Felix Salmon

When banks securitize loans to each other

Felix Salmon
Sep 15, 2009 14:15 UTC

Richard Barley has a very depressing column today which begins like this:

Bankers and policy makers agree on the need to revive the securitization market to enable banks to roll over a big chunk of their existing wholesale funding.

If that doesn’t make a lot of sense to you, well, it didn’t make much sense to me either. But let’s rewind a little here, and remind ourselves of the two different types of securitization.

The first type, which is the type I think of when I listen to people talking about “the need to revive the securitization market”, is the securitization of existing real-world cashflows, like car payments or mortgage payments or even David Bowie royalties. Bankers get involved in this market primarily as intermediaries: they talk to the owner of the cashflows (the auto finance company, say, or David Bowie), structure a deal, get it rated, and then sell the bonds to investors. For this they get fee income — but in no sense can that fee income be considered “wholesale funding”.

Then there’s the second type, in which banks securitize their own assets — the loans which they made to their own customers. This kind of securitization makes much less sense. During the boom, a lot of this type of securitization took the form of “synthetic CDOs”, where the banks kept the loans on their own balance sheet and did clever things with credit default swaps to seemingly get rid of all the associated risk. We know how that turned out.

Alternatively, banks sometimes decided to get into the “originate to distribute” business, which was pretty much the single biggest cause of the subprime crisis: because they weren’t going to be holding on to most of the loan, they didn’t seem to care much about old-fashioned things like underwriting quality.

Sometimes, banks did just decide to sell off bits and pieces of their balance sheet by selling loans. This didn’t happen very often during the crisis, since no one was particularly worried about balance sheets getting too big. But when it did happen, the banks sometimes decided to turn to the securitization market rather than simply selling the loans to other banks as they had done for centuries. Was that because they wanted to tap bond investors and thereby increase the potential investor base for the loans? Not really. Barley explains the real reason:

U.S. banks have been subject to a leverage ratio all along, making them keen issuers of securitizations to offload assets, but reluctant holders of triple-A-rated assets, which used up balance sheet for little return. European banks, on the other hand, faced no gross leverage constraints but were regulated according to the Basel II capital rules, which encouraged them to load up with triple-A-rated assets because these carried a very low risk-weighting.

In other words, it was all regulatory arbitrage. Securitization didn’t decrease the total amount of leverage in the banking system as a whole — in fact, it probably increased leverage, by parking assets at European banks who could hold them more or less cost-free as a result of those assets’ triple-A credit ratings.

But in any case, running down the list, it’s still pretty hard to see how securitization could really be considered a funding source. The point of securitization is that you sell assets (after converting them to bonds) — you don’t borrow against them. Conceivably synthetic CDOs might be considered a funding source, but surely no one wants to go back to them.

The one thing which is absolutely clear is that banks should never be in the business of securitizing loans and selling them to other banks. If you want to sell loans to other banks, just do so directly, by syndicating or participating out the loan. Going the securitization route is expensive enough that the only way it makes sense is if there’s some kind of regulatory arbitrage going on, and we don’t want that.

Looking at what’s happening to bond spreads, it’s conceivable that there’s now a bid out there again, among real-money bond investors, for securitized loans. If that’s true, then maybe a few banks could start testing the waters. But insofar as the business of banks securitizing loans to each other has now died, it should never be resuscitated.



It’s all just a bunch of Bierce

Felix Salmon
Sep 15, 2009 12:41 UTC

My friend Matthew Rose has written a wonderful financial edition of the Devil’s dictionary. A taster:

PPIP, or PUBLIC-PRIVATE INVESTMENT PARTNERSHIP, v.t. Orig: Gladys Knight. To use a form of hypnotism in which merely saying you intend to fix a problem has the effect of making everyone forget about the problem. Usage: “We really peepipped Congress on those AIG bonuses.” See ASSETS, TOXIC.

QUANTITATIVE EASING, n. A regulatory approach based on the point in Western movies when the sheriff, having fired all available bullets, in an act of final desperation throws his gun at the bad guys. See also INFLATION, HYPER.

As they say, go read the whole thing.


Here’s one that’s available if you’ve paid approximately $8.85 per month for entire year:

TOO BIG TO FAIL, idiom. Banks, insurance companies, car companies, presidential approval ratings, Fed chairmen seeking second terms, other people who think they should be Fed chairman, the reputations of people who’d be responsible for letting things fail. Antonym: TOO BORING TO SAVE.

