Felix Salmon

Late links, September 10

Felix Salmon
Sep 10, 2009 21:23 UTC

Congo-Brazzaville spent over $6 million lobbying for an anti-vulture-fund act in DC, after losing to Elliott Associates. A rare example of vulture-fund-friendly investigative reporting. (Al Jazeera, Part 1 here)

Bloomberg is the front-runner to buy BusinessWeek?! (NY Post)

How much would you pay for a shorter commute? (Streetsblog)

Vanity Fair has 6,400 words on TARP (VF)

A better healthcare reform flowchart (Donkeylicious)

“Capitalism never tried to touch god, it was all about touching satan.” (Artnet)

New details on Steve Brill’s pay-for-news firm, Journalism Online, including what they’re charging clients (Nieman)


Vanity Fair on TARP: A kneejerk reaction which has now become egg-on-face. Why did the money not simply go directly to the appropriate/distressed tax payers/mortgage holders ? TRAP ? Just look at the photo sketch: fat tomcats with puffy eyes, what do you expect ?

Capitalism never tried to touch god, it was all about touching satan.” You sure this is all in lower case ?

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Otiose trustee of the day: US Bancorp

Felix Salmon
Sep 10, 2009 20:38 UTC

About a month ago, I got an advance copy of this paper, in which Lee Buchheit — the godfather of the sovereign bond markets, and good friend to sovereign issuers around the world — essentially apologizes for two things he did during the Ecuadorean debt restructuring of 2000 and in many other sovereign bond issues to boot: dropping the restriction on the issuer repurchasing defaulted debt; and including boilerplate trusteeship language in the bond documentation rather than something stronger.

This paper is essentially the formal version of the remarks that Buchheit made at EMTA in June. And like he was then, Buchheit is clear that a large amount of blame can be laid on the shoulders of the “bovinely passive” trustee of those Ecuador bonds. Buchheit’s a wonderful writer, and you should read the whole thing, but here’s a taster:

The movement toward the use of trust structures for emerging market sovereign bonds was not intended to dilute creditors’ legal rights, but merely to centralize those powers in the hands of a trustee who would exercise those rights for the ratable benefit of all creditors. Naturally, this approach assumed that the entity appointed to exercise these centralized powers (the trustee) would, if and when necessary, acquit itself of its duty to preserve, protect and defend the interests of the bondholders.

These assumptions, and this legal architecture, were tested for the first time in connection with Ecuador’s 2008 default… As things turned out, the assumptions proved to be fragile and the legal architecture failed in its principal purpose…

Even though the issuer had publicly repudiated the instruments (it’s hard to imagine a more serious provocation), the trustee did not exercise its discretion to accelerate either series of bonds or to commence an enforcement action..

This much seems certain — the closing of the cash buyback represented the first, the best and perhaps the only opportunity for the creditors to recover a sizeable portion of their claims. The trust indenture deprived the individual bondholders of their ability to pursue legal remedies on their own; they were thus wholly reliant on the trustee’s vigilance and enterprise to protect their interests.

Buchheit never actually outs the trustee, but I can tell you that it’s US Bancorp. I can also tell you that I forwarded the article to US Bancorp as soon as I received it, to get their side of the story. In the weeks since then I’ve called and emailed multiple times — probably two or three times a week, depending on how busy I was — and have heard nothing back from them whatsoever. “Bovinely passive” is one way of putting it; I’d say that they’re positively aggressive in their inaction.

It’s notoriously difficult to get a fiscal agent to do anything on behalf of bondholders — that’s one of the reasons why the structure was switched to using a trustee instead. But the lesson of Ecuador is that even though the trustee works for bondholders and not for the issuer, they’ll still do nothing to protect the bondholders’ interest, when push comes to shove. Hell, it’s a miracle if they even so much as return your phone calls.


Yep, agreed on the locution. Thumb up.

As for USB, I hate ‘em. Their subsidiary (Elan Financial, ugh) purchased my credit union’s credit card portfolio. They have been so deeply incompetent to make me miss not only the kind efficiencies of my old credit union card, but also unkinder yet adequate card issuers of yore.

When you can make me miss Wells Fargo, you really suck.

