Felix Salmon


Felix Salmon
Oct 15, 2009 05:24 UTC

Calvin Trillin’s banker-pay theory is right! — Baseline Scenario

Simon Singh wins right to appeal! Another good day for free speech — IOC

“For returning charisma and breezy confidence to the beleaguered dollar, it’s hard to find a better image than Jack Nicholson” — TBM

Las Malvinas son Argentinas! You think it’s over? It ain’t over — Argentine Post

I loved the book; the film looks great too. — The Men Who Stare At Goats

“Che’s book on Guerilla Warfare doesn’t discuss wages at all; payment of a daily wage is quite unusual for guerilla armies” — Dsquared


““For returning charisma and breezy confidence to the beleaguered dollar, it’s hard to find a better image than Jack Nicholson””

I think George Clooney would be better, frankly. More current.

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Awful investing advice of the day, distressed-mortgages edition

Felix Salmon
Oct 14, 2009 20:17 UTC

Michael Osinski has an interesting article on nymag.com about how he, a CMO-structurer-turned-oyster-farmer, is playing in the riskier end of the distressed-debt market.

I have no illusions about the risk of what I’m doing. Buying mortgage-backed bonds today is putting your finger to the wind in a storm, like you’re standing on a seawall facing a nor’easter. You know the second wave of defaults is coming. It’s forming out past Montauk, swelling in Gardiners Bay, about to smash into your seawall. Will it knock you down, rip your boat from its cleats, and scatter your oyster cages all along the rock pile?…

I buy my bonds through a former colleague named T…

You have to treat every bond like a time bomb, carefully assessing how much time you’ve got before it blows up in your face.

T. is selling me CMO bonds. I’ve bought seven of them in the last three months.

It’s a good, well-balanced piece, which shows how a sophisticated financial market professional is taking very careful and calculated risks with money he can afford to lose. He also knows, of course, that if he does end up losing that money, he has no one but himself to blame.

And then, at the end, it goes horribly, horribly wrong:

So how can you consider joining Michael Osinski and invest in toxic assets?


The answer to that question is Do Not consider joining Michael Osinski. Do Not invest in toxic assets. And, whatever you do, Do Not start buying shares in things like BKT and HSM and TSI and FMY and HTR — ticker symbols all helpfully provided by nymag.com — especially if you think that in doing so you’re somehow replicating what Osinski is doing. You’re not.

Osinski is buying a very small number of very carefully-vetted bonds. This is the classic “PA” trade, where financial market professionals buy obscure instruments for their personal account in sizes which simply don’t scale up to the sort of money thrown around by institutional investors. Osinski’s bought seven bonds in three months, and I’m sure he went over each and every one in great detail with his friend T. That’s small-scale, highly-informed investing — the exact opposite of throwing your money at the Helios Total Return fund and hoping for the best.

Yes, the website does urge its readers to “be especially careful here”. But that doesn’t excuse spending 600 words on what you should do if, in a moment of recklessness, you decide that you want to ape the investing strategy of an oyster farmer who has just written a feature article for nymag.com, and who knows much more about what he’s doing than you ever will.


Eh, sorry Felix, think you missed the point on this one. I think they pretty obviously say they’re not condoning or advising, and that these plays aren’t mimicking what the “oyster farmer” does. And i think the information provided is pretty informative / interesting as well. Telling us what’s out there doesn’t seem like such a horrific thing to do.

Naked-shorting datapoint of the day, Carl Icahn edition

Felix Salmon
Oct 14, 2009 19:02 UTC

Nathan Vardi, to his credit, doesn’t use the term “naked shorting” in his story today about a dispute between Carl Icahn’s High River Limited Partnership and Goldman Sachs. But that’s what he’s talking about — and, interestingly, the securities in question aren’t stocks. They’re bank loans:

“High River apparently ‘sold short’ the bank debt, anticipating that the market price of the bank debt would decrease,” Goldman says in its lawsuit…

“Neither the fact that High River did not own the bank debt at the time it entered into the contracts, nor the fact that the market has moved against High River, nor any other reason, excuses High River from meeting its contractual obligations,” Goldman says.

