Felix Salmon

No one seems to be a fan of the trial balloon which went up on Tuesday, suggesting that the FDIC borrow money from “healthy” banks. No one, that is, except for Jamie Dimon, who jokingly told Sheila Bair at the Clinton Global Initiative this morning that he thought she was a good a credit and that he would probably be willing to lend her some money if she needed it.

What’s becoming increasingly clear, though, is that the point of the idea is to capitulate to the banking system generally, by multiplying the alternatives to the first-best solution — a simple FDIC special assessment on the banks. The banks probably wouldn’t mind very much if the FDIC tapped its line of credit at Treasury instead of borrowing from JP Morgan and others. What they would mind is taking a direct hit to their equity and capitalization ratios by having to pay unrefundable cash to the FDIC.

Here’s Taunter:

The plan, to put it in plain language, makes no sense.

Why would the FDIC borrow at all? The FDIC – the Federal Deposit Insurance Corporation – is funded by a levy charged to all banks. When the insurance fund runs low, the banks have a supplemental levy. It is the banks’ obligation to keep the FDIC fund topped up.

And here’s Jonathan Weil:

The question Bair posed should be a no-brainer. Borrowing taxpayer money to bail out the FDIC should be an option of last resort reserved for unforeseen emergencies.

Borrowing from banks instead of Treasury, of course, is just as bad, or possibly even worse, since it only serves to take an explicit loan, on which Treasury receives interest, and replace it with an implicit government guarantee, for which Treasury doesn’t get paid at all.

At the moment, the banks are happily sitting on artificially inflated capital ratios, a function of the fact that they never had to pay much money into the FDIC insurance fund and the fact that the FDIC is seemingly reluctant to ask them to pay, today, the real and present cost of its multiple bailouts. Rather than address the issue straight on, the FDIC is trying to come up with clever financial solutions which only really serve to kick the problem down the road. Unfortunately, given that the FDIC seems to be on exactly the same page as the banks it nominally regulates, there’s very little chance that the correct answer to the question — a special assessment — will happen.

The latest chapter in the Brandeis fiasco is that president Jehuda Reinharz is resigning, just one year after signing a new five-year employment contract. The official letters don’t once mention the name “Rose”, which is insane: how can Reinharz say with a straight face that he “will leave the University in good condition with a strong foundation on which to build in the future”, even as there’s still enormous uncertainty over the question of whether the university will have to sell millions of dollars from the Rose’s art museum just to make up its funding shortfall?

Reinharz explicitly denied, in an interview with the Brandeis Hoot, that his decision had anything to do with the Rose — while admitting that PR surrounding his resignation would be handled by the same crisis-management firm that was hired after the Rose news broke and the university’s own communications officers utterly botched the way they dealt with the announcement. There’s certainly nothing in Reinharz’s stated reasons for his resignation (“It is now time for me to enter the next chapter of my professional life”) which explains what has changed since a year ago, when Reinharz signed his five-year contract.

With any luck a new president will be found soon, who has no personal association with the decision to close the Rose — and who might be able to better cope with the attention now being paid to that beleaguered museum.

Indiviglio defends securitization by saying it should have been done right, in which case it would never have taken off — Atlantic

Konczal’s requiem for the vanilla option — Rortybomb

37signals is now a $100 billion company, after investors bought 0.000000001% of the company for $1. Genius! — 37signals

The flack-to-hack ratio rises above 2 — BusinessWeek

This is the most amazing map of NYC I’ve ever played with — Oasis

Is this the greatest headline ever? — Twitpic

In the wake of my blog entry last month saying that people shouldn’t invest in microfinance, I had the opportunity to meet yesterday with Premal Shah, the president of Kiva. Kiva is an interesting case, and I don’t consider Kiva’s lenders to be microfinance investors — not least because they get no interest on their money. The best-case scenario is that they’re paid back what they lend, and the worst-case is that they lose it all. That’s not much of an investment.

With Kiva, the interest is more literal — they take a real interest in the individuals to whom they’re lending. That’s why Kiva loans are structured as loans to individual borrowers, rather than as loans to the local microlenders. Lending to microlenders is the way that most microfinance finance is structured, and it’s the logical way of doing things. But there’s less human-as-opposed-to-financial interest there. At Kiva, says Premal, “What makes it all work is the story engine.”