In defense of the NYT Magazine

Felix Salmon
Sep 10, 2009 19:45 UTC

Leon Wieseltier’s attack on the NYT magazine is doing the rounds of the Twitterverse today, which is understandable, since it’s always fun to watch a brutal smackdown. But the fact is that the smackdown is profoundly unfair, and that Wieseltier has picked a most peculiar target for his ire.

It’s worth remembering here that the NYT magazine is just that — a glossy magazine, produced so that the NYT has a venue suitable for the kind of expensive, high-production-value ads produced by fashion companies and the like. “I understand that The New York Times Magazine is not Mind“, Wieseltier writes, but really he doesn’t: indeed, he doesn’t seem to have grappled at all with the idea that different parts of the NYT have different sensibilities, and that the glossy magazine, by its nature, is going to be the most fashion-friendly, “Urban Modern” part of the paper.

Given that, Wieseltier should really be astonished by the depth of the magazine’s seriousness and ambition: the fact that it devoted an entire issue to the question of women’s rights, especially in the developing world; or the fact that it is regularly home to the most insightful and important financial journalism that the NYT produces, such as Joe Nocera’s investigation of value-at-risk or Paul Krugman’s 8,000-word essay on inequality.

Wieseltier might fancy himself above the mundane considerations of newspaper economics, but the editor of the NYT magazine cannot be. And every section of the NYT outside the daily news hole has to be able to pay for itself, and ideally cross-subsidize the central newsgathering operation. Wieseltier claims that there is “a mark of decadence” upon the magazine — well, yes, of course there is, glossy magazines are fundamentally decadent institutions. What’s impressive is that the NYT has taken this decadent institution and used it to commit great journalism. Good for them, and long may they continue to do so.


There’s someone who really shouldn’t be complaining about others favouring style over content.

Idea of the day: Replacing VaR with leverage ratios

Felix Salmon
Sep 10, 2009 19:21 UTC

For all that Rick Bookstaber has taken potshots at Nassim Taleb in the past, his testimony today in front of the House committee on science and technology ultimately ends up in pretty much the same place as Taleb’s does.

Here’s Taleb:

Leverage is a direct result of underestimation of the risks of extreme events –and the illusion that these risks are measurable. Someone more careful (or realistic) would issue equity. April 28, 2004 was a very sad day, when the SEC, at the instigation of the investment banks, initiated the abandonment of hard (i.e. robust) risk measures like leverage, in favor of more model-based probabilistic, and fragile, ones.

And here’s Bookstaber:

There are two approaches for moving away from over-reliance on VaR.   

The first approach is to employ coarser measures of risk, measures that have fewer assumptions and that are less dependent on the future looking like the past. The use of the Leverage Ratio mandated by U.S. regulators and championed by the FDIC is an example of such a measure. The leverage ratio does not overlay assumptions about the correlation or the volatility of the assets, and does not assume any mitigating effect from diversification, although it has its own limitations as a basis for capital adequacy.

Happily, I think they’re both likely to get what they want: the G20 seems determined to move to simple measures of capital adequacy, rather than the failed, complex measures which were embedded in Basel II. How long that will take, however, is unclear: bank regulation moves slowly at the best of times, and slower still when the changes are big.


Let the banks disclose as much data as the life insurance industry, and let them do the harder stress tests that valuation actuaries do. That would be a good start.

The depressing income and poverty data

Felix Salmon
Sep 10, 2009 16:03 UTC

There’s no good news in today’s data from the Census bureau. Unless you’re the kind of person who worries about inflation, that is: in that case you’re probably reassured that real median household income fell 3.6% between 2007 and 2008, from $52,163 to $50,303. That’s a drop of over $1,800: real money.

Naturally, the pain was concentrated in the poorer parts of the US: incomes in the South fell by 4.9% to $45,590, while incomes in the Northeast were unchanged at $54,346.

Oh, and the number of people in poverty increased by a whopping 2.5 million, to 39.8 million: 13.2% of the population, the highest poverty rate in over a decade. How poor do you need to be in order to be counted as living in poverty? Very poor:

As defined by the Office of Management and Budget and updated for inflation using the Consumer Price Index, the weighted average poverty threshold for a family of four in 2008 was $22,025; for a family of three, $17,163; for a family of two, $14,051; and for unrelated individuals, $10,991.

