Felix Salmon

Ivory Coast’s complicated new bond

Felix Salmon
Sep 29, 2009 22:04 UTC

This is big news, in the world of sovereign debt restructuring: Ivory Coast, which defaulted on its Brady bonds in 2000, has come to a deal with the London Club of private creditors to restructure them.

The most striking thing for me, about the deal, is the fact that Ivory Coast was talking to the London Club at all. The London Club is a group of large commercial banks (Citibank, Barclays, SocGen, you get the picture) who lent billions of dollars to third-world countries in the 1970s and then saw it defaulted on in the 1980s. Eventually, with the help of the US Treasury, those loans were restructured into bonds, which were named after the Treasury secretary at the time, Nick Brady.

Ecuador was the first country to default on its Brady bonds, in 1999. Ivory Coast followed, as did Argentina. But when Ecuador and Argentina restructured their bonds, they didn’t go back to the London Club — they went to the bond market. The London Club is a place to go when a finite number of creditors hold loans; not when thousands of bondholders hold bonds. Or not until now, anyway.

A glance at the terms of the new Ivory Club bond screams “loan restructuring”. Bonds tend to be restructured into something simple: a plain-vanilla global bond, normally, with a set coupon and maturity date. By contrast, the new bond which Ivory Coast is issuing is horribly complex: it starts paying interest immediately, at 2.5%, which then steps up to 3.75% after two years, and to 5.75% another 18 months later. Then, once a six-year grace period os over, the principal of the new bond starts amortizing, according to an almost arbitrarily-complex schedule:

payments 1 to 2: 1%; payment 3: 1.5%; payments 4 to 6: 2%; payments 7 to 12: 2.5%; payments 13 to 22: 3%; payments 23 to 26: 3.5%; payments 27 to 28: 3.75%; and  payments 29 to 34: 4%.

This is the kind of repayment schedule only a commercial banker could love. When I covered the Brady market for a living, people used to joke that nobody really understood the structure of the Brazilian C bond, not that that stopped them from trading it. This isn’t quite that bad, but it still pretty much guarantees that trying to work out yield to maturity and the bond’s reinvestment risk is something you want to outsource to your Bloomberg and is not something you can have an intuitive feel for.

So why do it this way? Why did Ivory Coast negotiate at length with a bunch of bankers, rather than simply mandating Lazard to put a bond swap proposal together, which it could then present to the market? My guess is that the answer lies in the nature of Ivory Coast’s bondholders: it wouldn’t surprise me in the least to learn that the overwhelming majority of them are precisely the same banks which lent the country the original money in the first place. There might have been a Brady deal, but those Bradys didn’t really make it onto the open market: they just remained stuck on a small number of commercial-bank balance sheets. And they’ll probably stay there, too, even after this restructuring. You can turn a loan into bonds, but if those bonds rarely get traded and are held overwhelmingly by banks, it’ll still end up behaving just like a loan.


Ecuador was the first country to default on its Brady bonds, in 1999. Ivory Coast followed, as did Argentina. But when Ecuador and Argentina restructured their bonds, they didn’t go back to the London Club — they went to the bond market

… ecuador and argentina are out, they are barred from international financial market.

Posted by nounou | Report as abusive

Tying the Fed’s hands

Felix Salmon
Sep 29, 2009 19:23 UTC

Joe Stiglitz’s high-level UN report on regulatory reform says that sometimes regulators need to have their hands tied:

181. It is not enough to have good regulations; they have to be enforced. The failures in this crisis are not just a failure of regulation but of regulatory institutions that did not always effectively implement or enforce the regulations. In this crisis, the regulatory performance of many central banks has been far from stellar. They did not adequately enforce and implement the regulations at their disposal, and they did not alert governments to the need for additional regulatory authority or restructuring authority when existing authority was not adequate…

186. In light of this pressure, it may be necessary for part of the regulatory structure to be “hard wired,” limiting the discretion available to regulators and supervisors. Counter-cyclical provisioning and capital adequacy requirements of the kind discussed in previous sections should be rule-based, while adjustments to regulation due to evolution of financial practices and innovation will require monitoring and discretion in adjusting regulations as appropriate.

In other words, since regulators have a tendency to get captured, don’t let give them too much discretion — and any changes in regulatory oversight should be done explicitly, through changing regulations, rather than by nod-and-wink.

