Opinion

Felix Salmon

Counterparties

Felix Salmon
Sep 30, 2009 23:29 UTC

How the art world embraces much more photography than, say, painting — WaPo

Can we force the ratings agencies to have some kind of skin in the game should their ratings go spectacularly awry? — Drum

The end of TED’s magnum opus on banker pay has some really good insights — TED

Vanity Fair owns the Conde-McKinsey-end-of-an-era story — VF

Konczal on Waldman on Konczal on vanilla products – this is the blogosphere at its finest — Rortybomb

Placebo may cause side effects — the same side effects as the medicine for which it’s standing in — Cheeptalk

This CQ mess makes the Economist look positively evil. Do they know that? — WaPo

True Blood, now in its 18th week of DVD release has $54.998 million in total sales. — TV by the Numbers

Newsmax publishes, then takes down, column calling for military coup against Obama — TPM

With the FDIC taking over 95 banks this year, it has many assets to dispose of, including a Ferrari — The Deal

COMMENT

@TED: Thanks for the enlightenment. I still believe that someone in your industry could read what you wrote and excuse themselves as individual participants. Why else do we find such institutional resistance to change? I’ve not heard much about leadership standing up there and saying “Our system, model, and we as individuals bear a large amount of blame, and here’s how we plan to change.” Have you heard such proclamations from financial services leadership? I understand that there may be legal implications to such a statement, but 1) they should be secondary to honesty; and 2) they do not preclude change. Have you seen real change?

Good for you on the soul searching. I am not of any industry associated with finance, so consider my opinions as those of an educated outsider. In my own profession and life, I search my soul far too often, and far too often find it wanting.

Posted by Curmudgeon | Report as abusive

Choosing BofA’s CEO

Felix Salmon
Sep 30, 2009 23:06 UTC

Running a bank the size of BofA is impossible. So long as the Fed does its best to make the banking system profitable, you could put a baked Alaska in charge and the bank would throw off billions of dollars a year in profits. The job of the CEO is not really about managing down, so much as managing out — repairing relationships with Andrew Cuomo, Sheila Bair, Barney Frank, Mary Shapiro, Elizabeth Warren, and other Washington VIPs. The board will want an experienced manager, to be sure. But they’ll really want someone with political skills, who can calm the savage beast that has woken up DC and which is eyeing the giant of Charlotte.

Which is one reason it’s not so ridiculous that Sallie Krawcheck is being talked of as a serious contender for the top job at BofA. She has the kind of credibility as a straight-shooter that the company desperately needs, and she might be able to mollify some of the bank’s more antagonistic foes.

Meanwhile, if the board starts looking at external candidates, all such candidates must be thinking in the back of their head that a very similar opening is likely to appear at Citigroup sooner rather than later. Vikram Pandit has done amazingly well just to outlast Ken Lewis — his ability to stay in his job is impressive, even if it’s largely a function of the fact that Citi has no succession plan. But as the last of the great destroyers of value still to be drawing a paycheck, he can’t last much longer.

It’s a good time, then, to be a potential megabank CEO. But it’s still a thankless job. Both banks are too big to manage, and both are likely to be broken up eventually. And that kind of decision can’t come from a new CEO: it has to come from the board.

COMMENT

With regard to Pandit – yes he and Shiela Bair may not be getting along. But Citibank was the first to pull the toxic stuff onto its balance sheet, (and may still be the only one), so it is likely it looks a lot worse than the others simply because it is not running a smoke and mirrors operation.

Posted by niket | Report as abusive

Ken Lewis, RIP

Felix Salmon
Sep 30, 2009 21:37 UTC

Ken Lewis is leaving Bank of America — and about time too. The board now has three months to find a successor; the new chairman, Walter Massey, has no real choice but to move “in a deliberate and expeditious manner” to find a replacement.

The timing is intriguing, coming the day after this statement from Jamie Dimon about Bill Winters:

“Choosing between two outstanding people is the hardest part of this job. Bill is an outstanding professional. He has expressed a desire to be his own CEO and I think that is entirely reasonable.”

Would BofA choose an investment banker as its new CEO? That didn’t work out so well for Citigroup. But on the other hand, Lewis has been personally identified with Bank of America for as long as it has existed in its present form (essentially, from the day that Nationsbank acquired the legacy BofA). There’s certainly no heir apparent.

With John Thain out, the most likely successor is probably Brian Moynihan, the man who was parachuted in to save the day in the wake of Thain’s ouster. But the fact that BofA isn’t announcing a successor now is indicative of the chaos within the bank, and indicative too that Lewis’s departure isn’t entirely voluntary.

