Felix Salmon

Derivatives datapoint of the day

Felix Salmon
Sep 28, 2009 14:34 UTC

Here’s a little table I put together with numbers from the OCC — page 9 of this pdf. Using second-quarter numbers for each year, I looked at the total nominal derivatives exposure of end users — the people for whom derivatives are meant to exist — and for dealers.

The results are pretty startling: while end-users have pared their derivatives exposure to a seven-year low, dealers have increased theirs to yet another all-time high. And as the OCC notes, when we say “dealers”, we really mean four banks in particular: JP Morgan Chase, Goldman Sachs, Bank of America, and Citibank.

Oh, and did I mention? The amounts here are in trillions.

Year End Users Dealers Ratio
2003 2.6 62.4 24.0
2004 2.5 76.9 30.8
2005 2.5 96.2 38.5
2006 2.6 110.1 42.3
2007 2.6 138.1 53.1
2008 2.8 163.9 58.5
2009 2.4 187.6 78.2

What has happened in recent years that derivatives dealers now need $78 in nominal derivatives exposure for every $1 in end-user exposure? When Adair Turner talks about “profitable activities so unlikely to have a social benefit, direct or indirect, that [banks] should voluntarily walk away from them”, this is surely a prime example of what he has in mind.

When the OCC tells us that total derivative notionals are now above $200 trillion, we can’t really help but go blank: the number is so many orders of magnitude divorced from any conceivable reality that it’s almost impossible to work out what it could possibly mean. But clearly that kind of exposure wasn’t necessary a few years ago. So why is it now?


The word ‘nominal’ is used for a reason. It does not — repeat not — represent the amount anybody owes anybody else. What is owed is a small fraction of that amount.


Felix Salmon
Sep 28, 2009 05:58 UTC

Is Nordstrom paying “a healthy $4.2 million a month” in rent for its Union Square store? No. Per year, maybe. — NY Mag

Alan Grayson tries to eat the Fed’s general counsel for breakfast. The GC doesn’t seem to enjoy it. — Taibblog

This Picabia is one of the two paintings Ed Ruscha would most like to own. — FT

Meg Whitman: Rich, not smart? — AdAge

Google Maps pixelation art — Greg.org

Bank of America is “unable” to say whether it destroyed Countrywide phone recordings. Pathetic. — WSJ

Fed staffers Glenn Loney, Michael Collins, Joan Cronin, John Yorke: What were you thinking? Rorty’s on your case — Rortybomb

If pro sports teams can employ their own announcers, I see no problem with them hiring their own journalists. — NYT

“Essentially, the slut list is the Goldman Sachs daughters list… It’s a celebration of machismo, but for girls only.” — NYT

Why would anybody bring their own shovel to a groundbreaking so they could crash the official photo? — Statesman

Ivanka Trump has written a “self-help memoir”. Of course. — Trump

Zubin Jelveh posts Hyun Shin’s great chart showing Wall Street’s growth post-1980 “like a big tumor” — TNR

The NYT’s very good Safire obit — NYT

Dan Bull’s open letter to Lily Allen, in song form — YouTube

Allen Stanford’s wife sues her divorce lawyer for $200 million — Stanford Watch

The WaPo Twitter/FB guidelines are unrelentingly negative. It’s clear editors would be happier with no use at all — PaidContent

Stop imposing bikers on the pedestrian part of the Brooklyn Bridge. Put them on the road instead, in a protected bike lane! — NYT

“Although some White Zin drinkers suffer from arrested development and never move beyond it, I am persuaded many do.” — Wine Economist

Judge Orders Google To Deactivate User’s Gmail Account. Scary. — MediaPost

The best bit of this idiotic Tyler Brule column? The links to 9 different social-networking sites at the bottom. — FT

It’s amazing how a few strategic bleeps can spice up an advertisement — FakeSteve

After Kennedy obit appeared on WSJ.com, editors inserted Limbaugh slam in print version. — Hillman Foundation

Park Slope repels Westboro bigots with spontaneous hora dancing and shofar blasts — F’ed in Park Slope

Katie Couric asks Glenn Beck to define “white culture” and refuses to let go — YouTube

Arrrg! Pirates seize a wall near you — WalletPop


the piece on Meg Whitman was very good, she is a poser wannabe fraud who was in the right place at the right time and her biggest accomplishment was not totally screwing things up. We need more of those exposes on her and her twin loser, Carly Fiorina, both of whom believe their fame will prevent California voters from discovering their incompetence.

Brule’s FT column may have been strange, but the gist of it was on target: twitter is largely unnecessary. It’s unfortunate their latest capital infusion was from private funds; if they were were publicly traded, then I could short them.