Interestingly, this is exactly the route chosen by the Obama administration to implement the Credit Card Act. Rather than simply impose new rules directly on credit card companies, the Act forces the Fed to impose those rules. Accordingly, the Fed today issued a formal proposal for implementing the rules which Congress has already mandated. Congress tells the Fed what to do, and then the Fed goes ahead and does it.

There’s a lot to be said for this kind of structure, which makes it much harder for regulators to quietly and unilaterally determine that, hey, why bother. But at the same time, it’s a lot easier to force the Fed’s hand in narrow and easily-defined areas like credit card regulation than it is in something as big and vague as systemic macroprudential risk management. Ultimately, macroprudential regulation can’t be rules-based: there has to be some other mechanism by which citizens can have justifiable faith in their regulators.


It might be time for people to reread this classic:

“Simons, Henry C. “Rules versus Authorities in Monetary Policy:’
Journal of Political Economy (February 1936), pp. 1—30.
Reprinted in Friedrich A. Lutz and Lloyd W. Mints, eds.,
Readings in Monetary Theory (Richard D. Irwin, Inc., 1951).”

Dangerous hybrid datapoint of the day

Felix Salmon
Sep 29, 2009 15:50 UTC

These tables come from a study organized by the National Highway Traffic Safety Administration, and they’re sobering: they show that hybrid electric vehicles (HEVs) are in some times twice as likely to be involved in pedestrian and bicyclist crashes as their internal combustion engine (ICE) counterparts.

The first table shows 1.2% of hybrids being involved in low-speed crashes with pedestrians, twice the rate of old-fashioned cars; the second table shows 0.6% of hybrids crashing with bicyclists, again twice the rate of noisier cars.



The reason, of course, is that the hybrids are so quiet: bikers and pedestrians use car noises to help them work out which cars are moving and which aren’t. That’s why hybrid manufacturers are now talking about adding vroomtones. Sounds like a good idea!

(HT: Voiland, via Weisenthal)


PS my email is yowza1@myway.com

Posted by Patrick Sullivan | Report as abusive

What’s happened to Nairu?

Felix Salmon
Sep 29, 2009 14:44 UTC

Rich Miller reported yesterday that a number of luminaries have diagnosed a significant upwards move in Nairu, the rate of unemployment below which inflation starts kicking in — or, to put it another way, the level of unemployment which the Fed should consider to constitute “full employment”. They include JP Morgan’s chief economist Bruce Kasman; Harvard’s Lawrence Katz; and Ned Phelps, who got his Nobel for looking at such things.

Against that, notes Miller, the Fed doesn’t seem to think that Nairu has increased at all.

One of the people Miller quotes as believing that Nairu has risen is Pimco CEO Mohamed El-Erian. I asked him for a bit more detail on his thinking, firstly on what causes changes in Nairu. He replied:

A number of factors are contributing to the increase in theNAIRU. They include:

First, lower labor mobility which, in part, is due to the poor state of the housing market where negative equity positions are hindering what has traditionally been a geographically flexible job hunting process.

Second, the elimination of activities that were facilitated by turbo-charged and unsustainable Wall Street credit factories. These activities that can no longer be supported in a de-levering and de-risking world.

Third, industries–such as autos, finance, and real estate–that are experiencing a major size reset after a period of over-expansion

Fourth, an erosion of skills as people are unemployed for longer

Fifth, the ongoing re-alignment of the global economy in the context of overall over-capacity

All this points to a worrisome picture for unemployment. High rates of unemployment will persist for longer; and the reversion will be to a higher NAIRU. As I noted in today’s FT column, this has implications for the sustainability of the growth recovery, the robustness of social safety nets and other aspects of the social contract, and the mobilization of political support for longer-term structural reforms.

El-Erian also confirmed for me that he reckons a 7% Nairu “sounds reasonable” — well above the 4.8%-5% that the Fed seems to be using.

Determinations of Nairu are always more of an art than a science, but it does seem reasonable to assume that the reasons El-Erian outlines would bring it up. In turn, that’s going to raise problems for right-leaning economists and politicians, who are going to find it harder to extol the abilities of the free market to find employment for all, and thereby dismiss claims that we need to provide a robust social safety net for the millions of Americans who can’t find jobs.


Possible increase in NAIRU and ‘problems for right-leaning economists and politicians.’ Huh? Is the NAIRU concept part of the ‘vast right-wing conspiracy’?