Did Massey finally get fed up with the SEC, and the New York attorney general, and Judge Jed Rakoff, and half of Congress, and a large part of the shareholder base, all calling for Lewis’s head? Maybe we’ll see when details of Lewis’s exit package emerge. My guess is that his last act as CEO will be to strong-arm the board into giving him something very generous.

COMMENT

KENNY THE BAILOUT MOOCHER
(Minnie the Moocher, Cab Calloway)
WilliamBanzai7

Sing along link: http://www.youtube.com/watch?v=33nTnawq6 jk

Hey folks here\’s the story bout Kenny the bailout moocher
He was a low down Charlotte BAC hoochie coocher
His was the roughest toughest banking sob tale
But Kenny had an appetite as big as a securitized whale

Hidehidehidehi (hidehidehidehi)
Hodehodehodeho (hodehodehodeho)
Hedehedehedehe (hedehedehedehe)
Hidehidehideho (hidehidehideho)

One weekend he messed around with a bloke named Thain
He wanted the Merrill Bulls or he\’d go completely insane
Thain took him round the block to Chinatown
And showed old Kenny how Wall Street gangstas kick the gong around

Hidehidehide-LEVEL 3 (hidehidehidehi)
Whoah (whoah)
Hedehedehede-GREED (hedehedehedehe)
A hidehidehideho CDO (hidehidehideho)

Kenny had a dream bout yet another financial supermarket
It would give him things that he was needin
It would give him a home built of gold and steel
A diamond studded learjet with platinum wheels

A hidehidehidehidehidehidehi (hidehidehidehidehidehidehi)
Hodehodehodehodehodehodeho (hodehodehodehodehodehodeho)

Thain sold Ken a herd of bonus cows and a boatload of subprime losses
Each meal Ken ate was full of surprising new derivative courses
Had a billion dollars worth of taxpayer nickels and dimes
He sat around and counted them all a million times

Hidehidehide-LEVEL 3 (hidehidehidehi)
Hodehodehode-CDO (hodehodehodeho)
Hedehedehede-GREED (hedehedehedehe)
Hidehidehide-HOSED (hidehidehideho)

POOOOOOR MAN
POOOOOOOOOOOOOOOR MAN
POOOOOOOOOOOOOOOOOOOOOOR MAN

Hey folks here\’s the story bout Kenny the bailout moocher
He was a low down Charlotte BAC hoochie coocher
His was the roughest toughest banking sob tale
But Kenny had an appetite as big as a securitized whale

Hidehidehidehi (hidehidehidehi)
Hodehodehodeho (hodehodehodeho)
Hedehedehedehe (hedehedehedehe)
Hidehidehideho (hidehidehideho)

One weekend he messed around with a bloke named Thain
He wanted the Merrill Bulls or he\’d go completely insane
Thain took him round the block to Chinatown
And showed old Kenny how Wall Street gangstas kick the gong around

Hidehidehide-LEVEL 3 (hidehidehidehi)
Whoah (whoah)
Hedehedehede-GREED (hedehedehedehe)
A hidehidehideho CDO (hidehidehideho)

Kenny had a dream bout yet another financial supermarket
It would give him things that he was needin
It would give him a home built of gold and steel
A diamond studded learjet with platinum wheels

A hidehidehidehidehidehidehi (hidehidehidehidehidehidehi)
Hodehodehodehodehodehodeho (hodehodehodehodehodehodeho)

Thain sold Ken a herd of bonus cows and a boatload of subprime losses
Each meal Ken ate was full of surprising new derivative courses
Had a billion dollars worth of taxpayer nickels and dimes
He sat around and counted them all a million times

Hidehidehide-LEVEL 3 (hidehidehidehi)
Hodehodehode-CDO (hodehodehodeho)
Hedehedehede-GREED (hedehedehedehe)
Hidehidehide-HOSED (hidehidehideho)

POOOOOOR MAN
POOOOOOOOOOOOOOOR MAN
POOOOOOOOOOOOOOOOOOOOOOR MAN

The unwilling risk-takers

Felix Salmon
Sep 30, 2009 21:14 UTC

Comment of the day comes from Chris:

The person most willing to take on risk is the one unaware he is doing so. He charges no risk premium…

The resulting market equilibrium is that the guy who is unaware of the risk ends up loaded with it. Then the music stops.

This is possibly a very beautiful and elegant explanation for the extreme profitability of investment banks. They charge their clients a lot of money to take risk off their hands, and then they transformed that risk, using sophisticated financial engineering, into instruments which didn’t, on their face, look risky at all, and which could easily be sold to risk-averse investors. Bingo, massive profits.