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Felix Salmon
Sep 15, 2009 00:24 UTC

53-page Treasury report entitled “The Next Phase of Government Financial Stabilization and Rehabilitation Policies” — Treasury

I kinda love this piece on Malcom Gladwell, “jungle-maned Casanova” — Daily Beast

Can’t all the hipster media outlets just get along? — Gawker

The Washington Post is losing $24 million a month: — WaPo

Judge in BAC/SEC case quotes Oscar Wilde in ruling against Merill bonus settlement — NYT

“The LEICA M9 is the smallest, lightest, highest-quality digital camera ever created by the hand of Man” — Ken Rockwell

Luc Tuymans, a bit of a douche — greg.org

Ben Davis suggests some new targets for Glenn Beck’s art criticism — Artnet

Where the FT wipes the floor with the WSJ: gloriously nerdy articles about negative swap spreads — FT

The massive ghost fleet at anchor off the coast of Singapore — Daily Mail

Why doesn’t the NYT publish source documents? “There’s not much reason not to publish” them, says Ryan Chittum — CJR

People like wine more when they know it has lots of Parker points. Obvs. — Science Daily

Dan Brown and David Foster Wallace were in the same creative-writing class at Amherst. — NY Mag

Good pro-Kanye, anti-MTV rant from Choire Sicha: “Leave Kanye Alone.” — Daily Beast

<love> — Don’t Judge My Hair

I don’t think these guys understand what “bike lane” means — Twitpic


Perhaps I’m simply a worse person than you, Felix, but what caught my eye was ‘the Schtupping Point’.

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Pinning the blame on the House Republicans

Felix Salmon
Sep 14, 2009 18:18 UTC

Jim Surowiecki has an interesting response to Joe Nocera’s contrarian idea that letting Lehman fail, far from precipitating the worst of the financial crisis, actually enabled the government to bail out AIG and otherwise increase its intervention to something approaching the needed level.

Here’s Nocera:

In the months between Bear Stearns and Lehman Brothers, Mr. Paulson and Mr. Bernanke had approached Congressional leaders about the need to pass legislation that would give them a handful of additional tools to help them deal with a larger crisis, should one ensue. But they quickly realized there was simply no political will to get anything done. After Lehman, however, Mr. Paulson and Mr. Bernanke were able to persuade Congress to pass a bill that gave the Treasury Department $700 billion in potential bailout money — which Mr. Paulson then used to shore up the system, and help ease the crisis. Even then, it wasn’t easy; it took two tries in the House to pass the legislation. Without the crisis prompted by the Lehman default, it would have been impossible to pass a bill like that.

And here’s Surowiecki:

What if Congress had passed the TARP bill the first time around, instead of voting it down on September 29th? While it’s certainly true that Lehman’s failure provoked a global panic, and in the days immediately after it went under we saw credit markets start to freeze up, stock-market sell-offs, and the like, it’s also true that the news that the U.S. government was working on a toxic-asset bailout plan for the banks actually did stabilize the markets. By Friday, September 26th, for instance, the S&P 500 Index was trading only slightly below where it had been before Lehman went under. At that point, it seemed, investors were reasonably confident that the government’s actions would bring some order to the chaos in the system.

That confidence disappeared, obviously, on September 29th, when the House of Representatives voted down the TARP.

Is it then the House Republicans, rather than Hank Paulson, who deserve most of the blame for failing to respond strongly enough to the financial crisis? Might we have muddled through fine if they’d just passed the TARP bill the first time around? After all, September 29 came after the AIG bailout, so clearly the stomach-churning stock-market implosion we saw thereafter was not necessary for the enaction of further multi-billion-dollar bailouts.

One thing worth remembering here though is that it’s pretty spectacularly unhelpful to look at the stock market as an indicator of financial well-being over the course of the crisis. The Dow hit its all-time high long after the crisis had already begun, and from then on in it was a decidedly lagging indicator. The fact that it only took a couple of weeks to implode in the wake of the Lehman bankruptcy could actually be a sign of the stock market reacting much more quickly than it had done previously.

In any case, even if Nocera is right and Lehman’s failure was in hindsight a good thing, it was at the same time a chaotic thing, and any silver lining came more through luck than judgment. I still think we’d have been better off saving both Lehman and AIG this time last year — and I still think that if Paulson had wanted to do that, he would have found a way.


Felix- i think your coverage of the market is excellent and I love reading your stuff. i’m curious why you think bailing Lehman out would have prevented the chaos from showing up, even worse, down the road? Lehman failed because they had a lot of bad assets on their books, as did lots of other institutions. they did everything they could to keep the world from realizing this. as we know now (and they most likely knew at the time), the assets really were quite bad and weren’t going to recover in value. The final reckoning and deleveraging were inevitable, with or without a bailout.

if you are interested, i should have a post up tomorrow on businessinsider.com that discusses this some more.
keep up the great work!

