Opinion

Felix Salmon

Counterparties

Felix Salmon
Oct 12, 2009 03:50 UTC

Please let this be the final word on ridiculous Zero Hedge monetization conspiracy theories — Accrued Interest

Iceland welcomed more tourists in the 8 months to August than it has inhabitants — Bloomberg

Periodic Table of Hedge Fund Returns — Lyrishq

Can anybody solve Mark Thoma’s compact parking puzzle? — Thoma

Is Damon Darlin Ben Stein’s replacement as the NYT Everybody’s Business columnist? — NYT

Boston Globe’s fate unclear. Bid deadline was Friday — NYT

COMMENT

No one gives a gundar’s ear?

Whaddat?

Improving your credit vs paying down debt

Felix Salmon
Oct 12, 2009 02:50 UTC

Mitra Kalita profiles Karen King, who has debts of $36,000 and a credit score of 576. King wants to get the former down and the latter up, but sometimes those two impulses work against each other:

With the aid of a financial counselor provided by a nonprofit, Ms. King is applying triage to her debts. “First, I want to take care of all the little things,” she says, “and then the student loans.”

When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person’s credit report when it is settled for a partial payment.

This is what happens when people obsess about credit score at the expense of their broad financial health: it’s much the same thing that happens when people try to lose weight instead of simply trying to get healthier.

In an ideal world, people would simply find their credit score increasing as their financial well-being improved. But in the real world, there’s a whole cottage industry which has sprung up devoted to trying to maximize credit scores, as well as ancillary industries such as Ben Stein’s evil attempt to trick people into paying $30 a month for a service they neither need nor can afford.

What worries me is that the financial counselor provided by a nonprofit might well have been the person advising Ms King not to pay off her utility bill at a discount. Often these financial counselors are seconded from some arm of the financial-services industry, which has an institutional interest in people paying as much of their debts and penalties as possible. Meanwhile, of course, from an individual perspective, if you can pay off a debt at a discount, most of the time it makes perfect sense to do so.

Annoyingly, Kalita never tells us whether it’s generally true that paying off an overdue bill at a discount is likely to be bad for your credit. If it’s not true, of course, then King was extremely badly advised. But even if it is true, there’s a strong case that she should have taken the offer anyway.

COMMENT

Having a lower debt to income percentage does indeed help you qualify for new credit products and will raise your credit score over the long term as compared to having balances still owed and unresolved. My statement about the act of settling a debt “does not in and of itself” raise your score in the above article remains true.

I cover the issue combined with debt settlement and access to new credit products fairly thoroughly in an article on the Consumer Recovery Network site. The article compares credit score impacts with debt settlement, bankruptcy and debt counseling services.

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Pledge now, pay later

Felix Salmon
Oct 12, 2009 01:17 UTC

Given that the government (despite my urging) isn’t going to significantly increase its arts funding, creative types are naturally going to look online for alternative sources of funds. And a new model is springing up across the web which I like a lot.

The way it works is that projects get posted on a website, and individual funders can pledge money towards them. Once a certain total amount is pledged, the money is released; often the funders get some kind of material recompense as well, like a print or a CD or even a share of the eventual proceeds.

So far Kickstarter, Funding the Arts, and Trust Art all seem to have adopted more or less this model, although in the case of Trust Art the creatives have to be invited to participate, which makes it less democratic. I’m sure there are others out there too.

The key difference between this model and fundraising 1.0 is that funders pay nothing unless and until a certain total is reached. In that sense, it’s a bit like Lending Club: if someone’s asking to borrow $5,000 and I offer to lend that person $50 of the total, that money won’t be lent out until other people club together to raise the other $4,950.* The result is that the people asking for money have an incentive to keep their asks and their budgets low, and that individuals offering a small amount know that they get to keep that money until the project is genuinely going to get off the ground.

I’m not particularly familiar with any of these websites, but it would make a certain amount of sense for one such site to be the clear leader in the field, with many more fundraisers and funders than the others. Everybody’s better off with one eBay than with a thousand smaller, competing auction sites. But I have no idea how any one of these sites might be able to set itself off from the rest and become the default place to donate and raise money for the arts.

*Update: Turns out this isn’t actually true: if you don’t “raise” the full amount you ask for, you have the option of taking only the amount that you did raise, or alternatively of trying again from scratch a second time. About 85% of qualified Lending Club loans are fully funded, 8-10% are partially funded, and the last 5-10% either don’t take the partial funding or relist.