Financial complexity and innovation, on this view, are essentially tools of obfuscation. And it’s easy to hide risks when risk-averse investors want debt-like products which retain their face value: such instruments tend to have very low volatility, and so look and feel as though they’re low-risk, even if they’re full to bursting with enormous amounts of tail risk. The answer, as I’ve said many times in the past, is for risk-averse investors to be willing to take a small amount of explicit market risk, and to move towards safe equities (utilities and the like) and away from debt. Because if they go to an investment bank asking for safety, they’re likely to just get hidden risk in return.

COMMENT

Best sentence of the financial crisis-

“Financial complexity and innovation, on this view, are essentially tools of obfuscation.

Posted by Bill Shoe | Report as abusive

Philanthrocrat of the day, ProPublica edition

Felix Salmon
Sep 30, 2009 20:38 UTC

Paul Steiger’s salary in 2006, his last full year as editor of the for-profit WSJ: $547,692

Paul Steiger’s salary in 2008, his first full year as editor of the non-profit ProPublica: $570,000

Update: ProPublica’s Dick Tofel points out that Steiger did get options when he worked for the WSJ, which brought his total compensation comfortably into seven figures. Steiger gets no bonus at ProPublica. Not that he really needs one, given that he’s earning almost $50,000 a month.

COMMENT

Actually, the Propublica tax document indicates total expenses for 2008 were just $6.1 million including salaries. That means Paul Steiger and Stephen Engelberg, with a million betwen the two of them, took home a sixth of it, or 16 percent of the total expenses.
Who would donate to a non-profit with that ratio?

Posted by journalist guest | Report as abusive

The Zero Hedgies

Felix Salmon
Sep 30, 2009 20:13 UTC

I met up with Joe Hagan this morning, in the wake of the appearance of his big New York story on Zero hedge. The vitriol aimed at him from the Zero Hedgies is something to behold, both in the comments on nymag.com and on ZH itself. For instance, these three consecutive comments:

Let’s get some of his work particulars, as well as information about his father. And does he have kids?
Hagan: you’re just another meal in the food chain, and you might find ZH readers are a hungry lot.

welcome to fight club joe.

Joe forgot we are the ones that educate his kids, care for his parents, fix his car and deliever his pizza. hehe

There’s genuinely nothing in the article which could remotely justify that level of hatred, except maybe for the fact that Hagan outed ZH as Dan Ivandjiiski. (Something the NY Post had done back on September 2.)

That said, however, it’s undeniable that ZH has a huge following: Quantcast puts pageviews at over 5 million a month, and uniques at over 330,000. (The ratio between the two is very high indeed by website standards, showing how sticky and addictive the site is for its loyal readers.)

Who are these people who flock to zerohedge.com and lap up everything they’re served? They clearly love the chart-filled posts about intraday movements in the stock market, which is one clue. I think what we’re dealing with here is, essentially, retail day-traders, as profiled by Hagan back in February. (Hagan told me that even back then, before ZH really took off, the day-traders he was writing about were constantly reading the site.)

You need to be a little bit delusional to be an individual day-trader, paying substantial sums for information, technology, and trading spreads every day and yet somehow reckoning that by zooming in and out of highly-levered ETFs you can not so much beat as utterly obliterate broader market returns. All day-traders think they’re above-average; they have to, otherwise they wouldn’t have the hubris necessary to do it in the first place.

The idea really took hold in the popular imagination sometime during the first dot-com boom: stay at home, hook in to the markets, and make more by trading your own account than you ever would working for the Man. Call it the ultimate triumph of Capital over Labor.

It’s not hard to guess why these people might be angry: they’re losing substantial amounts of their own money in the market, and they’re casting about for someone to blame. The insanely profitable Goldman Sachs, for one, is always a good target. And indeed it might well be the case that Goldman’s traders probably are picking off a lot of these individual day-traders, and making quite a lot of money off them in aggregate.

Remember too that day-traders tend to be quite rich (or they wouldn’t have money to play with) and convinced that they know something most people don’t (or they wouldn’t have their self-perceived edge in the market). At that point it becomes quite easy to see how they would be attracted to a conspiracy theorist like ZH, who writes dense and often hard-to-decipher posts about the arcana of how the market works. The masses read Dan Brown for fun; the day-traders read Zero Hedge for profit.

None of this really explains the unbridled anger aimed at Hagan, but for the fact that when you’re casting around for someone to blame, and a major media outlet paints your idol as some kind of sleazy kook, you’re liable to take extreme umbrage — especially when you can hide safely in complete anonymity. The Zero Hedgies, in other words, are the 4chan of the financial blogsphere, which is maybe one of the more depressing aspects of the degree to which the financial blogosphere has matured.