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Obama’s speech: The good news

Felix Salmon
Sep 14, 2009 17:12 UTC

A couple of bits jumped out at me from Barack Obama’s prepared speech today. First is his explanation of why the Consumer Financial Protection Agency is so necessary:

Consumers shouldn’t have to worry about loan contracts designed to be unintelligible, hidden fees attached to their mortgages, and financial penalties – whether through a credit card or debit card – that appear without warning on their statements. And responsible lenders, including community banks, doing the right thing shouldn’t have to worry about ruinous competition from unregulated competitors.

Now there are those who are suggesting that somehow this will restrict the choices available to consumers. Nothing could be further from the truth. The lack of clear rules in the past meant we had innovation of the wrong kind: the firm that could make its products look best by doing the best job of hiding the real costs won. For example, we had “teaser” rates on credit cards and mortgages that lured people in and then surprised them with big rate increases. By setting ground rules, we’ll increase the kind of competition that actually provides people better and greater choices, as companies compete to offer the best product, not the one that’s most complex or confusing.

This is very well put. All too often, what the financial-services industry likes to think of as “innovation” is in fact just deliberate predatory obfuscation. (For example: Ben Stein’s “free” credit score which ends up costing $30 a month.) If banks put half as much effort into competing on actual product quality as they put into trying constructing thousands of pages of agate type for a single credit card, consumers will undoubtedly benefit.

And then there’s Obama’s promise that any future bailouts will have to be repaid — if not by the company being bailed out, then by its competitors:

If taxpayers ever have to step in again to prevent a second Great Depression, the financial industry will have to pay the taxpayer back – every cent.

The financial industry. This is big, and important. Because what it does is it turns the whole industry — every bank, every banker, every hedge fund manager — into a mini-regulator, the eyes and ears of the systemic-risk regulator. All too often, those with eyes to see try to monetize their insights, rather than sounding a more general alarm. But if they ultimately end up paying for the cost of any bailout, they might stop just quietly putting on short positions, and start taking their analysis to the Fed instead. Which, under Obama’s plan, will have the ability and authority to put an end to activities which pose major systemic risk.

I’m still pessimistic that any of this is going to actually happen, and I stand by my original criticisms of the plan. But at the margin, at least, Barack Obama is (mostly) fighting on the side of the angels, even if he does feel the need to pay occasional lip service to the benefits of financial innovation.


Your statement on banks needing to focus on competing, rather than pages of agate type is correct. but is there a substantially large enough market of major credit card issuers to sustain true competition? I don’t think so. And probably not in a more regulated environment.

Obama likes financial innovation

Felix Salmon
Sep 14, 2009 16:13 UTC

Barack Obama said that he wants to do regulatory reform “in a way that doesn’t stifle innovation and enterprise”. Shame. Given how dangerous financial innovation and enterprise have been over the past decade, one would have hoped that a bit of stifling was a top priority for the Obama administration.

Update: Here’s the full speech:



> In fact, while there continues to be a need for government involvement to stabilize the financial system, that necessity is waning.

Note “waning”, but changing in character from preventing imminent collapse to reducing the likelihood of recurrence of the past year’s (or two years’) events. I hope that’s what he meant.

Mint gets eaten by the Borg

Felix Salmon
Sep 14, 2009 15:51 UTC

Intuit is buying Mint.com for a whopping $170 million. That’s a lot of money for a company which has yet to make a dollar in profit — indeed, it found itself in need of an extra $14 million in equity capital only last month.

So what makes Mint worth so much? The website basically has two main possible revenue sources. The first is the way it’s making money right now (or getting revenues, anyway): armed with its users’ financial information, it can act as a broker, introducing them to offers from financial-services companies which might be a good deal. And like any broker, it gets to keep a commission.

There’s also what Mike Arrington calls “a goldmine of user data” — incredibly granular information on the saving, spending and borrowing habits of 1.4 million registered users who between them account for $175 billion in transactions, and $47 billion in assets. If that information is added to the information which Intuit already holds, it could provide unprecedented insight into how Americans deal with money.

The problem is that while Mint is generally much-loved, Intuit is generally much-hated. Mint is free; Intuit is constantly trying to squeeze every marginal dollar out of its customers. Mint’s user experience is a joy; Intuit’s is gruesomely bad. (And is possibly responsible for the whole nightmare that was Tim Geithner’s tax situation.) Mint is trusted; Intuit isn’t.

