal loans to celebrities? I’m sure the Squid is none too happy about having been dragged into this ugly dispute. And I’m equally sure it doesn’t want to be in the business of collateralizing photo archives, especially with a counterparty who’s known to be as wildly erratic as Annie Leibovitz. Maybe they should just sell the loan to American Express instead, and have Annie pay it off in kind, with celebrity advertising photoshoots.


“…especially with a counterparty who’s known to be as wildly erratic as Annie Leibovitz. ”

As opposed to Goldman Sachs, the biggest criminals in the USA? Frankly, the entire senior executive staff at G-S should take thirteen steps up, and one short one down.

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Ben Stein’s ethical lapse

Felix Salmon
Aug 17, 2009 15:40 UTC

Edward Wasserman, who glories in the title of Knight professor of journalism ethics at Washington and Lee University, has mounted a weird half-hearted defense of Ben Stein in the Miami Herald. Yes, he says, Stein’s columns were “windy and self-indulgent”. But there was no ethical wrongdoing on Stein’s part, and the NYT was wrong to say that there was ethical wrongdoing when it fired him.

This jibes with Ben Stein’s own self-defense, in which he said that he “didn’t do anything wrong”. But it’s Stein and Wasserman who are wrong here, on multiple levels.

Firstly, and most importantly, it’s ethically wrong for anybody, NYT columnist or otherwise, to shill for FreeScore. It’s an evil company, devoted to tricking America’s poorest, most indebted, and most financially illiterate citizens into paying money they can’t afford for a service they don’t need and which is available for free elsewhere. The job of a business columnist is to write columns in the public interest. The job of a FreeScore pitchman is most emphatically against the public interest. There’s your conflict right there.

But there were narrower conflicts, too, which Wasserman zeroes in on and dismisses:

Stein’s defense is that he has never written about credit ratings or about this company, therefore no conflict existed. One of his critics, the Reuters blogger Felix Salmon, offers an equally succinct counterpoint: “Stein provides financial advice in his column, and he provides financial advice in the ad.”

I’m not convinced. I pulled down four of Stein’s recent Times columns and was hard-pressed to find any whiff of financial wisdom. He seems to have styled them as ruminations on economics and public purpose. One was on the glories of salesmanship, another a look back at America’s “decline” seen from 2089. I thought they were windy and self-indulgent. But they offered me no advice, and Stein never suggested I check my credit score.

Wasserman read four columns by Ben Stein, and on the strength of those four columns concluded that Stein didn’t offer financial advice in his column? I know that journalists are lazy, but that’s really taking the biscuit. If he’s really going to imply that I was wrong when I said that Stein offers financial advice in his column, he might at least have asked me first why I said that. And it wouldn’t have taken me very long to find for instance this column, where Stein not only offers his “best advice” on investments, but even gives ticker symbols for what to buy.

Of course Stein gives financial advice: he’s written entire books of the stuff, not to mention his other media appearances and columns elsewhere. Financial advice is a huge part of Stein’s shtick, and that’s absolutely one of the reasons that FreeScore wanted to hire him: he’s known (unfortunately) as a trusted dispenser of financial advice, and so he comes with some measure of built-in credibility as a financial pitchman. His NYT column is part of what gave him that credibility. So yes, there’s a massive conflict there.

What’s more, Stein was in direct contravention of the NYT’s own ethics guidelines, which state that NYT journalists — and that term includes freelancers such as Stein — cannot perform paid PR work. How does Wasserman get around that one?

This is a guy who has been shilling for years — for nonstick cookware, paper towels, Clear Eyes and lately, alongside Shaquille O’Neal, for Comcast Cable — so he has long been on the wrong side of the PR taboo. The irony is it was undoubtedly his celebrity that commended him to The Times in the first place, a status created by his rise as a personality on TV, in movies and, yes, in commercials.

Yep, a professor of journalism ethics has managed to go on the record as defending an explicit breach of written guidelines, on the grounds that hey, the same journalist had breached those written guidelines in the past, so they can therefore be safely ignored.