COMMENT

Felix – your vitriol directed at ZH comes across as envy.

Because of course when you work for the MSM you check your journalistic credentials at the door and you become a sycophant to the corporations.

Sure you probably think what you write is real critique – but is it really – how far are you allowed to go without being slapped in the head by your editor – and eventually shown the door?

The reason I read ZH is because the MSM has let me down – most of what I see that passes for financial news these days resembles verbatim press releases (propaganda) from govt officials/central bankers.

There is for the most part no analysis and no questioning.

Case in point – recent 14% increase in China exports. Trumpeted across the home pages of MSM sites.

I immediately said whooooaaaa there… the EU is a wreck and the US stagnant. HOW is China growing exports?

But nope – none of the MSM sources asked that question – they just printed the BS without a second thought.

Another case in point – Fracking – the MSM reports this as if it were the 2nd coming of Christ.

Next to nothing is said about 1. toxic side effects 2. that is is hugely expensive and most importantly 3. I am not seeing any MSM suggesting that we are without a question at Peak CHEAP Oil because otherwise why in the hell are fracking, drilling miles beneath the sea and tearing apart the entire province of Alberta – to get at oil that is VERY expensive to extract?

When I go to ZH I get THE ANSWERS. That site will increase its traffic in direct proportion to the failures of the MSM to report accurately.

Posted by Roadhouse | Report as abusive

Resolving banks by guaranteeing short-term debt

Felix Salmon
Sep 30, 2009 14:55 UTC

Robert Pozen has an interesting idea:

In my view, the adverse repercussions of Lehman’ failure could have been substantially reduced if the federal regulators had made clear that they would protect all holders of Lehman’s commercial paper with a maturity of less than 60 days and guaranteed the completion of all trades with Lehman for that period.

James Kwak tries to flesh it out:

Once the government has determined which liabilities and exposures will have systemic ripple effects (he says short-term CP and outstanding trades), it could just announce a guarantee on those liabilities and exposures and let everything else go into bankruptcy. Now maybe they didn’t have time to make such a determination the weekend before Lehman failed (although arguably they had since March to figure it out), but by the time Citi and BAC and the last AIG bailout rolled around arguably they did. I’m not enough of a markets person to be sure this would work, but it seems like a viable proposal.

One has to be careful when using the term “bankruptcy” with respect to banks, because I think what we really want here is a massive debt-for-equity swap which keeps the bank viable in some form, rather than outright liquidation (which is what banks have to do if they file for bankruptcy). Given the fact that recovery rates for unsecured bank creditors in liquidation are very close to zero, few creditors would be likely to object to such a thing. Is such a thing possible under the government’s existing resolution authority? I’m unclear on that, but I’m definitely interested in the details of Pozen’s proposal.

One big problem here is that such a plan can’t really be institutionalized ex ante: the last thing we need is an incentive for too-big-to-fail banks to borrow short rather than long, because there’s a semi-explicit government guarantee on all of their funding less than 60 days. Or maybe the Fed could force all banks to have no more than x% of their unsecured debt in the form of commercial paper.

COMMENT

U.S. banks don’t file for bankruptcy, Felix. They’re resolved by the FDIC. Do you seriously not know this yet?

And no, the government does not have the authority to force debt-for-equity swaps under its existing resolution authority (bankrupcy code or FDI Act). But that hasn’t stopped supposedly serious people from claiming, without a hint of irony, that this is what the government SHOULD have done.

Posted by A&O | Report as abusive

Shiller’s underwhelming innovations

Felix Salmon
Sep 30, 2009 05:32 UTC

James Kwak has a great response to Robert Shiller’s FT op-ed about financial innovation. But his line at the end about how “for the sake of argument, I am willing to concede that these are useful innovations that would make people better off” has been misconstrued, and it’s worth pointing out that in fact they’re not useful innovations that would make people better off.

Why not? Mainly because, at heart, they’re all variations on the theme of doing-clever-things-with-as-yet-uninvented-derivatives. But that’s a theme which really shouldn’t have survived the financial crisis.

In 2003, Alan Greenspan famously said that ““what we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so.” But, as it turned out, they weren’t. Lots of people wanted to transfer risk, and precious few were genuinely willing and able to take it on: even hedge funds generally prided themselves on being lower-risk than the stock market as a whole.

The result was a system where derivatives were used to hide risks, and shunt them off, unseen, into the tails. A system where hidden risks turned out to be much more dangerous than if they’d all been out in the open all along.