Premal says that when visitors to kiva.org lend money, the rate of return they’re looking at is social impact, rather than anything financial. That makes sense. And indeed they have a much greater risk appetite than most socially responsible investors: they’re reasonably happy to take modest losses, especially when it’s a result of circumstances outside the borrower’s control, such as exchange controls imposed by the government in question.

Given the fact that Kiva has a greater risk appetite than most investors, it tends to work at the riskiest end of the microfinance spectrum — places like Iraq and Liberia. That’s pretty cool. But it does share a couple of structural problems with the world of microfinance investors more generally. The first is that there’s too many dollars and too few microlenders: what’s really needed is not more money, but more people in rural areas willing and able to lend it.

The second problem is the way in which much microfinance investment is at heart a gussied-up carry trade: investors fund in dollars and then lend out, at very high nominal interest rates, in foreign currencies. Kiva has started to address this problem with an opt-in scheme whereby lenders take FX risk after the first 20% of local-currency devaluation, thereby preventing microlenders from having to pay back, in local-currency terms, much more than they borrowed. It’s a start, but I don’t like the way that microlenders have to opt in: it should rather be opt-out, since the scheme is free. The microlenders who opt out will have privileged access to the minority of Kiva users who don’t want to take any currency risk, but those users shouldn’t really be lending money to foreign-currency borrowers in the first place.

My feeling is that where Kiva works best is in giving ordinary Americans a real connection to policies and people in far-flung countries; it’s also probably the best way in which microfinance lenders can take advantage of dollar-denominated funding. That said, such microlenders should always look for grants before loans, and for local-currency funding before anything in dollars. So Kiva, while not necessarily a last resort, should maybe be the second-to-last place they look for capital.

Update: I’ve realized this was pretty unclear in that I use the term “lenders” to refer both to the Kiva visitors, lending in dollars, and to the local microlenders, lending in local currency. So I’ve changed all the “lenders” to “microlenders” where appropriate. Of course the Kiva visitors can be considered microlenders themselves, but that just gets confusing.

Paul Volcker, in his testimony today, talks at some length about the necessity that the government has a new form of resolution authority:

I also believe an approach proposed by the Administration and others should be supported. The basic concept is to provide a new “resolution regime” for insolvent or failing non-bank institutions of potential systemic importance.

The problem here is the “non-bank” part of Volcker’s proposal. Since he explicitly excludes “banking and insurance organizations already subject to substantial official regulation”, it’s not obvious how many companies would be covered by this proposal — GE? Citadel? One or two others, tops?

The real question, which Volcker ducks in his testimony, is the government’s willingness and ability to use its existing regulatory powers to force some kind of debt-for-equity conversion at banks. You can’t use the bankruptcy regime for this, because banks can’t declare bankruptcy without failing: as Jesse Eisinger pointed out to me in an IM conversation, bankruptcy is cashflow positive for most companies, but it’s cashflow negative for a bank.

It would have been great if the government could simply have forced some kind of debt-for-equity conversion at Citi and Lehman and AIG, perhaps combined with some kind of governmental liquidity support. Yes, there would have been a nasty ding to the credit markets, especially since many bondholders aren’t allowed to hold equity. But the financial system would have been put on a much more sustainable footing going forwards, and the choas of Lehman’s bankruptcy might well have been avoided.

So yes, I’m all in favor of a new resolution regime. But let’s get serious about applying it to banks before worrying about whether we should apply it to a handful of systemically-important non-banks as well.

(Related: John Gapper on the Volcker testimony. Recommended.)

As Stacy-Marie Ishmael says, “there has been an outbreak of contrarian thinking on the links between ratings, securitisation and the mortgage market” of late. She points to a paper by Ronel Elul, while Zubin Jelveh, who has been following the contrarian line for a while now, picks up on a different paper by Ryan Bubb and Alex Kaufman.