Clearly Stein did get an implicit or explicit pass on the no-shilling guidelines at some point. But equally clearly the FreeScore gig was a step too far, most likely because it had such a big overlap with the subject of his column. “I’ve broken the law in the past and got away with it” is never the most convincing defense at the best of times, and in this case it’s particularly weak.

Oh, and one other thing: contra Wasserman, the NYT never actually said in as many words that the FreeScore gig “was a conflict of interest for Stein”. Here’s the official statement from NYT spokeswoman Catherine Matthis:

Ben Stein’s fine work for us as a columnist for Sunday Business had to end, we told him, after we learned that he had become a commercial spokesman for FreeScore, a financial services company. Ben didn’t understand when he signed on with FreeScore that this might pose a potential conflict for him as a contributing columnist for the Times, because he hadn’t written about credit scores or this company. But, we decided that being a commercial spokesman for FreeScore while writing his column wouldn’t be appropriate.

The NYT isn’t saying that the ad was a conflict of interest, it’s saying that it might pose a potential conflict of interest, and that it was not “appropriate” for Stein to write his column while also shilling for FreeScore. That seems entirely reasonable to me. So Wasserman’s search for “a genuine conflict of interest” is silly: why not just take the NYT’s words at face value, and admit that Stein’s position as a financial columnist was rife with potential conflicts of interest.

What’s more, Wasserman’s definition of “conflict of interest” is ridiculously narrow:

It describes a particular situation in which a journalist has some undisclosed outside loyalty, commitment, affiliation or obligation that might plausibly influence his judgment and tilt his work to satisfy this off-stage constituency.

Undisclosed? Is he serious? Does the Knight professor of journalism ethics at Washington and Lee University really think that journalists can accept any amount of money from any constituency — even within their own beat — and that’s fine so long as they disclose it? Maybe if he does then it’s easier to see why he agrees with Stein that there was no ethical lapse in this case. But it’s also easy to see why the likes of the NYT shouldn’t pay him much attention.


You need to make your case that this particular company, not its parent company is sleazy. Stein argues that FreeScore was different.

I view Stein as an entertainer and I think most people who read is column do too.

As a moderate democrat, I think the far left wing of our party have long, long been frustrated by voices like Stein that they disagree with, and this is just an excuse to purge him from the NY Times.

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Against guaranteed bonuses

Felix Salmon
Aug 17, 2009 14:26 UTC

John Carney has a novel defense of guaranteed bonuses this morning: they’re a good thing, because if they didn’t exist, traders might take on less risk!

The level of profits demanded by shareholders of financial firms increasingly require banks to raise their level of risk taking. Someone who knows that even if he loses everything he’ll still take home a million bucks can afford to be more daring than someone who is worried about paying his mortgage.

This argument doesn’t really stand up to scrutiny: if it were really true, then guaranteed bonuses would be most common among veteran senior traders whom the bank knows well. In fact, they’re overwhelmingly used to poach new traders to a desk, and expire after a year or two.

It’s also not true that shareholders are requiring banks to increase their level of risk taking — they’ve seen where that leads. Riskier banks always trade on lower p/e multiples than boring banks which take very little risk. Invariably, when banks take on lots of risk, their employees get most of the upside while their shareholders wind up with the first loss.

The fact is that guaranteed bonuses are a tool used by smaller, weaker banks who are desperately trying to beef up their trading desks to compete more effectively with the larger trading powerhouses. You don’t hear much about Goldman Sachs or Citadel paying their traders guaranteed bonuses. It’s also a fact that most of the time the smaller, weaker banks, after spending enormous amounts of money on guaranteed bonuses and the like, end up failing and dismantling those desks: the bonuses are simply a transfer of wealth from shareholders to opportunistic traders, and/or a way to persuade traders to join a weaker shop even though it’s more likely to fail. They do neither the shareholders nor the system as a whole any good at all.


