Felix Salmon

Wine: the price of the unknown

Felix Salmon
Oct 21, 2009 22:45 UTC

How many people, when looking at a wine list, would spend $80 on a timorasso, or $90 for sagrantino? (No, I’ve never heard of them either.) According to Stephen Mancini, the 28-year-old wine director for Union Square Cafe, as channeled by Ryan Flinn, it’s a sizeable number: “drinkers are apt to try something they’ve never heard of if it’s less than $100″.

It’s good news that wine drinkers and restaurant goers are adventurous, of course. But is $100 really a “worth a try to see what it’s like” price point these days?


Uncle Billy, Sagrantino is a type of grape (and wine), not a specific wine. And yes, some of them are quite expensive. Not trying to justify the price, just correcting the facts.

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Chrysler: The view from the White House

Felix Salmon
Oct 21, 2009 22:27 UTC

Steven Rattner’s first-hand account of the automaker bailout is self-serving (of course), but still very much worth reading. He’s very much the office-bound technocrat: “we recognized the importance of a trip to Detroit,” he writes at one point, “so in March, several of us made the journey”. Well, yes, that would probably make sense.

At the same time, this financier understands clearly and intuitively that in bankruptcy proceedings, seniority of creditors doesn’t matter:

The lenders were particularly aggrieved that the UAW’s health-care trust, which ranked below the secured creditors, was slated to exchange an $8 billion existing claim for $4.6 billion in notes and 55% of the equity in the reorganized company. While arguably close to a 50% haircut, it was a higher-percentage recovery than we were offering the banks.

The lenders felt that this represented an ideological decision by the Obama administration to tilt in favor of labor and against capital. That was simply not the case. At no time during our months of work did the White House ever ask us to favor or punish any stakeholder.

Many other unsecured creditors — notably, suppliers and consumers holding warranties — actually received 100¢ on the dollar. The fact was, Chrysler had to have workers, suppliers, and customers to succeed and therefore needed to give them more than called for by their rank in the capital structure…

The outcome of the Chrysler restructuring had virtually nothing to do with the heavy hand of government and everything to do with the fact that Treasury was the reluctant investor of last resort.

Every stakeholder did better under our plan than they would have in the alternative: a liquidation, in which the lenders would have gotten far less than the $2 billion they wound up with.

Rattner’s job was to create a viable company, not to maximize recovery for bondholders. If those creditors wanted to put their own new money into Chrysler, and run it themselves, they were more than welcome to. But even the government came very close to simply letting Chrysler fail, until it worked out the magnitude of the knock-on effects on jobs at dealers and suppliers. No one else would put a penny in, and the fact that TARP money was found for the automakers meant that hundreds of thousands of jobs, and billions of dollars, were saved. The creditors really were lucky to get what they got.


I get so tired of ill-informed commenters who are forever stamping their feet and insisting that “the law” is what they think it ought to be. Perhaps they should spend their time explaining the nuances of bankruptcy law to the judge that oversaw the case.

The only thing that ticks me off even more is the fraction of Chrysler and GM bondholders who never really cared about whether reorganization or liquidation was the better deal for _them_–their priority was to make sure that the UAW got screwed worse than they did.

The car deals were a masterpiece, although no one really gets praised for limiting the downside of a catastrophe. Chrysler may still fail in five years or ten, and that doesn’t take anything away from the achievement of not letting them fail in 2009.

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Kenneth Feinberg, pay warrior

Felix Salmon
Oct 21, 2009 19:20 UTC

Oh wow. This is much more aggressive than anybody had dared hope it would be:

The seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year…

And for all executives the total compensation, which includes bonuses, will drop, on average, by about 50 percent…

At the financial products division of A.I.G., the locus of problems that plagued the large insurer and forced its rescue with more than $180 billion in taxpayer assistance, no top executive will receive more than $200,000 in total compensation, a stunning decline from previous years in which the unit produced many wealthy executives and traders.

In contrast to previous years, an official said, executives in the financial products division will receive no other compensation, like stocks or stock options.

Are you feeling outraged? Well, remember that $200,000 a year makes you rich. (Yes, really.) But these guys are effectively civil servants now, and they deserve to be paid as such. And if they have any fiscal responsibility at all, they will have saved up a huge amount of their past compensation to tide them through this fallow period.