The fear is that Intuit will stop showing Mint’s customers the offers which are best for them, and will start showing Mint’s customers the offers that are best for Intuit, even if those offers are predatory or otherwise unsuitable. And as for the money which Intuit might squeeze out of those users’ personal financial data — again, while I trusted Mint not to do anything evil, I don’t have the same feelings about Intuit.

I do have a Mint account, but I don’t use it very much, and it’s a bit glitchy. I think I’ll probably deactivate it now. Better safe than sorry.


Will Mint survive the Intuit acquisition?

Intuit is sales driven and is always looking for new customers. It could care less about existing customers who they abuse with forced “upgrades” of their bug ridden software.

In 1995 I wrote Quicken a letter detailing numerous, severe bugs. In 2005, having just upgraded (again) I happened to come across the letter in my files. Guess what? Same bugs. (Quicken admits this.)

In 2009, I upgraded again. Same bugs.
Sort sells were miscalculated, graphs mislabeled, and several Mutual Fund metrics are meaningless.

The benefits of using Quicken are only slightly above using no software at all.

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BusinessWeek datapoint of the day

Felix Salmon
Sep 14, 2009 14:24 UTC

Businessweek.com was charging $25 CPMs in 2006, and selling out 79% of its inventory. This year, its CPMs are down to less than $20, and even then it’s selling only a very weak 38% of its inventory. With CPMs down by a quarter and the sell-through rate down by a half, what has happened to total revenues? Astonishingly, they’re up by about 4.5% over the period in question, and are now running at more than $20 million a year.

The NYT sees the glass as half empty: “Though BusinessWeek.com attracts a lot of page views, 45 percent of those are from slide shows, which Web publishers consider a gimmicky way to increase hits,” writes Stephanie Clifford. “Only 16 percent of page views came from original articles for the six months ended in April.”

On the other hand, there’s another way to view these figures: BusinessWeek.com has remained profitable while capitulating to the first rule of making money from ads: that quantity matters much more than quality. The number of sites which can sell “prestige” ads or site sponsorships is tiny: while the dream of the internet circa 2003 was that you could launch narrowly-targeted sites with high-value readers and then sell them at a premium, almost nobody has successfully done that.

My dream is that we’re now entering the beginning of an era in which inventive partnerships between web publishers and advertisers will create new, high-value inventory, as advertisers realize they can’t get the exposure they need just by taking out full-page four-color ads any more.

But if and when that happens, it’s going to be natural web properties which reap most of the rewards. Slow-moving ofshoot websites of print magazines, like BusinessWeek.com, are unlikely ever to be nimble and creative enough to grasp that market, and might indeed be better off trying to monetize listicles. After all, their bright ideas for online are likely to do little more than eat insane amounts of money:

Hoping to find new revenue, BusinessWeek started a social-networking site, Business Exchange, and sank $16 million into it in 2007 and 2008. Almost two years after its introduction, the site drew just 1.5 million page views in the United States in July, according to the measurement firm comScore. That is about the same as Wikinvest.com, a start-up offering investment tips.

Last year, Business Exchange had expenses of $7.6 million, and brought in only about $600,000 in revenue.


How hedgies fight pneumonia

Felix Salmon
Sep 14, 2009 13:35 UTC

Lance Laifer is a good guy, with his heart in the right place and a history of raising millions of dollars for important causes. But I don’t think his latest idea is his best ever:

Hedge Funds vs. Malaria & Pneumonia is asking everyone in the hedge fund industry to wear blue jeans to work on November 2. The reason is simple. The two million children who die of pneumonia often turn blue when they get pneumonia. We believe that if everyone in the hedge fund industry wears blue jeans on World Pneumonia Day we will draw a massive amount of attention to the problem and encourage people all over the world to figure out how they can stop this massive killer of children. Surprisingly it is relatively cheap to diagnose and treat pneumonia (meds cost less than $0.50) and most pneumonia deaths can be prevented by vaccines, which are already on the market.

Wearing blue jeans to the office is an easy (and free) way to help change the world for the better.

Hedgies wearing blue jeans to the office because that’s the color that children turn when they die? On a scale from “ineffectual” to “downright offensive”, where would you put this one?


“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly; who errs and comes short again and again; because there is not effort without error and shortcomings; but who does actually strive to do the deed; who knows the great enthusiasm, the great devotion, who spends himself in a worthy cause, who at the best knows in the end the triumph of high achievement and who at the worst, if he fails, at least he fails while daring greatly. So that his place shall never be with those cold and timid souls who know neither victory nor defeat.”

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