But the fact is that none of these findings are all that powerful. Elul, for instance, essentially confirms that securitization causes a decline in performance: “a typical prime ARM loan originated in 2006 becomes delinquent at a 20 percent higher rate if it is privately securitized,” he writes, and the fact that a similar pattern can’t be seen in subprime loans is basically just a function of the fact that “very few subprime loans were actually held in portfolio” — substantially all of them were destined for the securitization machine.

As for the Bubb-Kaufman paper, the chart that Jelveh picks up on shows a good 90% of subprime mortgages getting securitized. Can that really suggest, as Jelveh says, that securitization might not be to blame for the decline in lending standards? If lending standards dropped at the same time as the securitization rate soared, I’d say there’s a strong correlation between the two, and a pretty good prima facie case for a causal relationship too.

At heart, it all comes down to information: loans are stronger and more desirable than bonds, because a bank intends to hold its loan to maturity and does a lot of underwriting, shoring it up with covenants. Bonds, by contrast, are often held only briefly, and are often bought by investors who do precious little fundamental analysis; what’s more, they simply don’t have the kind of granular information that bank lenders have. And securitizations are even worse than bonds — no one really knows what’s in them, and they’re ultimately based more on models than on shoe-leather underwriting. So it’s entirely predictable that the boom in mortgage securitization was bad for the overall quality of the debt. And attempts to show otherwise are ultimately doomed.

David Enrich says that Citi is retrenching its consumer operations in the US:

Executives at the New York company plan to narrow the focus of Citigroup’s U.S. branch network to six major metropolitan areas, according to people familiar with the situation. Citigroup also will limit its overall consumer lending in the U.S. primarily to credit cards and “jumbo” mortgages, while catering largely to affluent customers.

This makes a great deal of sense: even now Citigroup has many fewer branches than the likes of PNC and BB&T, and with the collapse of the ill-fated Wachovia acquisition, its dreams of becoming a retail powerhouse in the US are clearly dead. Citi was never very good at old-fashioned branch banking, and it should indeed play to its strengths rather than trying to be all things to all people.

Citi’s main strength, globally, is banking the affluent, largely through its extremely strong Citigold brand. The cities it’s concentrating on — New York, Washington, Miami, Chicago, San Francisco, and LA — are the main global cities in America, the ones that Citi’s international client base is most likely to visit. Philadelphia and Dallas, though lovely places, aren’t global in that sense, and if Citi has less than 1% of the deposit base in such cities anyway, it’s easy to see how it could make the decision to sell those branches to a strong local franchise. (It probably won’t, though: Citi sources tell my colleague Matt Goldstein that although the bank will indeed concentrate on the big six cities, it’s not going to leave Philly, Dallas, Houston, or Boston.)

I’m sure it’s unrelated to the WSJ story, but last night I got an email from the branch manager of my Citibank branch, the one at 120 Broadway in lower Manhattan; the subject line was “Our commitment to New York starts here.” She included her phone number, so I gave her a ring, and she gave me some astonishing numbers. That one branch alone, which includes all the accounts which used to be held at the World Trade Center branch, has over 30,000 customers, and a deposit base of — get this – over $1.5 billion. (That’s 75 times the size of my local credit union.) Its customers are a very diverse and international group of people, and, with an average of about $50,000 on deposit apiece, are clearly pretty well off.

That kind of customer base is clearly what Citi wants, and what it’s good at; you can see why Citi would want to concentrate on jumbo mortgages.

It’s true that this news means Citigroup pulling back from banking the ordinary Americans who bailed the bank out last fall. But frankly those ordinary Americans were always better served by the big retail powerhouses anyway. Retail banking is not Citi’s strength, except for possibly in Mexico and Poland. It should stick to banking the global affluent, who stuck by it through all the troubles of the past year, and who remain incredibly profitable for the bank.

“Of course there were four rooms in Mr. Thain’s office suite” — of course! — TBI

25% budget reductions at Conde Nast, but no mention of salary cuts. Surely all those $400k/year editors could live with such a thing — NYO

Couric’s salary is more than the annual budgets of “Morning Edition” and “All Things Considered.” — CJR

Madoff by Karsh!!! Being auctioned! — Artnet

A 2008 survey reported that chocolate digestives were “‘key’ to clinching business deals” — BBC

This Selective Twitter thing is a very good idea, I think — FB

Emanuel Derman’s ode to the chocolate digestive — who knew quants had a knack for the poetic and sublime? — Wilmott

Why would an “in-depth interview” show take its name from a twitter feed? — CBS

Easy + Easy + Easy = Impossible — Scienceblogs

Me, on the radio, on the G20 — KPCC

Me, on the TV, on lots of other things — BNN

Thanks to SP, I’ve now found the study (149 pages, 1.5MB) examining bank fees across Europe. It makes for fascinating reading.