Posted by Philip Rothman | Report as abusive

Felix Salmon smackdown watch

Felix Salmon
Sep 29, 2009 13:53 UTC

Matthew DeBord takes aim and fires:

Salmon also makes it sound as if the average American eats primarily at off-the-freeway fast-food joints in between trips to the supermarket to fill their car with huge amounts of groceries. They nourish themselves by “absent-mindedly shovelling down an unknown quantity of something random while watching the TV.”…

Oy! Talk about an east-of-the-Hudson River, blinkered mindset. There are plenty of cities in the U.S.—and the rest of the world—where the urban concentration isn’t that dense, people own cars…and remain thin while eating both restaurant cuisine and keeping the pantry stocked, preparing delicious, unfattening meals at home. That’s right, they have restaurants! And they don’t eat their ice cream by the gallon while watching Survivor! Some of them even use their cars to transport their bikes to the (beach, mountains) to ride them for…miles and miles! Or they drive someplace rugged and scenic to take a hike. Or they take frequent walks while also owning a car!

No argument at all, DeBord is right. An active lifestyle on the outskirts of somewhere like Boulder or Portland or San Diego trumps a relatively sedentary life of pork-and-butter-heavy NYC expense-account dinners any day.

On the other hand, if you’re an overweight suburbanite there’s a good chance that you don’t live an active lifestyle. And for the large number of people without the “personal discipline” that DeBord writes about, ceteris paribus they’re likely to be thinner if they live in an urban center. Although buying a bike and heading for the local foothills on a regular basis would be cheaper, more convenient, and more effective.


Oy! DeBord is boring and misunderstood, he missed the point completely.

Posted by Paul | Report as abusive


Felix Salmon
Sep 29, 2009 02:43 UTC

Das: “self-regulation bears the same relationship to regulation that self importance does to importance” — Kedrosky

“You can quickly see why deer would do well to exit West Virginia and move, say, to Hawaii” — Kedrosky

Allen Stanford, prison brawler — Business Insider

That Zoellick speech in full — World Bank

James Wagner vs the New Museum. The blockish thing on the Bowery does not come out well — JW

Some very good points about the limitations of the Kindle in an academic setting — Princetonian

“China isn’t conquering Russia, it’s just leasing it.” — TED

“Outlets who gag social media are unilaterally disarming in the war for reader attention.” — Carr

“Mr. Murdoch, meet price elasticity”: People don’t like subscriptions going up 50% without any warning or notification.– ZDNet


Can you list TED as in ‘Technology, Entertainment, Design’ and TED ‘The Epicurean Dealmaker’ in a manner that would uniquely identify them?

I propose The ED and TED.

Posted by zach | Report as abusive

A quick note on notional derivatives exposure

Felix Salmon
Sep 29, 2009 02:34 UTC

Vincent Fernando has a blog entry today headlined “It’s Time To Stop Being Scared By Derivatives’ Trillion Dollar Notional Values”. Which is a bit like saying “It’s Time To Stop Being Scared By The $6 Billion Budget Deficit”: both of them are off by a factor of 200 or more.

A decade ago, when notional derivatives exposure started being measured in the trillions, bankers started wheeling out all of Fernando’s arguments in an attempt to reassure the public that there really wasn’t all that much risk here. And if those exposures were still only a trillion or two, I might not be all that worried either. But the likes of Fernando don’t seem to understand that when the notional exposure increases by more than two orders of magnitude, whole new systemic risks can come into play.

US banks made $15 billion trading derivatives in the first half of this year. That’s real money, by anybody’s lights. And nobody believes that you can make $15 billion in the space of six months without running any risk. Indeed, as we’ve learned the hard way, in financial markets the downside tends to dwarf the upside. If US banks can stand to make $15 billion in six months, how much can they stand to lose in the same amount of time? And who would pick up the bill if that happened?

I’m no naif when it comes to deriviatives; indeed, I’ve been on the other side of this argument, explaining how it’s possible for notional exposure to increase without net exposure increasing. But I do get the feeling that far too many people unthinkingly accept that just because such a thing is possible, it must perforce be happening. Even as the revenue figures tell a very different story. (And yes, the credit-exposure figures are falling, but that’s largely a function of the declining notional quantities in the CDS market, which makes up a very small proportion of the total derivatives market.)


I suspect most of the banks’ income from derivatives has been commission or fees on trades between two separate parties, not their profit as a principal in the deal. Do we have any breakdown?

If this is the case, then it’s quite reasonable for the banks to make a profit in return for intermediating a deal between willing buyers and sellers of these derivatives. What’s more, it does not necessarily mean the banks are running any material risks – it is likely to be a simple function of supply and demand. There is very limited supply in the banking sector due to high barriers to entry, so they can charge a high price without taking much risk.