The poverty rate for children under the age of 18 is now an eye-popping 19%: basically one child in every five is living in poverty in the US. And even if a slow economic recovery is beginning to take hold, I can’t see that number declining much in the foreseeable future. Which is unconscionable, in the richest country in the world.

Update: Emily Monea and Isabel Sawhill of the Brookings Institution have a paper out which says that “the poverty rate will increase rapidly through 2011 or 2012, at which point about 14.4 percent of the country will be in poverty”, and that the number of children living in poverty could rise by 5 million, or 38%, to 18 million.

Update 2: David Leonhardt points out that real incomes fell over the course of the past decade, from $51,295 in 1998 to $50,303 in 2008:

In the four decades that the Census bureau has been tracking household income, there has never before been a full decade in which median income failed to rise. (The previous record was eight years, ending in 1986.) Other Census data suggest that it also never happened between the late 1940s and the late 1960s. So it doesn’t seem to have happened since at least the 1930s.


Milo, what on earth led you to believe that the poor are having more children than those of better economic stature? The number of children living in poverty is not an indication of increased breeding by the poor, but rather an indication of how poverty is spreading rapidly and now includes more and more families. Get your head out.

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When UBS sells crap and vomit

Felix Salmon
Sep 10, 2009 15:07 UTC

My colleague Matt Goldstein has got his hands on the judgment in the UBS vs Pursuit case which the WSJ writes about here. It’s a fun read, and I’ve uploaded it here. Neither of the parties to the case comes out smelling of roses: Pursuit seems to have completely missed the triggers in the CDOs despite two of its principals reading the offering memoranda, and as for UBS, well, the judge puts it very well:

The court takes UBS employees at their word when they referenced their Notes, these purported “investment grade” securities which they sold, as “crap” and “vomit”, for UBS alone possessed the knowledge of what their product, their inventory, was truly worth.

I’m not at all sure that Pursuit is going to win this case — this is just a prejudgment remedy asking UBS to put up $35 million in case it loses. The key to the case is insider knowledge on the part of UBS: it seems that senior UBS employees were in close contact with Moody’s and were informed that the CDOs in question were about to be downgraded. Since UBS knew that the notes would be wiped out in the event of a downgrade, they then went to great lengths to sell the CDOs before the downgrade happened.

The judge has thrown out most of the complaints that Pursuit made against UBS, leaving only one or two for UBS to defend; the bank, in turn, has said that it “is confident that it will prevail on the merits of the case”. But even it if does prevail, UBS has been revealed as being extremely sleazy at best. And it would be fair for anybody dealing with the UBS fixed-income desk to assume that they’re being ripped off, and treat any proffered paper with extreme prejudice.


Ginger, appreciate the clarification. I always enjoyed those “methodology changes” the rating agencies employed..it sounds better than “new method = CYA”

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What’s happened to Stuy-town rents?

Felix Salmon
Sep 10, 2009 13:39 UTC

When Tishman Speyer bought Stuyvesant Town and Peter Cooper Village for $5.4 billion in 2006, they knew that they couldn’t cover their mortgage payments with their rental income. But that was OK: they expected that rents would rise significantly as the housing market continued to rise and as rent-controlled tenants moved out.

Naturally, that never happened, and now they’re in trouble. As Bloomberg reported earlier this month, quoting an investor in the Stuy-town deal:

“Rents are not going up like they normally would, landlords are making concessions like free rent and people have not moved out at the rate anticipated,” said Williams, who came to the SBA after nine years as a managing director at Fir Tree Partners, a New York hedge fund.

Manhattan apartment rents fell as much as 10 percent in August from a year earlier, the Real Estate Group of New York said on Aug. 25.

All that I understand. And I understand too that there’s a big risk that the owners will have to refund a lot of previously-paid rent if they lose a lawsuit saying that they improperly deregulated 3,000 apartments. But they haven’t lost that lawsuit yet, and already their revenues, far from being even flat, seem to have fallen off a cliff:

Jerry I. and Rob Speyer and their partner, BlackRock Realty, who paid $5.4 billion for the quiet middle-class redoubt near the East River, have seen the property lose more than half of its value, and the income from rent — down 25 percent from its peak — covers less than half of their debt payments.