The semiotics of Larry Summers’s neckwear

Felix Salmon
Oct 10, 2009 23:38 UTC

Ryan Lizza’s New Yorker profile of Larry Summers was very good, but in many ways it’s the accompanying photograph, by Martin Schoeller, which is even more intriguing: it shows the key members of Barack Obama’s economic team striding purposefully away from the White House, with intense lighting from both front and back. There’s a certain Reservoir Dogs feeling to it, with Christy Romer playing the Chris Penn odd-man-out role.

But here’s the thing: what’s up with the men’s ties?

ties2.jpg

They’re all purple burgundy, and although it’s hard to tell from the lighting, they’re all virtually identical shades of purple burgundy. But each one has a different density of yellow spots, from Peter Orszag, whose tie is positively teeming with the things, through to Tim Geithner, whose tie has none at all. Summers is closer to the Orszag end of the spectrum, while Jared Bernstein is closer to Geithner.

It all reminds me of nothing so much as the semiotics of shirt collars in Martin Scorsese’s Casino, where the more pointed your collar was, the more senior you were within the crime organization. But the meaning of the yellow dots, I have to say, defeats me. Does anybody have the decoder ring?

COMMENT

I’m sure there’s something similar in Goodfellas, but yes, more than anything it looks like Reservoir Dogs to me. Although that’s unsettling if you take it too far, since it means the heist is about to go all wrong.

As for the burgundy ties, I’ve been out of that game too long. I remember the era of the Pink Tie, and the Obligatory Ferragamo Tie With Some Sort Of Tiny Whimsical Animals, but now I must defer to those who keep up better with this sort of thing.

Wasn’t there some minor flap a few months ago about Summers wearing a Harvard tie? Wouldn’t that be crimson, or burgundyish?

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Counterparties

Felix Salmon
Oct 9, 2009 21:52 UTC

Another attempt at movie derivatives. Any particular reason to believe this one will succeed where so many have failed? — FT

Why are the ratings agencies like the villainous South African diplomat in Lethal Weapon 2? — FinReg21

Sam Sifton is Reinhold Niebuhr’s grandson?! — TBM

My blog goes multimedia! Or, Reuters points a video camera at me and gets me to talk about Phibro — Reuters

If shares in a pizza rise from $1 to $2, the meal will still be no bigger. Why stocks aren’t wealth — Economist

Mohamed El-Erian and Chase Carey might agree. But I’m dubious about mustachioed men earning more — Reuters

Rovzar on the NYT on Harvard — NYMag

How to boil an egg, scientifically — Serious Eats

The Stocktwits Charity Poker Tournament — Pokerformycharity

TheStreet jumps the shark — Wall St Cheat Sheet

Dynamite the Nobel prize in economics! — Reuters

How did I miss this? High-Frequency Trading Hits The Daily Show –TBI

COMMENT

movie derivatives sounds like a job for Las Vegas, not Wall St. What is the underlying asset for betting on box office revenues?

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Corporate bully of the day: Hertz

Felix Salmon
Oct 9, 2009 19:10 UTC

Good on Audit Integrity for fighting back against the blatant bullying being perpetrated on it by Hertz.

A brief history is in order: on September 16, Audit Integrity released a report, based on new and proprietary analysis, listing 20 large public companies with the highest probability of declaring bankruptcy in the next twelve months. One of those companies was Hertz, which, in its latest 10-K, has a 23 pages of risk factors, including these:

We have substantial debt and may incur substantial additional debt, which could adversely affect our financial condition, our ability to obtain financing in the future and our ability to react to changes in our business…

Despite our current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt…

Our reliance on asset-backed financing to purchase cars subjects us to a number of risks, many of which are beyond our control…

We may not be able to generate sufficient cash to service all of our debt or refinance our obligations and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful…

A significant portion of our outstanding indebtedness is secured by substantially all of our consolidated assets. As a result of these security interests, such assets would only be available to satisfy claims of our general creditors or to holders of our equity securities if we were to become insolvent to the extent the value of such assets exceeded the amount of our indebtedness and other obligations.