High River of course says it will contest the lawsuit. But would naked-shorting Delphi loans even be illegal? They’re not exchange-traded securities, after all, and all we’re really talking about here is a bilateral contract between High River and Goldman under which High River agrees to sell certain loans at a certain price. It’s foolhardy to enter into such a contract if you don’t actually own the loans in question. But is it illegal? That’s less obvious.


I don’t read anything in the linked article suggesting that what High River did was illegal; it is a civil suit to force High River to actually meet the terms of the contract. I’m probably just missing Felix’s point.

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The Vulcan bank meld

Felix Salmon
Oct 14, 2009 18:34 UTC

Kevin Connor has found something rather interesting with respect to the Wells Fargo-Wachovia merger: Donald Rice, who was Wells Fargo’s chairman until 2007, sits on the board of a company called Vulcan Materials. Also on the Vulcan board are Donald James and John Baker, who sat on the Wachovia board.

When Wachovia was incorporated into Wells Fargo, a dozen of its directors found themselves with no seat on the new board. But Donald James and John Baker — the men who had sat with Rice on the board of Vulcan — were whisked over painlessly to the Wells Fargo board.

Connor concludes:

The data can be interpreted a few different ways, but it strongly suggests that the Vulcan Three were at the center of this deal — that Rice, James, and Baker played key behind-the-scenes roles in the Wells-Wachovia merger.

There’s no smoking gun here, of course. But it’s certainly an intriguing hypothesis.


Many apologies, Sajal. Fixed now.

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Anti-CFPA lobbying effort of the day

Felix Salmon
Oct 14, 2009 16:47 UTC

Is there a risk that the new Consumer Financial Protection Agency will start cracking down on media companies? A couple of advertising industry associations seem to think so:

Controversial legislation winding its way through the House to create a Consumer Finance Protection Agency would establish a whole new regulatory system for financial-services advertising. One provision, according to media industry advocates, could make media outlets liable for running financial advertisements the new agency deems misleading…

“The whole advertising community should be concerned about this,” said Dan Jaffe, exec VP of the Association of National Advertisers…

The ANA and the American Association of Advertising Agencies oppose the bill in its current form, along with a wide swathe of business groups, including the U.S. Chamber of Commerce. They are worried about the sweeping regulatory authority the legislation would give the CFPA.

This all seems very silly to me. For one thing, as Jim Surowiecki notes, the U.S. Chamber of Commerce is hardly representative of carefully-considered views:

Its opposition to regulation now seems reflexive; at the moment, its legislative priorities include opposing a consumer financial-protection agency, opposing a shareholder bill of rights, and opposing “flawed health care proposals,” which seems to mean any health-care proposal made by a Democrat.

For another thing, note that it’s the advertisers complaining, here, not the publishers. It’s right and proper that advertisers should be held accountable for what they advertise, and all the guff about “free-speech issues” and the “chilling effect” of the law is really just a desperate attempt to hide the fact that they’re worried the CFPA is going to be tougher on financial advertising than the FTC has been.

The specific part of the legislation they’re talking about is the part of the bill which makes it “unlawful for any person to”

(3) knowingly or recklessly provide substantial assistance to another person in violation of the provisions of [CFPA’s unfair, deceptive or abusive acts or practices regulations] and any such person shall be deemed to be in violation of that section to the same extent as the person to whom such assistance is provided.

Now remember that media companies already vet ads before they run them. But in general the CFPA has no incentive to shoot the messenger in these situations. The job of the CFPA is to stop unlawful products from being offered in the first place, not to stop them being advertised. The advertising, indeed, might well be a very useful way in which the CFPA finds out that such products exist. The natural response of the CFPA on seeing such an ad would be to stop the product in question from being sold. Once that happens, there’s no need to go after the publisher of the ad, since it’ll stop running anyway.