My thoughts on banker comp from a few months ago fwiw: http://www.parkparadigm.com/2009/05/23/o n-compensation-and-outcomes/

Why the FDIC won’t run out of money

Felix Salmon
Aug 17, 2009 13:50 UTC

With the FDIC insurance fund running low, there’s a fair amount of confusion out there about whether the FDIC can run out of money. The answer is no, it can’t. The insurance fund might be down to its last $13 billion, but that number is really useful only for accounting purposes. There’s a government guarantee on bank deposits; the FDIC is merely the arm of the government which administers that guarantee and tries to make sure, by charging banks insurance premiums, that it doesn’t cost the taxpayer any money over the long term.

Joe Weisenthal, this morning, says that we needn’t worry about the FDIC’s money running out because “Congress will replenish the FDIC instantly” — implying that there’s at least the possibility that Congress wouldn’t replenish the FDIC. But that’s not the case. In May, President Obama signed a bill providing the FDIC with as much as $500 billion in credit at the Treasury — more than enough to cover anybody’s bank-failure worst-case scenario. That bill is now a law, which means that Congress needs to do nothing in the event that the FDIC’s funds go to zero.

I wish that the reporting on the FDIC insurance fund were clearer on this front: it’s basically just a way of keeping score, and working out whether the cost of FDIC bailouts is greater than or less than the insurance premiums that the FDIC has received from the banking industry. It has no bearing at all on the FDIC’s ability to backstop bank deposits.


Congress repeatedly refused to allow the FDIC to impose or increase its fees for about a decade. You can’t blame the FDIC folks, they wanted to.

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Sunday links reinvent themselves

Felix Salmon
Aug 17, 2009 04:32 UTC

Why share buybacks are evil

My review of “The Match King”, by Frank Partnoy, in the NYT

Why Chinese won’t replace English: It’s too hard to learn.

On AIG/AIU’s rebranding as Chartis


Re: Chinese

Potato-Faced Youngster Lauded For Memorizing Primitive 26-Character Alphabet” (the Onion, of course).

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Annals of unncessary foreclosure fees, Harlem edition

Felix Salmon
Aug 17, 2009 01:49 UTC

Three cheers for Justice Emily Jane Goodman, who threw out a ridiculous foreclosure case that was brought by Washington Mutual against Imar Hutchins, a man who made repeated attempts to make his mortgage payments, all of them rejected by the bank, which then served a foreclosure notice on one of his renters.

It’s unclear why Hutchins had this particular mortgage in the first place: he took it out the $470,000 loan in May 2006, and then in May 2008 missed a single mortgage payment of $3,730. He had a lot of positive equity in the building: the price was $675,000, which means that his downpayment of over $200,000 was more than 30% of the purchase price. Yet even then, within two years of getting the mortgage, his mortgage rate was already at about 9%.

But the fact that WaMu insisted on initiating foreclosure proceedings after a single missed payment is still revealing. Hutchins, with his $200,000 of positive equity, was no deadbeat jingle-mailer. But the fees that a servicer gets from foreclosure proceedings are high, and the costs fall overwhelmingly on the homeowner. Maybe the fact that he had such a high-interest-rate mortgage served as some kind of signal to the bank that they should try to rip him off even more by tacking on unnecessary foreclosure fees.

A mortgage isn’t a credit card: you shouldn’t be slapped with fees and lawsuits just for missing a single payment. But maybe, for mortgages taken out at the height of the boom in mid-2006, that’s exactly where banks like WaMu thought they were going to make their money. If true, that’s utterly depressing.


WAMU’s merchant account scam has been holding my two companies hostage and depriving me of the right to earn a living for almost a year now. My case against them is pending with the courts and because of this non-sense my landlord took me to court to put me on the street because I owe him money that he no longer wants to wait for. This is the last straw so I am not worried about it because God is in control of the situation. What was meant to harm me will ultimately turn out the be a blessing in disguise. My landlord hired a pitbull lawyer to make the case and put me on the street….but little do they know that they put me on speed-dial to something bigger and much better. I am ready to move out of death valley.

