Felix Salmon

Harvard donations: Down, not up

Felix Salmon
Sep 16, 2009 19:40 UTC

On Friday, I posted a chart which I thought showed donations to Harvard University rising substantially over the past couple of years, to over $1.6 billion a year. Boy was I wrong. As the Crimson reports, Harvard received $602 million in gifts this past fiscal year—an 8 percent year-on-year decline.

My commenters picked up on the mistake very quickly, but unfortunately I missed those comments: I rushed to meet Bob Millman for wine that afternoon, and then disappeared off to a wedding for most of the weekend, and by the time I got back the comments on the Harvard post were quite far down the list. Which is no excuse: I really should have been on top of this.

So many apologies for not updating the post in a timely manner, and for not paying enough attention to my astute and perspicacious commenters. You guys are the best, and I definitely screwed this one up.


Thanks for making the correction and apologizing, however belatedly. Nobody’s perfect and I think we all appreciate you doing your best.

Posted by right | Report as abusive

Hilton’s LBO unwinds

Felix Salmon
Sep 16, 2009 18:46 UTC

The LBO of Hilton hotels made no sense even at the time: I described it as crazy, adding that the lenders (including Bear Stearns, bless ‘em) were “taking equity-like risk” for pretty modest returns. So it comes as no surprise to learn that Blackstone, the buyer, has not only written down its investment by half, but is also looking to restructure Hilton’s debt.

The interesting thing here is the way that Blackstone is planning to do this: it essentially wants to convert Hilton’s outstanding loans into bonds. Which might come as some relief to the US taxpayer: we own a whopping $4 billion of Hilton debt inherited as part of the Bear Stearns bailout. If the bond markets are frothy enough to show appetite for Hilton debt right now, I’d happily sell it to them.

Update: See also the way that Warner Music Group turned $1.1 billion of loans into bonds. Although, as Vipal Monga notes, a lot of the time “refinancing loans doesn’t eliminate the debt, it just replaces lower-priced loans with more expensive bonds, increasing the interest burden on the companies”.


The restructuring is quite logical.

Example: (I made up the dollar amounts and haircut percentage)
1. Convert $100m in loans into $80m in bonds;
2. The government takes a 20% haircut;
3. The new lenders take less risk;
4. Despite having their equity wiped out in the original deal, the “owners” end up with new equity and keep the properties.

Everyone wins – except Uncle Sam.

Posted by Brad Ford | Report as abusive

Are wages sticky after all?

Felix Salmon
Sep 16, 2009 13:10 UTC

Many thanks to David Leonhardt for the shout-out in his column today. Referencing an old blog entry of mine, he returns to the question of sticky wages and concludes that, contra the likes of Chris Swann, there really is something to it: “the sticky-wage theory,” he says, “seems to have survived the Great Recession”, with average weekly pay rising from $612 to $618 in nominal terms over the past few months, and even more in real terms.

I’d caution, however, that it’s a bit too early to be quite as constructive as Leonhardt is when it comes to wages. No one ever said that the stickiness in wages had disappeared overnight: these things happen slowly. Here’s Swann in June:

With so many workers waiting in the wings, wages nationwide may start to fall over the next couple of years.

The United States would be following the path of Japan in the 1990s — the most recent example of absolute pay cuts in a modern economy.

And here he is following up last month:

With the U.S. economy clawing its way out of recession, surely the danger has passed? Not quite. Prices are the ultimate economic straggler.

In Japan, for example, the country only started to experience falling prices roughly three years after the start of the recession in 1991. Wages didn’t start to fall until 1997. The United States could still follow Japan’s lead.

When one looks at the large number of companies which have implemented pay cuts, it’s too much of a stretch to extrapolate that to immediate nationwide pay declines. Instead, it’s more that a taboo is being broken. What’s more, there’s a continuing and significant risk of medium-term deflation, certainly so long as unemployment remains at its current elevated level.

Here’s Leonhardt:

“There’s been a huge shift in power in recent years from labor to capital,” as the astute financial blogger Felix Salmon has written. Labor unions have shrunk, and companies can move operations to lower-wage countries. “Now that workers have lost their negotiating leverage,” Mr. Salmon wrote after FedEx made its announcement, “we might start seeing more across-the-board pay cuts.” If the economy were to weaken again, we still might.

But I don’t think that the only way we get there from here is via a double-dip recession. Any jobless recovery runs the risk of painful deflation. So unless and until the unemployment rate stops going up and starts coming down, the threat to wages remains.

Update: Leonhardt responds.


@ Alexis:

I’d be interested in the same information. Any idea how to aquire good data to construct that correlation?