What this means is that the people who used to be the 25 best-paid employees are now going to be far down the list, with underlings making much more than they do. That’s OK too. There’s no particular reason why senior executives should always be the best-paid employees in any organization. Quite the opposite, in fact.


It bears to keep this in mind:

Without gov’t money, these companies would have gone belly up. Had that happened, the compensation would have received would have been $0.

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The importance of Volcker

Felix Salmon
Oct 21, 2009 16:02 UTC

There’s a curious coincidence of newspaper stories today: just as the NYT’s Louis Uchitelle writes a long piece about Paul Volcker being marginalized, the WSJ runs a story about how he could end up being responsible for what would arguably be the single most important piece of economic policy implemented by the Obama administration.

Here’s how Uchitelle ends his piece:

He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern.

So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.

Well yes, the tax law on overseas corporate profits is one of the issues that Volcker is looking at. But he’s also, says the WSJ, looking at something much bigger and much more far-reaching:

White House advisers are examining whether to curb the corporate tax code’s bias toward raising money from tax-deductible debt issues rather than from stock sales…

Tax experts for decades have bemoaned the tax code’s bias toward debt over equity: Interest on most corporate debt is tax deductible, while dividend payments are not.

“The disparity between debt and equity financing encourages corporations to finance themselves more heavily through borrowing. This leverage in turn increases the financial fragility of the economy, an effect we are seeing quite dramatically today,” Jason Furman, now deputy director of Mr. Obama’s National Economic Council, told a congressional panel last year.

This is something I’ve been pushing for a while, and it’s a really good idea. As the WSJ article shows, the US, with its 39.1% corporate tax rate, manages to raise just 3.2% of GDP through corporate taxes. Meanwhile, Australia, with a 30% corporate tax rate, raises 6.6% of GDP from corporate taxes. If Volcker starts taxing debt as well as equity, that would do wonders for the US fisc, and would reduce the systemic danger that debt poses to the economy. What’s not to love?


Re \”This proposal destroys the economics of being a financial intermediary that lends money and in turn pays interest on borrowed funds (whether those funds are deposits or bonds), i.e., a bank.\”

Surely it would make sense to distinguish between interest paid in the ordinary course of trade (eg by a bank to depositors)and interest paid on long term debt. I suggest the former should continue be tax deductible.

Art market datapoint of the day

Felix Salmon
Oct 21, 2009 15:18 UTC

Law firm Heller Ehrman spent millions of dollars putting together a corporate art collection during the biggest bull market the art world has ever seen, before going bankrupt at the end of last year. Now that art collection is being auctioned off:

The largely contemporary collection is expected to fetch between $610,000 and $1 million in a slow art market, according to bankruptcy papers and the auctioneer hired to conduct the sale…

Martin Gammon, director of business development for Bonhams, acknowledged the art will be going on the block at a time when “the art market is somewhat down from its highs of 2007.” But he said he expected the Heller auctions to be successful.

“In this particular instance, the pieces are post-war and contemporary, which has seen some deflation, but most of that speculation took place at the very high-end of the marketplace, pieces that were selling for hundreds of millions of dollars,” Gammon said. “This is all, I would say, very well selected and well curated material.”

Peter Benvenutti, the chair of Heller Ehrman’s dissolution committee who is now at Jones Day in San Francisco, said he expected the auction to generate “a small fraction of the original cost” of the art, which he said was substantially more than $1 million.

Anybody who claims that art can ever be a good investment should bear this in mind. If anything could have turned a profit, it would be contemporary art which was bought a decade ago and which is being sold now. But no: this collection is worth much less, at auction, than the amount that was paid for it.

If you buy art — especially works on paper — from an art gallery at full retail price, then your chances of being able to ever sell that art at auction for more than you paid are slim indeed. When people talk about art as an asset class, they’re not talking about the kind of art which you see hanging on law-firm walls, or even in suburban homes. They’re talking about a tiny subset of the art world, which you’re not invited to except as a sucker. Caveat emptor.



I think you’re missing a few fundamental points. What if at the same time, and investor had chosen equities or property? Say, the bought shares in Heller Ehrman…they certainly wouldn’t be getting $1m back from that investment. I have worked as an economist in the art market for 15 years and in fact most art does appreciate in financial value. The problem with investment in the market is LIQUIDITY. This is a forced sale at a bad time for that sector of the art market.