Rahm Emanuel, Treasury secretary

Felix Salmon
Aug 17, 2009 01:28 UTC

I’ve been wondering for a while whether the real Treasury secretary — the person who actually makes the big decisions about US fiscal policy — is in fact not Tim Geithner but rather Rahm Emanuel. Today, we learn:

After Treasury Secretary Timothy F. Geithner stumbled in rolling out a new banking policy, Mr. Obama told Mr. Emanuel to step in, and he met for an hour each day with the economic team to develop a workable policy.

Geithner is a creature of Washington, and one would expect him to be very good at the political aspects of his job. But no one would expect Geithner to have more political nous than Rahm. And it’s hard to imagine, after Rahm is parachuted in to make US fiscal policy “workable”, that he adopted a posture of cringing obeisance towards Geithner’s policy ideas.

Speaking of which, whatever did happen to Geithner’s much-hyped bank bailout?


In my opinion what happened is Rahm E. pushed the Geithener press conference over Geithner’s objections, and Obama ordered closer ties to make certain Rahm E. did not make the same mistake twice.

Treasury is clearly being run by Geithner. The bank bailout is doing just fine.

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Chart of the Day: The stock market’s P/E Ratio

Felix Salmon
Aug 17, 2009 01:11 UTC

From Bespoke Investment Group, via Abnormal Returns:


Stocks are now trading at p/e ratios not seen since 2004. This is more than pricing in a recovery — this looks very much like pricing in a return to the status quo ante. Does anybody really still think that corporate profits are going to be able to rise faster than US GDP indefinitely? It seems from the level of the stock market that, yes, they do.


I was reading everyone’s posts, and would like some feedback. Forgive me if my question is rudimentary, as I’m not an economist nor particularly knowledgeable about economics.

Here’s my question: hasn’t the stock market been experiencing a bubble in the making for the past 20+ years as a result of the baby boomers saving for retirement? If you look at the history of the p/e ratio, you will see it began to spike around the same time boomers probably started saving for retirement. It has been growing rapidly ever since until the latest crash of course. Now, what happens when all the boomers stop contributing to the stock market and at best start living off their investments, or at worst start drawing down on their investments? Won’t that result in the p/e ratios closer to their historical levels?

I also noticed that the p/e ratio started to climb drastically at the same time the 401K program was instituted. In other words, the boomers started to plow their own moneies into the stock market at that time.

The question someone raised earlier about looking at the bond market seems valuable to understand how the allocation between bonds and stocks changed as a result of individual investors making their own decisions about investment strategies.

Does anyone have any insights into these issues?


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Will Terra Firma give up EMI?

Felix Salmon
Aug 16, 2009 22:28 UTC

Aaron Patrick’s WSJ article on EMI tells us little we don’t already know about the state of the famous record label, and indeed soft-pedals the famous “fruit and flowers” expenses so much that many readers will have no idea what he’s talking about. (It’s industry code for cocaine and other illegal expenses.)

What is interesting, however, is what’s going on at the top of the company: after installing himself as CEO, owner Guy Hands then replaced himself last September with Elio Leoni-Sceti, who is now telling Patrick that “it’s a natural part of the business that it moves on from ownership to ownership over the course of a long term”.

EMI Music has failed three covenant tests on its $950 million loan from Citigroup, which could, therefore, were it so inclined, foreclose on the loan and auction off the business. The quote from Leoni-Sceti sounds to me as though he’s wholly cognisant of that possibility, and not particularly scared of it, especially if (as is entirely possible) he remains CEO under the new ownership.

The acquisition of EMI by Terra Firma was one of the highest-profile private-equity acquisitions of the boom, along with Cerberus buying Chrysler. The latter went to zero; there’s no reason why the former shouldn’t do the same.


Terra Firma, a private-equity firm run by Guy Hands, bought EMI for £4.2 billion ($8.3 billion) in 2007. But the recession and declining music sales made it impossible for Terra Firma to pay off EMI’s massive debts. Private equity is no stranger to public embarrassment. But Terra Firma’s struggle to control EMI has been particularly humiliating. Let’s just hope EMI can continue to hold events with perfect audio visual to earn back and repay its debts..


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