Hertz wasn’t happy with the Audit Integrity report, and sent the company a rather silly letter on September 22, which included lines like this:

Several analysts follow Hertz and its competitors closely, and all of them have significantly increased their estimates of the per-share price of Hertz’s common stock from where their price targets were 6 months ago. In addition, had your staff taken the time to review what the analyst community is saying about the rental car industry in general and Hertz in particular, you would have learned the favorable macro economic factors working in favor of the industry into the foreseeable future.

Heaven forfend that an independent research house should do something other than just “review what the analyst community is saying” and look at “macro economic factors”!

The really nasty bit of the letter, however, was where Hertz’s general counsel not only threatened to sue Audit Integrity over the report, but also copied the general counsels of all the other companies on Audit Integrity’s list, encouraging them to do likewise.

The lawsuit arrived on September 25. It’s pretty weak stuff, but Hertz is clearly hoping that it can embroil Audit Integrity in a large number of annoying and expensive lawsuits, brought not only by itself but by any other company that Audit Integrity singles out as being at risk.

So Audit Integrity’s chairman, James Kaplan, has decided to take this to the SEC:

Hertz is entitled to protest Audit Integrity’s findings. It also has the right – in fact, we believe the obligation — to address the areas of risk which we identified, and take steps to correct them. Such actions would benefit Hertz’s shareholders and would show that fact-based research was being used to improve the transparency and financial health of the company. Instead, the company has chosen to defame our methods – which are published on our website, but which the company’s management apparently has not read – and to invite unrelated companies to file action against us.

Frivolous attempts to crush independent research do not benefit investors. Publicly dismissing our model as “misinformation and untruths” also is a materially misleading statement about Hertz’s current financial condition…

As you have stated that you plan to step up the SEC’s enforcement efforts and better protect investors, it is my hope you will investigate this matter. It is possible Hertz will yet prove to be one of America’s great corporate success stories, but there is a disturbing trend of financially precarious companies aggressively trying to silence or tarnish their critics in the months immediately prior to their demise (Enron, Tyco, and Lehman immediately come to mind). If Hertz is allowed to mask serious financial risk by attempting to discredit quantitative research, Hertz’s shareholders may follow in the footsteps of others who suffered from a lack of warning.

It would be great if the SEC took this letter very seriously. Not all independent research is accurate, but the way for companies to deal with inaccurate research is to engage it on the merits and the substance, rather than to launch bullying lawsuits which have the aim of shutting down the research house in question. I haven’t spent any time looking in detail at the Audit Integrity report, but I do know that Hertz’s response is extremely worrying, and in and of itself raises serious questions about the company’s commitment to transparency and openness.

COMMENT

Looking at that report, I really wouldn’t blame Hertz for their mad retaliation. But the report does look worrying and it seems they had the intention of withholding these debt issues from investors and the public. Embroiling in another lawsuit is just another underhand means to drag Audit Integrity into the realms of debts with them.

Simon
http://www.idpro.co.uk

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Bicycle accident datapoint of the day

Felix Salmon
Oct 9, 2009 16:47 UTC

In the UK, men account for 72% of bike journeys, 84% of fatalities, and 81% of recorded injuries. That makes a certain amount of sense: men tend to be more aggressive cyclists, and that means their chances of having an accident rise.

But there’s a twist when it comes to truck-cyclist collisions in particular:

This year, seven of the eight people killed by lorries in London have been women…

There are no national figures but there’s little reason to think it is any different.

In this particular case, it seems, aggression helps, and timidity can be fatal:

In 2007, an internal report for Transport for London concluded women cyclists are far more likely to be killed by lorries because, unlike men, they tend to obey red lights and wait at junctions in the driver’s blind spot.

This means that if the lorry turns left, the driver cannot see the cyclist as the vehicle cuts across the bike’s path.

The report said that male cyclists are generally quicker getting away from a red light – or, indeed, jump red lights – and so get out of the danger area…

Marian Louise Noonan, 32, from south London, is a confessed kerb-hugger, and that leaves her feeling quite vulnerable on the roads, unlike her husband.

“He cycles much more aggressively and is aware of all the traffic around him. He cycles as if someone is going to hit him and makes sure he is in a safe position,” she says.

“I’m much more nervous of my cycling ability, I’m frightened people might hit me, which means I don’t cycle in a positive manner.”

The main problem is the attitude of other drivers, she says, as they make her feel like she does not belong on the road.

She also feels reluctant to put herself at the front of the traffic at red lights, which is the safest place for cyclists to be.