Posted by RH Pyle | Report as abusive


Felix Salmon
Sep 15, 2009 21:42 UTC

The TED spread is just 16bp, lowest since 2004. No good can come of this. — PragCap

“In eight states, plus the District of Columbia, getting beaten up by your spouse is a pre-existing condition” — HuffPo

“The president calling Kanye West a ‘jackass’ is perfect information for a tweet. In fact, that’s the ideal format.” — AP

A New York state trooper confronts a woman who chose to bike to school with her kid, calling her “out of compliance” — Streetsblog

Audio of Obama calling Kanye a jackass — TMZ

What happened to Pactual? Morgan Stanley has doubled Brazil bankers to 30 in last year — and adding more — Bloomberg

Roger Federer’s Joy in Losing — NYer

Pics of the new Sol LeWitt mural at Columbus Circle station, from MTA’s Arts for Transit program — MTA

New York mag owner Bruce Wasserstein decides against making a final bid for BusinessWeek — BW

BusinessWeek’s pitch to investors: Buy us, then fire us — Kafka

Little-known fact: Breadpig, the publisher of the xkcd book, is part-owned by S.I. Newhouse IV. — xkcd

What does Lady Gaga have to do with MBS trades? Sing along and find out — HW

The answer to “Can X predict the stock market?” is always no. — Wall St Cheat Sheet

More Roubini/Photoshop action — ibid

I’m #2! — Mediaite

“It’s now cheaper to borrow in dollars than in Yen, so the $ is becoming the new currency of choice for the carry trade” — self-evident

A story about Google and media which includes the word “propinquity”? I’ll read that! — SAI

Corporate bond spread chart of the day shows how desperate investors are for yield — Morningstar


> how desperate investors are for yield

No good can come of this.

How endowments spend tuition payments

Felix Salmon
Sep 15, 2009 20:12 UTC

If you want a defense of the endowment style of investing, Michael Hennessy provides a really good one. Even he, however, admits that many endowments went way too far during the boom years:

Some (not all) endowments were far too aggressive with their private assets programs, sometimes to the point of planning on incoming charitable contributions (and even seasonal tuition payments) to help fund private asset capital commitments and private capital calls in a “just-in-time” fashion.

Using tuition payments to make capital calls from private-equity funds? I know that people have described Harvard as a large hedge fund with a small educational institution attached, but this is just insane. As a public service, Hennessy should start naming names.


I’ll not name any names, but suffice it to say that these referenced universities still all have outstanding long time real and risk-adjusted returns, even including 2008. The real egregious flaw was banking on donations into their institutions to help provide liquidity. Tuition payments are fairly predictable and, after all, contractual obligations, albeit ones experiencing more deliquencies and defaults than normal.

Indeed most endowment investment operations should be communicated in a fully transparent way, and most are. And indeed they should be used, and are used, as a selling point to prospective donors and students alike. And that has historically been a very good thing because they have by and large done a superb job, leading to much more money for programs, tuition aid, etc. How that money is divvied and spent is an entirely different matter, and decided by the governing bodies of those institutions, and informed by faculty and administration primarily and the educational marketplace (which has become a misguided arms race, as most arms races are). But again, being down 25% in the worst financial crisis in our lives = what the 70/30 did. What model of investing will produce the best returns over the next 10 years?

Credit card chart of the day

Felix Salmon
Sep 15, 2009 19:42 UTC

John B just left me an interesting comment on the subject of credit cards:

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.

It’s a good question, so I used the data here to chart the share of the credit card market held by the biggest issuers. The percentages aren’t of the total market, just of the top 15 issuers, but it’s close enough:


It’s pretty clear from this chart that between them, the big credit card issuers absolutely have the ability to set prices. It’s also clear just by looking at their marketing materials that none of them is particularly interested in competing with the others by reducing the maximum interest rate that they charge.

In most contexts, a chart like the one above would I think bespeak a competitive market. But in credit cards, I’m not so sure. On the other hand, do we want credit cards to be highly competitive? I’m not sure that we do: what we really want is for credit cards to be transparent.

At the margin, if the card issuers bring down their interest rates, that will only result in even more people borrowing even more money on their credit cards. But doing so is nearly always the worst possible way of borrowing money, except for maybe going to the loan shark down the street. Ideally we want the whole credit-card market to shrink, and for banks to go back to offering personal loans.


I’d bet a chart of national deposit share looks pretty similar. IE, the heavyweight control a big %% of a pretty big pie. Not on a percentage base, of course, but the names: Chase, BAC, Wells Fargo, Citigroup.

4-5 years ago I’d thought consolidation was good / healthy indicator for ‘economies of scale’. Now…not so much.