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How Paulson gave Goldman the Lehman heads-up

Felix Salmon
Oct 21, 2009 13:58 UTC

The secret Paulson-Goldman meeting wasn’t the only time that Hank Paulson treated his buddies at Goldman Sachs especially well while at Treasury. In fact, it wasn’t the only time he did so before he got the now-famous waiver.

A bit further on in the Sorkin book, while Paulson is trying to work out what should be done with an imploding Lehman Brothers, we find this:

If all that weren’t enough to deal with, [Lehman president Bart] McDade had just had a baffling conversation with [CEO Dick] Fuld, who informed him that Paulson had called him directly to suggest that the firm open up its books to Goldman Sachs. The way Fuld described it, Goldman was effectively advising Treasury. Paulson was also demanding a thorough review of Lehman’s confidential numbers, courtesy of Goldman Sachs.

McDade, though never much of a Goldman conspiracy theorist, found Fuld’s report discomfiting, but moments later was on the phone with Harvey Schwartz, Goldman’s head of capital markets. “I’m following up at Hank’s request,” he began.

After another perplexing conversation, McDade walked down the hall and told Alex Kirk to immediately call Schwartz at Goldman, instructing him to set up a meeting and getting them to sign a confidentiality agreement.

“This is coming directly from Paulson,” he explained.

In many ways, this is worse than Paulson’s meeting with Goldman’s board: in this case, Paulson is forcing Lehman to open its books fully to a direct competitor, for no obvious reason. And in this case it’s not at all obvious that Paulson got a sign off from Treasury’s general counsel before doing so.

I suspect this is what happens when you do all your business by phone rather than by email: you’re so comfortable with the fact that you’re not leaving any kind of paper trail, it becomes much easier to cross the line and abuse your position as the most powerful Treasury secretary in living memory to the benefit of your former firm. If the Moscow meeting wasn’t enough to precipitate some kind of Congressional investigation of Paulson, this should be.

Update: There’s more, a few pages later:

As they were making yet another pass through the earnings call script, Kirk’s cell phone rang. It was Harvey Schwartz from Goldman Sachs, phoning about the confidentiality agreement that Kirk was preparing. Before Schwartz began to discuss that matter, however, he said that he had something important to tell Kirk: “For the avoidance of doubt, Goldman Sachs does not have a client. We are doing this as principal.”

For a moment Kirk paused, gradually processing what Schwartz had just said.

“Really?” he asked, trying to keep the shock out of his voice. Goldman is the buyer?

“Okay. I have to call you back,” Kirk said, nervously ending the conversation, and then almost shouted to Fuld and McDade, “Guys, they don’t have a client!”…

McDade, reasonably, was concerned about sharing information with a direct competitor: How mcuh did they really want to divulge? At the same time, he felt they couldn’t take a stand against a plan that he believed had originated with Paulson…

McDade, turning back to his preparations for the fast-approaching call, made his position clear: “We were told by Hank Paulson to let them in the door. We’re going to let them in the door.”


“Insanity: doing the same thing over and over again and expecting different results.” Albert Einstein

Need more be said in reference to this situation?

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Felix Salmon
Oct 21, 2009 03:15 UTC

Average credit score by email domain. LOVE this chart. — Credit Karma

BusinessWeek editor Steve Adler resigns as Bloomberg takes over magazine. That didn’t take long. — NYP

SEC in thrall to Goldman, hires 29-yr-old for key position — Baseline Scenario

I love it when Bob Herbert gets his righteous anger on. — NYT

“I like Andrew a lot, but I did tell him that I thought he was incredibly stupid and sloppy.” Need I name the source of the quote? — Gawker

The impossibility of finding balanced, ecologically farmed wines in California — NYT

Who will stand up for the millionaires living on their bond coupons? I know! Allan Sloan! — WaPo

“If we think a wine is cheap, it will taste cheap; if we think we are tasting a grand cru, then we will taste one” — Scienceblogs

Konczal demolishes the idiotic Levitt/Dubner/Myhrvold “solution” to global warming — Rortybomb


“Who will stand up for the millionaires living on their bond coupons? I know! Allan Sloan!”