Here’s one key graph:

On the y-axis is the annual cost of a checking account for the average individual; on the x-axis is the degree to which banking products are transparent and simple. (Simplicity and transparency are very highly correlated.) Basically, once transparency and simplicity reach a certain not-particularly-high point, the cost of checking is capped at a reasonable level. But where there is opacity, the sky’s the limit when it comes to how much banks can charge.

Incidentally, “checking” is now very much a misnomer in pretty much all European countries. In Belgium and Spain, the average household writes less than 3 checks per year, and fewer than one in three households writes any checks at all. At the other end of the spectrum, in Portugal the average household writes one check a month: anything more than that is considered “high usage”. I don’t know what the equivalent figures are for the US, but I’m sure that the number of checks written overall is at least a full order of magnitude higher than it is in the EU.

I’m also intrigued by these charts:

The main thing I see here is lots of red and purple: basic annual and account charges. What that says to me is that banks in Europe don’t hide their charges in the form of overdraft fees and other things people don’t expect to incur: that in general European bank charges are much more transparent than those in the US. That’s a good thing, and it stops the poor from cross-subsidizing the rich, as happens in America.

Spiegel has a good interview with Lloyd Blankfein. They started out by asking him about his astronomical pay, and whether such sums promote greed:

Blankfein: I think we all know that greed can drive behavior, but it tends to be short term and ultimately destructive. Our leadership team stands out because most of our people have built their whole career at the firm and stayed through many years and many changes in the market. When our people leave they tend to go on to other positions — whether in government or other forms of public service — that no one would do if their were motives were financial. Those characteristics don’t make me think of “greed.”

SPIEGEL: So only modest, good people work for Goldman Sachs? We hardly believe that.

Blankfein: I have stated my honest view of things.

Of course, for every Rubin, Corzine, or Paulson — someone who made it to the very top of Goldman Sachs, became dynastically wealthy, and then went on to amass power commensurate with their wealth — there’s a John Thain or Chris Flowers, who left Goldman to make even more money elsewhere. And besides, if the motives of Goldman employees weren’t financial, why would the firm pay them such exorbitant amounts of money?

Then Blankfein tries to deflect the too-big-to-fail question:

SPIEGEL: Wouldn’t it be much easier to simply limit the size of banks? After all, the danger of systemic contagion is less when the banks are smaller.

Blankfein: So what is “too big to fail”?

SPIEGEL: When a bank is so large that in the event of insolvency, it could take the entire financial and the entire economic system along with it into the abyss. The state would then rescue the financial institution with taxpayer money.

Blankfein: The size of the bank is not the most important factor. Whether a certain risk is bundled at a single bank or spread across several is completely irrelevant. That doesn’t diminish the size of the risk. In fact, this would only change the problem from “too big to fail” to “too many to fail.”

When you have “too many to fail” — as we saw during the S&L crisis of the 1980s — the repercussions are manageable, in the way that the repercussions from the collapse of a Fannie Mae or AIG, say, really aren’t. Of course it’s relevant if a systemically-devastating risk is bundled at a single bank: then one bank’s errors can cause chaos. Besides, banks which are too big to fail — like Goldman — benefit from the moral hazard play: you can lend to them at low rates, safe in the knowledge that they’ll be bailed out if they ever get into trouble. The result, of course, is higher profits for Goldman. And more risk for the taxpayer. That doesn’t happen with small-enough-to-fail banks.

(Via TED)

This beautiful map comes from Stephen Von Worley, who has mapped the contiguous USA by how far any given point is from the nearest McDonald’s. Turns out the McFarthest Spot, somewhere in South Dakota, is 107 miles, as the crow flies, from a Golden Arch. There’s something for South Dakota to be proud of!