How on earth can rental income be down 25%? More than half the apartments are rent-regulated, and we know the income from those apartments hasn’t fallen. Meanwhile, the owners have been putting a lot of money into tarting up the complex and making it more attractive to yuppies, in an attempt to be able to raise market rents significantly. Even if those rents haven’t gone up, I can’t see how they could have fallen by a third, or whatever the number would need to be in order for total rental income to be down by a quarter. Something has gone spectacularly wrong here, and I’d love to know what it is.


There are a large number of vacant apartments within the complex. The transient first-time renters are not renewing their leases as StuyTown management has shown no flexibility on rentals rates for those wishing to renew upon expiration of current leases. Rather than enjoy the fruits of a continuing customer, apartments are being vacated and languishing empty. The complex has transformed itself from one of a stable community to a very transient one – the complex has become strewn with garbage and detritus of leaving tenants, dirtier (rats are commonly seen in public spaces such as the oval), louder, and not what was once a jewel of NYC. People cared about the community and their homes here in the past – the renters they are now trying to attract could care less.

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Late links, September 9

Felix Salmon
Sep 9, 2009 22:22 UTC

The Economist’s new CEO arrived in 2008 and said he wanted to triple profit in five years. Guess some media isn’t dying. (Campaign Live)

My BNN hit. Watch me say the word “screwing” on national TV! (BNN)

Kevin Drum nails it: killing overdraft fees doesn’t hurt banks, it just forces them to compete transparently. (Mother Jones)

Chase Carey, twirling his moustaches, cackles as he thinks of how he’ll talk the whole world into charging for content (Bloomberg)

IPOs are like weddings: overpriced ‘cos they only happen once. Therefore bankers make loads of money. (The Atlantic)

The worst lede in the history of sports journalism? (OC Register)

Okay, Who Is Behind This Recession 101 Campaign? (New York)

Tomorrow’s testimony from Jim Rickards (Basis Point)

The ICI opposes compulsory floating NAV on money-market funds. Fair enough, but it still ought to be more common. (ICI)

Has Steve Jobs gained any weight at all? (gdgt)

Chicago Sun-Times cuts non-union employees’ pay by 8% — or 11% if they make over $100K. (Windy Citizen)

Salon’s losses over its life are now $102M. That’s more than Portfolio! (BNET)

We’re Deleveraging! (YouTube)

A new museum exhibition strategy: one painting (Artnet)

How can James Patterson publish 17 books between now and 2012? (Publishers Weekly)

Love the way this story kicks off by quoting “the bridge’s Twitter feed” (NYT)

I like the idea of flipping a coin, after the meal, to see who pays the bill. (Economists Do It With Models)

Don’t steal bikes, bro! (Gothamist)

Does the placebo effect even exist? Or is it getting stronger? (NYT, Wired)

Simon Johnson reads between the lines of G20 communiques (Baseline Scenario)

It’s rare to find intelligent commentary on Google Books, so kudos to James Boyle, who’s smart and subtle. (FT)

Alexandra Jacobs goes deep inside Zappos, and lives to tell the tale (New Yorker)


I actually quoted a tweet in a research paper this semester. Needless to say, that one wasn’t in the Harvard Style Guide.

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Google gets into micropayments

Felix Salmon
Sep 9, 2009 21:50 UTC

Lots of people have tried to make micropayments work, and all of them have failed. But now Google’s dipping its toe in the water, and it’s just possible this one might work. I’m willing to give Google my credit card details, once, and I’m willing to log in to my Google account when I’m online. If it’s then easy for me just to click a button and say “charge this to my Google account”, I might be willing to do that.

On the other hand, I will still be extremely hesitant to link to anything which requires one pay money to read it. Google says that “‘open’ need not mean free”, but the fact is that in the link ecosystem they really do mean the same thing. If you want to start charging for content, be my guest. Just don’t expect to be an integral part of the conversation that the rest of us are having.


to be honest I can trust google with all my heart.