Yes, the high notional derivative figure does indicate the potential for major disruption if things go wrong and a few parties are stuck on the wrong side of a multi-trillion liability (or asset!). But it doesn’t necessarily mean the banks are the ones taking that risk. I suspect the banks are relatively risk-averse right now because they can make decent returns without having to take much risk.

Overpaid philanthropists

Felix Salmon
Sep 28, 2009 20:26 UTC

One of the Philanthrocapitalists (I believe it’s Michael Green, unless Matthew Bishop is prone to referring to himself in the third person) attempts a defense today of the $1 million salary being paid by the Gates Foundation to its new CEO, Jeff Raikes. It’s pretty weak stuff:

A cheap bad leader is much worse than a well-paid good one. Better pay could, with care, attract better leaders to the non-profit sector and enable valuable donations to be better used.

Well, yes, and a well-paid bad leader is much worse than a cheap good one. Is there any indication at all that increasing the pay of non-profit leaders increases their performance? I doubt it. (How well-run is MSF? How well does it pay its executives? Now, how about the Getty Foundation?) Unless and until such evidence emerges, this sort of thing rings hollow:

According to the sources quoted by the Chronicle, Raikes did not even want a salary (his predecessor and fellow Microsoft veteran Patti Stonesifer took no money) but the Foundation decided that paying the CEO was a point of principle.

Does Gates really think that Raikes will perform better now that he’s being paid a seven-figure salary? I very much doubt it. Instead, the salary just serves to underline Raikes’s position as a mere employee. As our blogger notes, the guy in charge is Gates, not Raikes, and the CEO position is clearly subservient to that of billg. If Raikes were working for free, he would surely feel more ownership of the Foundation than if all of his actions are bought and paid for.

What’s more, at a million bucks a year, Gates could have hired pretty much anybody he liked. If he wanted to demonstrate that the job would go to the best-qualified person, he could have found someone who was highly qualified, had a lot of leadership experience in the non-profit sector, and who wasn’t independently wealthy. Instead, he’s giving $1 million a year to a centimillionaire who doesn’t need the money and who joined Microsoft in 1981.

Why would he do that, beyond control issues? Bishop suggests that maybe he wanted to raise salaries all round — but it’s silly and anachronistic to assume that the CEO must always be the highest-paid person in any organization.

Bill Gates can and will, of course, pay anybody he likes however much money he likes. It’s his foundation. But let’s not turn his foibles into some kind of principled stand.


Bill Gates is rich
, Bill Gates can and will, of course, pay anybody he likes however much money he likes. It’s his foundation. But let’s not turn his foibles into some kind of principled stand. http://www.mp3tom4r.net

Posted by evernn | Report as abusive

Why the Fed can’t protect consumers

Felix Salmon
Sep 28, 2009 15:52 UTC

Why did the Fed refuse to police predatory subprime borrowers, as detailed in Binyamin Appelbaum’s wonderful WaPo story? Well, you could start by asking Alan Greenspan:

Alan Greenspan, then chairman of the Fed, recalled that Gramlich broached the subject at a private meeting in 2000. Greenspan said that he disagreed with Gramlich, telling him that such inspections would require a vast effort with no certainty of results, and that the Fed’s involvement might give borrowers a false sense of security.

In hindsight, both of these reasons are ludicrous. Policework, by its very nature, involves a lot of effort and no certainty of results. That doesn’t mean there shouldn’t be any policing. And did Greenspan honestly believe that subprime borrowers were that much more cautious when entering into mortgages because they knew that the Fed wasn’t policing the lenders?

In reality, of course, Greenspan was simply casting about for a reason — any reason — to indulge his deregulatory instincts.

This is why we need a Consumer Financial Protection Agency working in conjunction with the macroprudential regulator: the Fed simply isn’t good at consumer protection. And, pace Zoellick, Treasury wouldn’t be much better.


Even the “automatic” stuff depends on regulators — you need people to audit and make sure that companies are reporting accurately; you need other regulators to make sure that the things required of different “automatic” classes of company are in fact happening. Otherwise it’s a whole lot of sailboat fuel.

The question (as usual) is how you align the interests of the regulators with those of the public, or at least with the continuing existence of well-enforced regulation. Only way I can see is putting a whole lot of friction in the revolving door. This requires increasing compensation in the public sector and reducing it in the private, or perhaps something drastic like letting public employees in on qui tam suits…