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Zero Hedge subsumes Equity Private

Felix Salmon
Sep 28, 2009 04:49 UTC

Buried in Joe Hagan’s 5,500-word profile of Zero Hedge is the news (at least to me) that it’s the latest home of Equity Private, a/k/a Finem Respice. She started posting at Zero Hedge under the pseudonym “Marla Singer” in May, and even brought her radio show over there (she moonlights as a DJ). Now, however, she has been subsumed into the Borg:

“Tyler Durden isn’t one person,” she said, but up to 40 different people allowed to post under that name. “We are all Tyler Durden,” Singer claimed.

I don’t see the point, frankly. I’ve been following EP for a pretty long time now, and if I knew which ZH posts were hers, I’d place much more weight in them. That’s what I meant when I said that ZH should be disaggregated. But at least now I understand why it seemed as though she hadn’t posted since July 12 — she just moved over to ZH.


GaryD, I’m on the record as disliking intensely the Economist’s culture of anonymity. What makes you think I’m not? I’d love it were the Economist disaggregated.

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How to compensate consumers under carbon pricing

Felix Salmon
Sep 28, 2009 02:18 UTC

Greg Mankiw, when it comes to cap-and-trade, is more or less on the side of the angels: he’s quite right that permits should be auctioned rather than given away to polluters. But is the tax code really the best way to compensate consumers for the higher energy prices they’re going to end up paying? Mankiw writes:

From the standpoint of economic efficiency, the price of carbon emissions should be passed on to consumers in the form of higher energy prices, so that consumers can make optimal decisions regarding energy consumption. Consumers should be compensated for paying these higher prices via cuts in income or payroll taxes. Those tax cuts would be financed by the revenues received from the auctioning of carbon rights (or, better yet, a carbon tax).

The first sentence is right, it’s the second I take issue with. If you cut income or payroll taxes, you end up giving more benefit to high earners than to low earners, and people who pay little or no taxes at all (eg the unemployed) get precious little benefit at all.

Better would be a flat refundable tax credit: the government essentially gives every taxpayer a flat amount each year, passing on the revenues it gets from the carbon auction.

Even that, however, would create inequities: three college roommates sharing a small city apartment would get three times the amount going to a single mother trying to raise three kids in the countryside — someone whose energy consumption would naturally be much higher.

There isn’t a simple and fair way of doing things — even channeling fixed payments through the energy companies themselves would unfairly advantage people who use say electricity and natural gas and heating oil. Instead, I fear that the fair method is going to be complicated, based on ZIP codes and size of household at the very least.

But the compensation should certainly be capped at no more than the average energy bill for the area. If people use less energy than the average, then it’s fine for them to profit from that. But there’s no reason to use a carbon-pricing mechanism to give high earners yet another tax break.


The dividend check is the way to go. And the tax on gasoline wouldn’t be $3 per gallon, closer to $0.10 per gallon. Carbon neutral just isn’t that expensive. See this study in New Scientist on affordability.
http://www.newscientist.com/article/mg20 427373.400-lowcarbon-future-we-can-affor d-to-go-green.html

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Zoellick’s excerpts

Felix Salmon
Sep 27, 2009 23:25 UTC

Bob Zoellick will say in a speech tomorrow that central banks have proved that they can’t be trusted with regulatory authority, and that in the US Treasury, rather than the Fed, should be the main risk regulator.

It’s an interesting idea, and I’d love to read his argument; weirdly, however, the World Bank has released only excerpts from the speech, rather than the speech itself.

I can understand why the Bank might not want to release the speech until after it’s been delivered. But in that case, why release the excerpts now? It smacks of trying to artificially manipulate the news cycle in a manner unbecoming to a major multilateral institution. On the other hand, Zoellick clearly doesn’t think the Bank’s present form is sustainable:

Bretton Woods is being overhauled before our eyes. This time, it will take longer than three weeks in New Hampshire. It will have more participants. But it is just as necessary. The next upheaval, whatever it may be, is taking form now. Shape it or be shaped by it.

Maybe trying to manipulate news coverage is part of Zoellick’s attempt to shape the new World Bank?


On the other hand, most elected officials shouldn’t have any impact on regulation either. What to do, what to do?

Prepaying mortgages

Felix Salmon
Sep 27, 2009 17:54 UTC

Mike Konczal says that all mortgages should be prepayable without penalty. He’s right — but in fact he doesn’t go far enough. As Tyler Cowen notes, it would be even better if mortgages could be prepaid at a discount when mortgage rates rise — or property prices fall.

The result would be a sharp rise in mortgage prepayments: you’d repay when mortgage rates rise, by repurchasing your mortgage at a discount, and you’d repay when mortgage rates fall, by refinancing. Mortgage rates in general might have to go up somewhat in order to make up for all this new prepayment risk, but to offset that there would be significantly less default risk. And right now, when mortgage rates are low, is a good time to implement something like this: the damage you cause to a bank when you prepay a low-rate mortgage is very limited.