In each of Shiller’s examples, you start with a risk that an individual wants to lay off: the risk that home prices will fall, or that the market will plunge just before you retire, or that inflation or healthcare costs will kick in after you retire. And in each case, the individual tries to lay off that risk elsewhere.

Shiller simply takes it on faith, however, that a nice liquid market can and should spring up to provide two-way prices in such risks, solving lots of problems at a stroke; he doesn’t stop to consider that maybe the reason such markets haven’t sprung up is precisely that there’s no real demand from anybody wanting to take on those risks. In reality, Shiller should know that better than anyone: his much-vaunted house-price derivatives have gone nowhere, partly because no one ever really had any need or desire to go long.

Shiller’s first proposed innovation is an attempt to deal with the regrettable move, in recent years, towards a “popular reliance on housing as an investment”. Only except for suggesting the obvious — moving people away from the idea of housing as an investment, and towards good old-fashioned renting — he comes up with a complex mortgage with all manner of embedded options. As with any derivative, those options will be a zero-sum game, and you can be sure the homeowner is going to end up on the wrong side of it. But Shiller still seems to think it’s a good idea for homeowners to buy them, instead of simply getting a plain-vanilla, easily-comprehensible mortgage, with payments which are set over the life of the loan and which are entirely predictable.

Shiller’s second innovation is target-date mutual funds: I’m almost surprised that he didn’t suggest some kind of principal-protection scheme, involving derivatives, instead. (Maybe because that would have sounded too much like portfolio insurance, which caused the 1987 crash.) But target-date funds are widely misunderstood, and in 2008 some 2010 funds contrived to underperform the S&P 500. They’re a mess, and they’re expensive, and it’s not obvious that they do any good. So color me unconvinced on this front.

Finally, Shiller dreams of annuities which would pay out a set amount of money per month for life, after adjusting for inflation, and which on top would include all healthcare costs. Nice dream, Bob. But there’s a good reason such things don’t exist: no insurer wants to take on a large amount of those kind of risks, and nor would any self-respecting insurance regulator allow them to do so. There isn’t a long-dated derivatives market in future health-insurance costs, but if there were, very few people would have any reason to sell protection against those costs rising, at any price. Sure, a few hedge funds might dabble in the market. But they could never satisfy demand. And in any case, as with the mortgages, the buyer of the annuity would generally lose out, just because of the zero-sum nature of derivatives. Since the cost of the embedded options would be hidden in the price of the annuity, the insurer would have a license to charge through the nose for it, and the buyer of the annuity would never know.

Simplicity and transparency are good things, and Shiller’s innovations go the other way instead. That’s nothing to get excited about.

COMMENT

I am thinking there IS one way that selling a lifetime monthly annuity including health insurance could be very profitable for the financial institutions: what if they sold a bunch of them on the assumption that eventually the government will have to take over these costs, at which time the “health care” portion of your annuity became a freebie to the financial companies?

THEY have the power to get a public health care passed if it’s in their interests.

Posted by Tom Doak | Report as abusive

Counterparties

Felix Salmon
Sep 29, 2009 23:05 UTC

Ryan Avent defends me against DeBord: “there is a very strong correlation between living in sprawl and being obese”. — The Bellows

Time magazine does a double smackdown on the Wash Post’s super-lame Twitter policy — Poniewozik

It’s been a while since I saw a personal-finance column with the phrase “round up to the nearest quarter-million” — BNet

Matt Taibbi joins the naked-short-selling-is-a-crisis crowd — True/Slant

Vodafone pays its bike commuters £85 per month — FT

The Atlantic’s First Draft of History event later this week now has a website — Atlantic

Chittum finds explicit political partisanship in the WSJ’s lede on Merkel’s victory — CJR

Geoff Hargadon’s “Cash For Your Warhol” prank at the Rose Art Museum — Wooster Collective

Princeton sign painters must think the local geese are smart enough to read signs — Twitpic

Gay Talese on how the tape recorder killed journalism. Wonderful, wonderful stuff. — BigThink

Ben Stein has “earned acclaim as an economist and a former columnist for the New York Times”, we’re told. From whom? — BizJournals

John Cassidy starts blogging — NewYorker

COMMENT

fwiw, fallows has been blogging about obesity lately…
http://jamesfallows.theatlantic.com/arch ives/public_health/

also btw, re: The Atlantic’s First Draft of History, it looks like a follow on to Harvard’s New Literary History of America http://newliteraryhistory.com/symposium. html :P

cheers!

Posted by glory | Report as abusive
  •