Posted by Griff | Report as abusive

Wine sales league table of the day

Felix Salmon
Sep 15, 2009 18:30 UTC

Mike Veseth reprints the most depressing list I’ve seen in a long time:

The top ten individual wines (by volume not value of sales) in 2008 were (drum roll) …

  1. Kendall-Jackson Vintner’s Reserve Chardonnay
  2. Cavit Pinot Grigio
  3. Beringer White Zinfandel
  4. Sutter Home White Zin
  5. Inglenook Chablis
  6. Ecco Domani Pinot Grigio
  7. Mezzacorona Pinot Grigio
  8. Copper Ridge Chardonnay
  9. Yellow Tail Chardonnay
  10. Franzia White Zin

The top-volume wines are always, by definition, going to be mass-produced wines. But that doesn’t mean that every single one has to be white (or the abomination known as “White Zinfandel”, which is basically wine for people who think that Yellow Tail Chardonnay is too dry).

Franzia White Zin retails for as little as $13.11 for a 5-liter box; if you assume the wholesale price is say $12, and assume 125ml glasses of wine, that puts the cost to the restaurant of a glass of wine at just 30 cents. You can see why restaurants would be keen to push this stuff. And you can also see why any self-respecting diner would rather stick to Budweiser.


As a sommelier i def have had my share of fine wines and how i do agree and wish the general public would range out a little more and try some new and better things, but anyone who actually knows, and understands the wine world well understands that people drink what they like. And who are you to call white zin an abomination? obviously the write has no real grasp of what wine is and is supposed to be, and that is very simply put, a drink that is to be enjoyed. And if white zin is what you enjoy, then i say drink up!! Its like saying pepsi is so horrible because i think coke is so much better, its ridiculous.

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The White House vs Henry Paulson

Felix Salmon
Sep 15, 2009 17:35 UTC

George Bush speechwriter Matt Latimer has an astonishing tale of what the economic crisis looked like from inside the White House — and it’s a must-read, even if GQ does force you to click the “next” button ten times in a row to read it.

Latimer starts off by describing Hank Paulson as “pretty much a nonperson at the White House”, and it goes downhill from there:

Pundits on TV started asking why the president wasn’t saying more and what he was going to do. The answers were: We had nothing to say and no one had any idea.

The central event in the narrative is a speech that Bush gave on the economy, trying to push the abortive first version of TARP:

The president directed us to try to put elements of his proposal back into the text. He wanted to explain what he was seeking and to defend it. He especially wanted Americans to know that his plan would likely see a return on the taxpayers’ investment. Under his proposal, he said, the federal government would buy troubled mortgages on the cheap and then resell them at a higher price when the market for them stabilized.

“We’re buying low and selling high,” he kept saying.

The problem was that his proposal didn’t work like that. One of the president’s staff members anxiously pulled a few of us aside. “The president is misunderstanding this proposal,” he warned. “He has the wrong idea in his head.” As it turned out, the plan wasn’t to buy low and sell high. In some cases, in fact, Secretary Paulson wanted to pay more than the securities were likely worth in order to put more money into the markets as soon as possible. This was not how the president’s proposal had been advertised to the public or the Congress. It wasn’t that the president didn’t understand what his administration wanted to do. It was that the treasury secretary didn’t seem to know, changed his mind, had misled the president, or some combination of the three.

Clearly Paulson didn’t much care about currying favor in the White House:

We wrote speeches nearly every time the stock market flipped. Meanwhile, the White House seemed to have ceded all of its authority on economic matters to the secretive secretary of the treasury. The president was clearly frustrated with this. I was told that at one Oval Office meeting, he got very animated and exclaimed to Paulson, “You’ve got to tell me what you’re doing!” (In the weeks that followed, Paulson changed his spending priorities two or three times. Incredibly, he’d been given the power to do with that money virtually anything he pleased. All thanks to a president who didn’t understand his proposal and a Congress that didn’t stop to think.)

If nothing else, this surely gives Paulson full license, in case he felt he needed it, to unload on Bush in his own book. There never seemed to be much light between the White House and Treasury at the time. But in hindsight, it seems that there was no love lost between them at all.


Substitute the topics of Afghanistan and Iraq, and the quotes I pulled seem about right.

I don’t know the icon for rolling on the floor sobbing.

Posted by Alan Murdock | Report as abusive

A modest suggestion

Felix Salmon
Sep 15, 2009 16:40 UTC

Rupert Murdoch should try selling his iPhone app for a flat $1.99 and see how that works before jumping straight in to a model where he charges that much per week.


You can always fall back to $1.99, so why not start higher.

The lesson pubs are learning is that if you think you EVER want to charge for something, never give it away.

Webmail seems to have made the same mistake. For gmail,yahoo,hotmail, these are all essentially utilities for many users and they never truly cashed in (though hotmail has been trying.)