(Via Matthies)

The erosion of the Obama administration’s regulatory-reform plans has now begun in earnest:

At a hearing before the House Financial Services Committee, Treasury Secretary Timothy F. Geithner announced that the administration had dropped one provision in its plan for a consumer financial protection agency — a requirement for banks and other financial services companies to offer “plain vanilla” products, like 30-year fixed mortgages and low-interest, low-fee credit cards.

There’s no good reason for this capitulation, except for the financial lobby has so effectively captured Congress that no reform would be able to get through with such a common-sense provision in place. This has nothing to do with the government “approving and disapproving a wide array of financial products”, it just says that anybody who wants to call themselves a bank should provide simple, basic banking products which aren’t prone to hidden fees and lucrative opacity. I fear that by the time Congress is done, the Consumer Financial Protection Agency won’t be able to protect consumers at all — and that’s assuming it’ll even exist.

The EU, after a long and complicated study which I can’t even find on their website, has come to a simple and powerful conclusion when it comes to the subject of bank fees:

High prices are directly linked to opaque price information. Therefore, consumers in countries with opaque price structures are likely to pay more for bank accounts.

This is a universal law; it’s not confined to the EU. The poster child for high and opaque bank charges is Italy: there, someone who uses their bank account a lot gets charged €831 (over $1,200) a year, compared to just €27 for the same level of service in Bulgaria.

That number includes overdraft fees, of course, which are the cause du jour in the US. Yesterday’s news is kinda funny: as of October 19, Bank of America will “not charge overdraft fees on more than four items per day”. What they don’t mention in the press release is that the cap was increased from five to ten earlier this year: they seem to have adopted the yo-yo model of bank charging, where you maximally gouge your customers until the Senate Finance Committee starts asking questions, and then immediately scurry backwards in a desperate attempt to avoid regulation.

Regulation is still very much necessary, no matter how much BofA, JP Morgan, and others try to avoid it. Anything they announce this week could be unilaterally repealed next week, or next month, or whenever the issue gets forgotten about. A few simple rules would make everything much more transparent and customer-friendly.

Rosealea Yao reports:

Roughly 80 per cent of China’s urban residents own their homes – an astonishing number for a country that only began to privatise its housing stock in 1998.

Astonishing is right — and frankly, given the absence of any sourcing, I’m not sure I believe it. The high point of the influx from rural to urban China might be behind us, but it isn’t over yet, and all those poor Chinese workers looking to make their lives in the big city are unlikely to jump straight onto the bottom rung of the housing ladder. There might be some shenanigans going on with the definition of “residents” here — are all city inhabitants really included in the denominator?

That said, no visitor to China can fail to be astonished at the sheer quantity of housing stock which is going up in high rises across the country. If Yao is right, then substantially all of that stock is sold rather than rented, which helps to explain the astonishing amount of money in the Chinese construction industry. But it also means hundreds of billions of dollars of mortgages in the Chinese banking system, which I doubt were underwritten with particular assiduousness, and which have been written at extremely high price-to-income ratios. China could yet suffer a mortgage crisis of US proportions.

When a number in the newspaper seems too outrageously large to conceivably be true, don’t believe it. For instance, from today’s WSJ:

The campaigns by the four bid cities, Rio, Chicago, Tokyo and Madrid, are heating up. Mr. da Silva has already approved some $240 billion in funding for the Games and offered the federal government’s financial guarantee to cover shortfalls in the organizing committee’s budget.

The Olympics are expensive, but they’re not that expensive — $240 billion would amount to more than 12% of the continent-sized country’s $2 trillion GDP.

The actual Olympic costs are $14.4 billion, and that includes $11.6 billion in construction and infrastructure costs — renovation of airports, roads, subway lines, that kind of thing. And the whole package has been incorporated into Brazil’s monster $240 billion federal investment program, 57% of which is public funds.

Most of the costs of the Rio Olympics, then, are a necessary part of the city’s (and country’s) regeneration in any event, they’re not Games-specific. The organizing committee’s operating budget is $2.8 billion, or about 1.2% of the number in the WSJ. That’s a much more realistic number to look at.