It’s true that prepaying at a discount doesn’t work as easily in the heterogeneous US as it does in the more homogenous Denmark, but there are ways around that; at the very least, homeowners should be given the opportunity to offset their mortgage liabilities in the broader capital markets. There’s got to be some way of doing that, and I’m not talking about zero-sum games like Bob Shiller’s housing futures.


I am in no position to repay my mortgage, but if l was l would not want to be penalized for it

The urban diet

Felix Salmon
Sep 27, 2009 17:24 UTC

James Fallows has a correspondent who drives a lot, and is overweight, and who writes:

Car culture is terrible for public health. Again, I’m significantly overweight. Always trying new exercise and diet programs that never result in sustained weight loss. What has? Spent two months in London without car, relying on public transit and walking, no attempt at dieting or exercising. Weight loss: 22 lbs. Six weeks in NYC without car, relying on public transit and walking, no attempt… Weight loss: 19 lbs.

In general, the urban no-car diet is a very good one, and not just because you’re getting incidental exercise from walking more than you otherwise might. If you don’t have a car, you generally have much less food at home, because you don’t have access to “free” transportation in which you can transport hundreds of dollars’ worth of food from your local supermarket and deposit it in a monster-size refrigerator.

Dense urban centers also tend to offer much more expensive dining options. Sure, you can find fast food if you want it. But the fast food is surrounded by restaurants you actually want to go to, and since they’re just as convenient, you don’t have the “no choice” excuse that you have when you stop off next to the freeway. So you gravitate to the more expensive (and generally intrinsically healthier) options. And as any economist will tell you, the amount you consume goes down as the price goes up.

More generally, living car-free in a dense urban environment forces you to spend effort and money on eating, which makes you appreciate food more, rather than absent-mindedly shovelling down an unknown quantity of something random while watching the TV. Which makes me wonder: could even suburban people with cars lose a significant amount of weight simply by getting rid of their televisions?


The point is right, without a car you will be forced to travel a lot in your feet and loose weight and build muscle fast so less fat more muscle

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Why the vanilla option is necessary

Felix Salmon
Sep 27, 2009 06:30 UTC

Welcome back Steve! That’s not me welcoming Steve Waldman back to the blogosphere, it’s me urging you to go and welcome him back by reading his latest blog entry, on the end of the vanilla option. It’s magnificent stuff:

Extracting the vanilla from the CFPA is not, as Felix Salmon put it “the beginning of the end of meaningful regulatory reform”. It is the end of the end. Vanilla products were the only part of the CFPA proposal that was likely to stay effective for more than a brief period, that would be resistant to the games banks play…

Rather than being anti-market, vanilla financial products would help correct very clear market failures that arise from imperfect information and high search costs. It is the status quo that is anti-market.

I’m sympathetic to the principled libertarian objection to having the government require private parties to offer a product they otherwise might not. No one should be forced to offer vanilla financial products. Small-enough-to-fail boutiques should be free to offer only the products they wish. However, if an institution wishes to avail itself of government-provided deposit insurance or to access Fed borrowing facilities, it is perfectly legitimate for the government to set requirements. The government can choose not to offer its safety net to institutions that don’t offer vanilla products, just as banks currently choose not to offer me a credit card unless I sign up to binding arbitration and unilateral contract changes. I fail to see why one is coercive and the other not.

As they say, go read the whole thing. And then call up Barney Frank and ask him to read it, too. It’s not too late for him to change his mind!


I just blogged a response: http://alyssakatz.com/blog/vanilla-fudge .html

Losing the plain vanilla mandate sucks deeply, but the really important battle regardless is what will happen to secondary market regulation. Fannie and Freddie and their regulators made plain vanilla the standard for decades – CRA activists in the 1980s actually used “plain vanilla” as an epithet, describing how the GSEs’ strict underwriting standards for this mortgages excluded minority/urban borrowers. The question now is how to best to reward and regulate plain vanilla on the secondary market level.

Playing chess with bankruptcy

Felix Salmon
Sep 27, 2009 06:05 UTC

Threatening to file for bankruptcy is a good way to get the attention of your lenders — it makes them that much more likely to agree to restructure your debts, just because bankruptcies are expensive, time-consuming, and unpredictable things. But how much money do you need to owe before your lenders will take you that seriously? In Kent Swig’s case, the number seems to be $28 million:

Developer Kent Swig is close to filing personal bankruptcy because he can’t afford to pay a recent $28 million judgment on his defaulted Sheffield57 condo conversion project in Midtown.

“We are exploring all options,” one of Swig’s advisers told The Post. “No one wants to do it but it’s certainly a play on the chessboard that we are considering at this time.”

I think most people are likely to be a little disgusted, when reading such a quote, that an extremely wealthy man like Kent Swig would cavalierly consider bankruptcy to be little more than “a play on the chessboard”. How come he gets to play chess with bankruptcy filings, when for the rest of us such a filing is ruinous in many ways? It’s just another way that the rich are different from you and me — and it reinforces my belief in some kind of wealth tax.


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