My experience from cycling in New York is that men are more likely than women to run red lights, much more likely to run red lights by weaving through flowing traffic, and much more likely to “bike salmon” up the street against traffic. All of these things are, needless to say, dangerous. On the other hand, women are less likely than men to wear helmets, and they’re also more likely than men to be riding significantly slower than traffic. Those traits I think make them more likely to get hit by a truck, and more likely to be killed if that happens.

The optimal combination for bikers — which I see in the UK much more than in NYC — is to be both law-abiding and aggressive. Don’t be shy about riding in the middle of the road if it’s not safe to ride on the edges, and certainly don’t be shy about driving faster than traffic, because that’s safer than having traffic drive faster than you. But obey red lights, stop behind the line and not halfway into the street, and be conscious about not getting in the way of pedestrians. Maybe, in some utopian future, they might eventually start being conscious of not getting in the way of cyclists, especially in dedicated bike lanes.

COMMENT

The problem for all riders, drivers and cyclists usually comes when their speed is much faster or much slower than those around them. Women may know cycling slower may not necessarily make them safer, but they are also conscious that they dare not be too fast as that will be perceived as even more dangerous.

Regards,
Simon Wheeler

http://www.dotbike.com/

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Loan-modification datapoint of the day

Felix Salmon
Oct 9, 2009 15:52 UTC

Shahien Nasiripour has an interesting datapoint, when it comes to the government’s HAMP loan-modification program:

Though the number of offers extended to eligible homeowners continues to rise, the number of offers accepted actually dropped, according to an analysis of Treasury Department data. In August, about 81 percent of homeowners accepted their modification offers; last month, just 54 percent of homeowners did so.

It’s not quite as simple as that, since it does take some time to go from the offer to acceptance. Specifically, once a homeowner receives an offer, they have a minimum of 30 days — and as much as 60 days, if the servicer permits, “to complete, sign, and return both Trial Period Plans, hardship affidavit, income documentation, first payment due under the Trial Period terms and any applicable executed disclosures”. Then, when they get the modification package, they have another 14 days to complete, sign, and return it.

All the same, if you look at the rate of change of loan modifications compared to the rate of change of offers extended, something weird shows up:

mods.jpg

While the number of offers continues to grow, the number of new modifications is now falling, quite sharply. That can’t be a good sign.

COMMENT

after 2 years of being unemployed and seeking a modification from Chase bank, they called a week ago to offer the trial period. The thing is,is that now that they are accepting some unemployment situations, we no longer qualify under 9 month guaranteed continuation of unemployment benefits. Yet, they are still offering the trial period. Meaning, if we take it we WILL get a balloon payment at the end of the trial forcing us further more into debt. That is why we will not accept it. We have for the past 2 years been 3 months late on our mortgage. Making payments just before getting a notice to foreclose. This is what we will continue to do. Because at least we are in control and not being drawn in again by predatory banks. And if unemployment is not extended to carry us untill we get a job. At least we will not be further in debt because we accepted a 3-7 month trial period that will only hurt not help us.

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Chart of the day: FHA delinquencies

Felix Salmon
Oct 9, 2009 14:26 UTC

FHA-delinq-&-Mother-of-All-.jpg

Whitney Tilson passes on this chart, showing delinquencies at the FHA. He notes that the FHA is a crucial source of support for the housing market right now, providing a whopping 23% of all mortgages. If you have a subprime credit rating of 600, you only need to put 3.5% down to get an FHA loan; even if you have a positively wrecked credit rating of 500, you can still get a mortgage with only a 10% downpayment. And the people brokering a lot of these loans are often the selfsame shady characters who represented the worst face of the subprime bubble.

How high will the 2008-vintage delinquency rates eventually go? That’s the crucial question, since those mortgages represent more than 20% of the entire FHA portfolio. They’re already high, at 19.4%, but they could go much higher, given that the 2007-vintage loans are over 30%.

We’ve seen this movie before; we know how it ends. There’s going to be an FHA bailout, and it’s going to be big. The only question at this point is just how big it’s going to be.

COMMENT

It’s not the graph so much as it is need to look at the TRIPPLING in the NUMBER OF FHA INSURED LOANS.

The problem is that the verticle axis is a percentage, and it doesn’t convey that though the percentage of defaults may be down, the NUMBER of defaults is exploding

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