The CFPA would have authority to determine which products consumers can choose from. In short, the bill would create a regulatory overlay of the entire business community, extending far beyond traditional financial services. We need to take control of consumer choice. How does CFPA affect you? http://www.friendsoftheuschamber.com/iss ues/index.cfm?ID=469

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Felix Salmon egg-on-face datapoint of the day

Felix Salmon
Oct 14, 2009 15:51 UTC

So, that happened. Guess I was wrong about this. But if you’re never wrong, you’re never interesting, nicht wahr?


Would like to be a fly on the wall when you have the Reut-blog, breakingwind team bonding!

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The problem with smart bankers

Felix Salmon
Oct 14, 2009 13:46 UTC

Calvin Trillin, in his own inimitable way, has now weighed in on the causes of the financial crisis. It’s great stuff:

“Don’t get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they weren’t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn’t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.”

“So what happened?”

“I told you what happened. Smart guys started going to Wall Street.”

Trillin’s right. Bankers have made money for centuries, by doing essentially what their fathers and grandfathers did before them. (They’ve lost money, too, but nearly always in the same way: by lending money to people who can’t or won’t pay it back.)

Then Wall Street went go-go in the 1980s, and lots of smart, hungry, and highly self-regarding MBA types started flooding into big investment banks. When they started making money, they credited themselves, and their own intelligence. Which led to an obvious conclusion: if you did something even cleverer, you’d make more money still. Which, like most things in finance, is a strategy which works until it doesn’t.

Trillin’s also right that a large part of the problem is that senior management had no idea what was going on:

“When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness.”

In fact, even the bankers from the upper third of the class — the likes of Bob Rubin, who famously had no idea what liquidity puts were until a bunch of them exploded right underneath him — fell into this trap: in his case, he was both the smart and scrappy arbitrageur who thought that he could turn brainpower into billions, and the baffled senior risk manager who gave his underlings far too much ability to blow up his bank.

Banking isn’t for outright dummies — conscientious underwriting, for one, is a difficult and highly-skilled job which requires good, well-paid professionals. But far too many bankers thought of that kind of income as boring money, and were much more excited by the higher rewards and sophisticated risk management being shown them by the rocket scientists on the structured-products desk. Maybe in future they’ll be more suspicious of things they don’t really understand, but I’m not holding my breath. That’s what regulators are for.


These people really are smart but not for the reasons the article attributes. Their ability to come up with cleverly named sham assets like credit default swaps and bundled securities was a real stroke of genuis. But really now anyone with any financial or accounting education had to see what purpose all these engineered instruments served. The ability to create some thing out of nothing had been reserved for magicians, and honest bankers and businessmen use to be content with a fair profit for a fair service. When the political reality of total control of government by the FED was realized with the help of Bush, the need for continued deception to draw in investors was over, the time to cash in had arrived. The fact that the scam is obvious and the players are well known is of no concern since there are no honest people left in government who can do anything about it. And we the people are left with the political reality that democracy is dead. We are left with the FED, long live the KING!

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Felix Salmon
Oct 13, 2009 22:20 UTC

BusinessWeek value goes from $1 billion in 2000 to less than $5 million nine years later — BW

A pie chart about bars! A bar chart about pies! — NYT

“Today’s pornography laws are a trap for unwary teens and criminalize a large fraction of America’s young people” — SSRN

Design awesomeness: Dyson’s blade-free fan — Wired

Lady GaGa plays MoCA! “The output will be flawlessly imperfect” — Style

Did high-frequency trading kill Michael Jackson? — Kid Dynamite

“Greenland is poised to achieve a geopolitical importance it hasn’t had since the invention of Risk.” — Atlantic

A digital-only subscription to The Economist is $19.95/month. Or $126.99 for a year’s subscription to the mag AND online. — Economist


Aren’t pretty much all the articles on the Economist online site free? Why would anyone pay $79 for a subscription if they can read it for free?