All too typical of you these days Felix. I’ve got an aunt that got a life insurance payment when my uncle died and the 401k he worked his whole life to build up. She can barely get the bills paid. Maybe she should just lever up and hope for the best huh!

Every time I come here you remind me of why the spans between visits grow and grow. What on earth has gotten into you?

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When too big to fail isn’t systemically dangerous

Felix Salmon
Oct 20, 2009 20:00 UTC

Economics of Contempt finds something very odd in the legislation that Tim Geithner has proposed for beefing up the regulation of too-big-to-fail institutions, or “Tier 1 FHCs” as they’re known in the jargon:

The administration makes a big mistake by requiring a separate “systemic risk” determination in order to use the proposed resolution authority for Tier 1 FHCs. This introduces needless uncertainty. Remember, a financial company is a Tier 1 FHC, by definition, if “material financial distress at the company could pose a threat to global or United States financial stability or the global or United States economy during times of economic stress.” An institution thus can’t even be a Tier 1 FHC in the first place if it doesn’t pose a systemic risk. Why require an additional, albeit slightly different, determination of “systemic risk” before the new resolution authority can be used? This will leave the market guessing as to which resolution regime — the Bankruptcy Code or the new resolution authority? — will be used to resolve distressed Tier 1 FHC. Creditors, unsure which resolution regime will apply and thus how their claims will be treated, will be less likely extend credit at exactly the time we don’t want creditors to be pulling back from a Tier 1 FHC.

I’m with EoC here: it makes no sense to require two separate determinations of when a bank is too big to fail. I guess the idea is that the government can preserve the fiction that Tier 1 FHCs aren’t necessarily too big to fail, and that therefore investors should be wary of lending to such institutions, instead of brainlessly making the moral-hazard play that all debt of Tier 1 FHCs is implicitly backed by the government.

Still, it’s silly. If you’re going to impose tougher capital and leverage requirements on too-big-to-fail institutions just because they can’t be allowed to fail, then you shouldn’t have to make a second determination that they pose a systemic risk before you intervene in times of crisis. After all, if you’re in a time of crisis, then simply making that determination would probably suffice to force some kind of intervention and conservatorship, so there’s going to be a lot of pressure on Treasury not to make it, unless and until bankruptcy is the only other option. Much better to make the determination ex ante, for all Tier 1 FHCs, and then address the moral-hazard problem directly.


seems like the problem could be the other way — what if the institution hadn’t been on the fed’s radar and so wasn’t a tier 1 fhc, but turned out to be a problem at a time of crisis?


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Annals of regulatory emasculation, ratings agency edition

Felix Salmon
Oct 20, 2009 17:53 UTC

Reuters is reporting today that Congress has “watered down” the bill regulating the ratings agencies. What’s unclear is whether there’s anything left at all:

  • References to the ratings agencies and their ratings will still appear in federal law, which means that the agencies will still carry the federal stamp of approval which was so good at making investors altogether too comfortable with them.
  • The ratings agencies can’t be held liable for ratings based on other agencies’ ratings, in multi-tiered structured products. (I think that’s what the story is driving at, anyway, let me know if it means something else.)
  • The ratings agencies will still be able to rate companies where one of their own employees has just started work.

In terms of regulatory reform, it’s clear which way the wind is blowing, it’s clear that we’ve wasted our crisis, and it’s clear that even if we forced lawmakers to read all 600 pages of the new Sorkin book, they’ve lost any and all fire in the belly when it comes to trying to ensure we never have another one like it. Meanwhile, the ratings agencies are giggling, and the industry is so profitable that new entrants are trying to muscle in. Nice work if you can get it, I suppose.


Sure. I’m just saying there’s room for more competition from within the existing NRSRO base, without requiring more NRSROs. That said, I’m all in favour of more NRSROs as well. The problem with Kanjorski’s bill is that nobody would ever want to be an NRSRO if it passed in its original form (especially if all the regulatory incentives to have NRSRO ratings your securities disappeared).

Oh, and to keep up the pedantry, CreditSights isn’t an NRSRO (thought it is very good). The 10 are the big three, DBRS, Egan Jones, RealPoint, LACE, JCR, R&I and AM Best. Of course, not all of them are authorised to rate structured products.

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