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Blithe Blankfein

Felix Salmon
Oct 13, 2009 21:55 UTC

Lloyd Blankfein’s op-ed in the FT today doesn’t break much in the way of new ground, but it’s still worth reading closely. That’s the only way you can notice where his logic falls apart:

An institution’s assets must also be valued at their fair market value – the price at which willing buyers and sellers transact – not at the (frequently irrelevant) historic value. Some argue that fair value accounting exacerbated the credit crisis. I see it differently. If institutions had been required to recognise their exposures promptly and value them appropriately, they would have been likely to curtail the worst risks. Instead, positions were not monitored, so changes in value were often ignored until losses grew to a point when solvency became an issue.

At Goldman Sachs, we calculate the fair value of our positions every day, because we would not know how to assess or manage risk if market prices were not reflected on our books. This approach provides an essential early warning system that is critical for risk managers and regulators.

The problem here is that Goldman’s mark-to-market system only works because other banks don’t follow suit. Think about what Blankfein is and isn’t saying here. He’s not saying that mark-to-market can stop credit bubbles from happening, because they can’t. In fact, if you mark your risk assets to market during a credit bubble, then the asset side of your balance sheet rises, and you look safer than if you marked to par. As a result, you’re likely to take more risk, not less.

So what happens when the bubble bursts and markets turn south? There are basically three options:

  1. The banks all mark to par. This is the brave-it-out approach, which actually works very well in mild recessions.
  2. The banks all mark to par, except Goldman Sachs, which marks to market. When there’s a major disruption this works well for Goldman Sachs, which can start selling as soon as the markets start turning, even as the rest of the market tries to brave things out.
  3. The banks all mark to market. This risks being disastrously procyclical, with all the banks running to the exits at the same time.

Blankfein would have us all believe that option 3 makes sense, and that somehow all the banks could sell all their assets at the same time and before they declined so far that solvency was imperiled. But who does he think they’d sell their assets to?

Blankfein also thinks it’s easy to get investment banks to hand over to regulators extremely sensitive and valuable market intelligence:

We have to build a culture whereby firms are required to share concerns about systemic risks with regulators…

Regulators could establish a multi-firm business practices committee to examine issues such as underwriting standards. If practices slip, regulators would be among the first to know. They should ask questions such as: “Where are policies being stretched and pressures building? Where are you seeing concentrations in risk, crowded trades or one-way bets?”

The insight here makes sense, and I agree with it: regulators should ask questions, and banks should volunteer information when they see systemic risks. But a large part the reason that the banks have this information in the first place is that they are trusted by their counterparties to keep secrets: that’s one of the reasons that all banks bang on so incessantly about putting clients first. What happens when you get confidential information from a client which would be of great interest to your regulator?

The fact is that there are a lot of hard questions here, and Blankfein’s blithe assurances that conceptually it’s quite easy to answer them ring false to me. Especially when he never mentions the too-big-to-fail elephant in the room. Because he knows that any action on that front would harm, rather than help, Goldman Sachs.


Thank you very much Lloyd. You are scaring everyone into socialism.

Borrowing as a bank at nothing from the Fed discount window and then using the proceeds to trade is taking taxpayer money.

Dealing in derivatives where blowups are a concern of the government is taking taxpayer money.

Taking 12B of AIG bailout funds is taking taxpayer money.

HFT used for frontrunning legitimate investing, using advantageous relations with the treasury for profit, these are taking public money without providing a service.

Goldman does a lot of useful and important business activity, no question. We need the good things they do. But they are souring the public to capitalism through activities which, while perhaps legal, are not moral or fair.

Blankfein’s assertion that the bailout money was not needed is laughable. If there is a systemic collapse all investment banks would fail. They were levered substantially like everyone else. If you are highly levered, your do not withstand a depression, full stop.

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